Speed up reforms to join high-income club, World Bank tells Malaysia

Source: The Malaysian Insider

By Shannon Teoh

May 23, 2012

Najib previously said the economy needs to grow by an average of six per cent annually in order for Malaysia to achieve high-income status come 2020. — File pic

KUALA LUMPUR, May 23 — The World Bank is urging Malaysia to expedite economic reforms and move beyond “quick wins” if it wants to achieve Putrajaya’s target of being a high-income economy by 2020.

In its bi-annual East Asia and Pacific economic update, the bank highlighted subsidy cuts and broadening the tax base as key initiatives to have stalled over the past year after cost of living spiked ahead of an impending general election.

The bank warned today that “downside risks have eased but persist” as Malaysia’s export orientation means that “ongoing risks to the global recovery constitute risks for Malaysian growth.”

It said the trade balance will subtract from growth as “strong domestic demand, combined with moderate export growth, will lead to faster growth in imports”, resulting in gross domestic product (GDP) growth coming in at 4.6 per cent for this year and 5.1 per cent in 2013, assuming a continuation of the global recovery.

“The government’s transformation programmes registered notable progress, but the challenge now is to go beyond quick wins and accelerate the implementation of more difficult — but critical — structural reforms that lie at the core of boosting the economy into high-income levels.

“There is momentum to the government’s reform agenda, but implementation could be accelerated,” the report said, referring to the Najib administration’s ambitious Economic Transformation Programme (ETP) launched in 2010 to double per capita income in 10 years.

The World Bank added that Malaysia should increase co-ordination of social safety nets and education, build capacity within the civil service to lead reforms, and work towards consensus in key areas such as education reform, subsidy cuts and broadening the tax base.

Although a goods and services tax (GST) had been mooted soon after Prime Minister Datuk Seri Najib Razak came into power in April 2009, the government has said it will not be implemented before the general election that must be called within a year.

Subsidy cuts had also begun last year, but as inflation hit a two-year high of three per cent in March and persisted until December, Putrajaya’s Performance Management and Delivery Unit (Pemandu) introduced instead a new key result area under it transformation plan to deal with cost of living.

The World Bank’s recommendations come a day after Second Finance Minister Datuk Seri Husni Hanadzlah said it will be “very tough” to meet the five to six per cent growth projection from Budget 2012.

The Tambun MP said the government would instead focus on the central bank’s revised target of between four and five per cent, which is lower than the growth of 7.2 per cent and 5.1 per cent in 2010 and 2011 respectively.

He said this was due to the impact on trade arising from China’s suddenly cooling growth amid the stuttering recovery in the United States and the persistent euro zone crisis.

The three markets make up three of Malaysia’s top four trade partners. Dismal economic data for April released last week suggest that China was heading for a sixth straight quarter of slowing growth, raising alarm bells in financial markets already worried about a slump in the euro zone.

Bank Negara will announce the first quarter GDP this evening, with a Reuters poll of economist projecting a figure of 4.5 per cent, a third consecutive drop since the 7.2 per cent registered in Q2 2011.

The business wire also reported that Malaysia’s export growth in the first quarter more than halved to 4.4 per cent from 9.9 per cent in the fourth quarter.

Strong economic growth is crucial for the Najib administration’s plans to cut the fiscal deficit with public debt at RM455.7 billion or 53.8 per cent of GDP at the end of last year, just shy of a statutory ceiling of 55 per cent.

The government has announced a slew of construction projects for intra-city rail and highways in the coming years, using infrastructure projects to stimulate the economy.

The government’s New Economic Model (NEM) forecasts more investments from the private sector although a number of the companies have Putrajaya’s sovereign wealth funds as their majority shareholders.

Putrajaya is also betting on development in the Iskandar region in Johor and various projects around the country to push Malaysia into the club of high-income nations.