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New KL govt should not jettison economic policies that worked

Ousted premier Najib Razak’s political legacy might be scandalous, but his economic policies were good for Malaysia. The GST and the high-speed rail link to Singapore should remain, and fuel subsidies continue to be scrapped.

Singapore, May 2019

Malaysian economy conundrum, what Najib policies to jettison? - excerpt from a new book by Vikram Khanna

In better times: Dr Mahathir Mohamad (right) and Najib Razzak - which economic policies need overturning now and which should be kept?

In a sweeping collection of essays culled from recent writings in The Straits Times and The Business Times, financial journalist and former IMF economist Vikram Khanna's new book, 'Headwinds and Hazards: Economic Snapshots in an Age of Populism,' tackles Singapore's socio-economic challenges, economic trends in SE Asia and broader global issues. Sweeping in scope and written with verve and insight, this chapter is reprinted with the permission of the Straits Times Press, Singapore © 2019.

MALAYSIANS can congratulate themselves for producing, through the ballot box, the political earthquake that has defeated the Barisan Nasional and unseated the unpopular prime minister Najib Razak.

Defying the political odds, the pollsters and the predictions of pundits, the unlikely coalition that is the Pakatan Harapan (PH) has been voted in, led by an equally unlikely former prime minister, Tun Dr Mahathir Mohamad, who at 92, has set a record for the world’s oldest head of government and can probably lay claim to the most stunning political comeback ever.

Vikram Khanna

Vikram Khanna

Many Malaysians will be relieved to see the back of Datuk Seri Najib... However, there [are aspects] of Najib’s legacy that do not deserve to be jettisoned... some of the key economic policies he put in place in his almost 10 years as finance minister

Malaysians brought about, for the first time in their history, a government that is not dominated by any one ethnic group. This landmark election can thus be justly viewed as the beginning of the political remaking of Malaysia, for the better.

Many Malaysians will be relieved to see the back of Datuk Seri Najib, who allegedly took kleptocracy to new heights, in a country that has seen a great deal of it. Many other aspects of the former premier’s legacy will need to be unwound – the subordination of the judiciary and the legislature to the executive, the disregard for the rule of law and the treatment of those who tried to uphold it, the repression of the media and the persecution of opposition leaders.

However, there is one important aspect of Mr Najib’s legacy that does not deserve to be jettisoned and that is some of the key economic policies he put in place in his almost 10 years as finance minister. There are three in particular that are good for Malaysia, and which, judging from the manifesto of the new coalition government as well as the pronouncements of its leaders, are in danger of being abandoned or revised.

These are the goods and services tax (GST), the removal of fuel subsidies and some major infrastructural projects, including the Kuala Lumpur-Singapore High-Speed Rail (HSR).

The GST conundrum

The No. 1 item in the PH coalition’s manifesto is to scrap the GST. It wants to revert to the sales and service tax (SST) which had been in force until April 2015, when the GST was introduced. Originally scheduled to be implemented in 2011, Malaysia’s GST was delayed by four years because of opposition from business and consumer groups. However, the rationale for its introduction was economically sound. Malaysia’s direct tax base is narrow: Less than 10 percent of working-age Malaysians pay income tax. Malaysia also has a large informal sector, including some 1.7 million undocumented foreign workers, who also pay no tax.

Its oil-related revenues – traditionally the biggest contributor to government coffers – have been on the decline. They more than halved from 41 percent of total revenue in 2009 to about 15 percent in 2015. There was thus an urgent need for a broad-based consumption tax like the GST. Even though many essential items are zero-rated to cushion the impact on the poor, the GST has delivered for Malaysia far better than the more narrowly based SST ever did, or could.

Last year, the GST yielded RM42 billion (S$14.2 billion), compared with RM17 billion raised by the SST in 2014. As a result, Malaysia has managed to protect its fiscal position from low oil prices, cut its budget deficit and free up resources for public services such as roads, schools, hospitals and telecommunications.

Malaysia has achieved this despite having one of the lowest GST rates in the world – 6 percent – which is also the second lowest in Asean (after Myanmar) and which the International Monetary Fund has recommended be increased.

By scrapping the tax and regressing to the SST, the new government stands to lose at least RM25 billion in revenue every year. New finance minister Lim Guan Eng will need to explain how he plans to replace this, without pointing to savings that can be achieved anyway, without scrapping the GST. In a pre-emptive bid to calm the markets over the weekend, Dr Mahathir pointed out that the government has sufficient revenue to scrap the GST. But that is because much of that revenue was generated by the GST.

Scrapping fuel subsidies

The removal of fuel subsidies in 2014 was another positive move by Mr Najib. Malaysia had had fuel subsidies for three decades since 1983. The retail price of energy was less than RM2 a litre and if the market price rose above it, the government subsidised the difference.

There was supposed to be an “automatic price mechanism” to partially pass on higher market prices to consumers, but this was politically sensitive, so in practice, the mechanism was far from automatic, and retail prices barely changed.

