Finding the right balance for 2018

WILL Budget 2018 address the economic concerns raised by the World Bank? The bank is normally cautious, polite and diplomatic in its reports on national economies. You have to read between the lines to seek out the messages it wants to convey to governments and their peoples.

The World Bank in its East Asia and Pacific Economic Update of Oct 3, presented a summary entitled Balancing Act on Malaysia.

Main messages

First, the economy has done well, with a growth of 5.2% this year and an estimated slower growth of 5% and 4.8% in 2019. Hence, the economy is weakening, unless the Budget does more to strengthen it.

The slowdown is due to our risks as an open economy, as we are vulnerable to external demand. This means that our exports could decline and our imports could rise. Thus, our balance of payments current account surpluses could narrow. Also, our exchange rate could then decline further and our cost of living could rise.

But the World Bank characteristically does not specify the details, lest it is seen to be dampening our official optimism, as they see themselves as our guests in Malaysia.

Second, the World Bank notes that private consumption, that is what the rakyat spend on food, transport, and shelter, etc, is large and has "expanded firmly". It is estimated at 6.6% in 2017 and another high of 6.5% in 2018. However, total investment is expected to increase at a slower pace of 6.1% this year and only 3.2% next year.

We have to remember that higher consumption can lead to less productive expenditure. And lower capital investment can lead to less infrastructure and lower capacity to generate production and income in the future. What can or will the Budget do about this structural problem? The World Bank has provided the problem and not the solution.

Third, inflation rose to 4.1% in the first half of this year. This is high and is likely to rise further with the relatively weak ringgit. At the same time, the prices of food rose to a high of 4.2% for the 12-month period ending July 2017. This is causing much hardship, especially to our low-income groups.

However, the World Bank does not give any solutions. But will the Budget 2018 adopt the necessary measures to reduce food prices?

My proposal would be to liberalise the rules and reduce any protectionist policies and the widescale corruption and expenditure wastage that both suppress and restrict the supply of basic goods and services. If this liberalisation is not done soon enough, the rakyat will suffer even more from rising prices.

Fourth, house prices have risen faster than our income growth, according to the World Bank. This makes the basic need for housing to become more unaffordable to the lower-income groups. Thus, the World Bank rightly points out that higher house prices raise the cost of living.

The solution here is for the government to build and provide more incentives to the private sector to more rapidly expand the supply of affordable houses. However, the long-awaited mass production of more affordable houses, through the purposeful adoption of the Industrial Building System (IBS), has not moved faster.

The IBS should now be implemented with a stronger political will. And if there are powerful vested interests that oppose the use of IBS, they should be strongly opposed by the government. This will be enthusiastically welcomed by the rakyat, in the national and public interests.

This move will benefit the rakyat and not some parties with narrow self-interests. I hope the Budget will provide the necessary push for the IBS.

Fifth, the bank states that "the Malaysian economy continues to face uncertainties mainly from the external environment". But the bank has ignored the more serious threats from within our country, which we can control. They are extremism, racialism, and religious bigotry.

They are debilitating negative forces that can undermine the national and international confidence in our country and its potential and future. And the bank politely keeps silent, although it is aware from its global experience that domestic and foreign investment can be adversely affected by these negative internal forces.

These are also the push factors for the rising brain drain. But no mention is made by the bank of these grave concerns in the interrelated political economy.

That is the World Bank. But will the 2018 Budget deal with these structural problems or sweep them under the carpet?

Sixth, the bank surprisingly and glibly proposes "reducing exemptions on the goods and services tax (GST). Does it not realise that the low-income groups are already experiencing considerable pain from rising prices? How could the bank also suggest "addressing the rise of civil servants' salaries and pensions" to contain the Budget operating expenditures. Instead, the bank could have proposed raising productivity in the civil service by promoting more competition, incentives, and meritocracy.

Will the Budget address these thorny issues or let the matter rest and fester?

Finally, the bank does mention in passing the need to "accelerating structural reforms to improve both private sector productivity and public sector efficiency" to sustain our current growth momentum in the medium term.

I agree entirely, but the bank does not say how. By being over polite the bank is missing the whole purpose of its mission in Malaysia. The bank has to be more direct and pointed in its remarks, however brief they may be. This is essential so that the bank where I once sat in its board, will not lose its high reputation.

Conclusion

The bank has to better serve Malaysia and other developing countries. But more importantly, we hope that the Budget 2018 on Oct 27, will address the subtle concerns expressed by the bank, on the soft state and the future of our economy amid domestic and global uncertainty.

But we can face our challenges, if we show stronger leadership and a collective national will to succeed further. We shall overcome with God's will.

Tan Sri Ramon Navaratnam is chairman of the Asli Centre of Public Policy Studies.