Opinion | Malaysia faces a make-or-break economic moment. Can Muhyiddin’s maiden budget deliver?

Malaysia’s dreams of becoming a high-income economy have been put on hold amid the devastation wrought by the coronavirus pandemic

Getting back on track calls for some difficult decisions to be made and will require tremendous political will, says Dr Ismail Bakar

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Malaysia’s Prime Minister Muhyiddin Yassin waves as he arrives for a meeting at the parliament building in Kuala Lumpur on Monday. Photo: EPA

Published: 9:00am, 4 Nov 2020Updated: 12:51am, 18 Dec 2020

In 1991, Malaysia’s then Prime Minister Mahathir Mohamad predicted that 2020 would be the year to mark the country’s graduation into the league of industrialised and high income economies. Instead, the coronavirus pandemic has forced it to hit pause on growth and grand visions amid persistent economic and political instability.

Friday’s unveiling of the budget for 2020-2021 will be a litmus test for current Prime Minister Muhyiddin Yassin’s administration. Political wrangling from both sides of the aisle makes this the first time in history that the passing of a federal budget by Malaysia’s parliament is in question. Despite this, expectations are high that more aid will be doled out on top of the US$70.7 billion already earmarked under previous stimulus packages.

Assuming that the budget will indeed pass, now is clearly not the time to fixate on fiscal prudence. Generating growth does require stimulus. But prudence allows for a focused reallocation of resources that prioritises key areas for long-term recovery, which could lead to Malaysia weathering the current storm with a more resilient economic structure. Can Muhyiddin’s maiden budget deliver on this front?

Difficult questions

While we can expect Malaysia to maintain its track record of having a current account surplus, fiscal injections to boost growth must be balanced by a commitment to long-term prudent fiscal policy. Pre-pandemic, 80 per cent of the government revenue went to keeping the government running. The room to manoeuvre in these difficult circumstances is understandably limited.

In the short term, the government should consider only maintaining the delivery of big-ticket infrastructure projects that are already under way. Examples of such key projects include Line 2 of the Mass Rapid Transit system and the East Coast Rail Link. Temporarily halting all new projects would defer the import of high-value capital goods, which could otherwise have a negative impact on Malaysia’s current account surplus.

There are of course more difficult decisions that the government could make to create fiscal space. The elephant in the room has always been the cost of servicing Malaysia’s enormous civil service, which employs some 1.6 million people – not including pensioners. This has ballooned over the years, with the wage bill breaching the US$26 billion mark in 2019. Now, however, revenue streams are dwindling, especially following the collapse of crude oil prices.