So, when energy prices went up, so did the subsidy bill. In 2008, when oil prices rose to US$130 per barrel, the government’s fuel subsidies threatened to balloon to more than RM50 billion – around one-third of total government spending – if nothing was done. The opportunity cost was colossal: Social spending was crowded out. For every RM1 billion spent on fuel subsidies, five hospitals, 20 schools or 50km of roads could have been constructed.

Nor were Malaysia’s poor the main beneficiaries of the fuel subsidies. Several studies, including by the World Bank, found that the biggest beneficiaries were industries, trucking companies and rich households – the largest energy consumers. Fuel smuggling out of Malaysia was also rampant, which further inflated the subsidy bill.

In June 2008, the Malaysian government (then under the prime ministership of Tun Abdullah Badawi) took the first step to reducing subsidies by raising petrol prices by 40 percent. However, the subsidy remained huge and continued to increase as oil prices rose again after 2010 and stayed high till 2014. Despite the 2008 hike, Malaysia’s petrol prices remained among the lowest in Southeast Asia – about one-third of those in Singapore, as Singaporean motorists know all too well.

In September 2013, Mr Najib announced further increases in fuel prices, coupled with cash transfers to the poor. However, with oil prices at US$110 per barrel, it was impossible to remove subsidies altogether. late 2014, by which time oil prices had corrected to less than US$80 per barrel... Najib took the decisive step to abolish fuel subsidies together with the regulatory pricing mechanism. That decision is estimated to have saved the Malaysian government about RM20 billion a year

But that opportunity came in late 2014, by which time oil prices had corrected to less than US$80 per barrel. Mr Najib took the decisive step to abolish fuel subsidies from Dec 1, together with the regulatory pricing mechanism. That decision is estimated to have saved the Malaysian government about RM20 billion a year. Together with the GST, it also helped reduce the fiscal deficit to 3.1 percent of gross domestic product in 2015, less than half the level of 6.7 percent in 2009 when Mr Najib took over as prime minister and finance minister.

Malaysia’s new government now plans to reintroduce the fuel subsidies. Although they are supposed to be targeted at owners of small cars and motorcycles, this will be difficult to police, and leakages – as well as a resumption of smuggling – are almost certain. It is little wonder that rating agencies have reacted sceptically to the government’s economic plans.

Moody’s has pointed out that the abolition of the GST and the reintroduction of fuel subsidies will be “credit negative” for Malaysia’s sovereign rating. Fitch has highlighted “policy slippage leading to deterioration in fiscal discipline and higher government debt or deficits as a negative rating sensitivity”.

Kuala Lumpur-Singapore high speed rail link

The third initiative that Mr Najib championed and is now under review is the KL-Singapore HSR. Mr Najib’s government was unequivocal in its support for the HSR, for which it indicated there is strong justification, adding that the HSR “will contribute significantly towards the country’s future economic growth”.

But the new government plans to review the project. Dr Mahathir said in an interview with The Sunday Times last year: “We need to know whether we really need this HSR or not.” The case for an HSR between KL and Singapore is a no-brainer. It will slash travel time between the two cities from four hours to 90 minutes. It will catalyse economic clusters around the seven stations across four states of peninsular Malaysia through which it will pass and create at least 100,000 jobs; at least 15 contracts have already been awarded for the project, most of them to Malaysian firms.

The HSR will also create new synergies between the economies of Malaysia and Singapore. It is a project that should have been pursued long ago.

While there may be a case to review several Chinese-funded projects in Malaysia, which are debt-creating with many of the benefits accruing to Chinese rather than Malaysian companies, there is no case to review the HSR.

Writing in online research portal SmartKarma, Mr Jim Walker, the chief economist of the Asianomics group, described the PH manifesto as being “economically illiterate”. While this is perhaps a bit too harsh, there does seem to be an urge on the part of PH to ditch, or revisit, economic policies regardless of their merit, simply because they were put in place by Mr Najib. While Mr Najib’s political legacy is undeniably scandalous, for which he should be held to account, he has left the Malaysian economy in reasonably good shape. The PH needs to continue with the policies that helped make this happen.

Vikram Khanna is Associate Editor of Singapore's main daily, The Straits Times and the former Associate Editor of Singapore's financial daily, The Business Times, where he has worked since 1993.He has also been a columnist with both papers and now helms the Economic Affairs column in ST. He used to coordinate the prestigious Raffles Conversation interview series in The Business Times. Over the last 25 years, he has conducted more than 250 full length interviews with heads of government, global CEOs, Nobel laureates and other thought leaders. Earlier, Vikram served for seven years with the International Monetary Fund in Washington DC. He has BA, MA and M.Phil degrees in Economics from the University of Cambridge, UK.

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Vswanathan (7 May, 2019) – Malaysia
The writer makes a useful point here. While Najib had many black marks to his record some of the economic policies were on the right track. It is important to keep Malaysia moving forward. And of course, we must be careful with too much debt owed to China

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