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

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?

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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.

People ride a Mass Rapid Transit train in Kuala Lumpur on October 30. The government should maintain delivery of big-ticket infrastructure projects already under way. Photo: Reuters

How can a sustainable funding model be found to maintain the machinery of government while preventing job losses? Is there room to consolidate agencies with overlapping functions to generate more optimisation? And can the savings generated be directed to other sectors?

Addressing these difficult questions requires tremendous political will, even more so in Malaysia where civil servants form an influential component of the electorate. Yet successfully doing so could give the government some much-needed breathing space to reallocate resources towards more targeted stimulus injections in hard-hit sectors that are crucial for post-pandemic economic recovery. Retail, tourism, hospitality and aviation all employ millions. For now, these sectors need government assistance to tide them over so they can survive the crisis.

Sustainable growth

As the former treasurer general and chief secretary to the government, I witnessed first hand the long and tedious process involved in coming up with the federal budget each year. Arguably, the most difficult aspect is balancing the demands of stakeholders, from politicians to fellow policymakers, interest groups and NGOs of all stripes. The process of seeing it through is exhaustive, involving back-to-back meetings between the Finance Ministry and the powerful Economic Planning Unit, as well as other ministries and agencies to secure decisions.

Governments change hands, but the work of charting a sustainable economic development path continues. In this sense, the coming budget is no different, and my colleagues in the public service are custodians of this process' continuity. Looming on the horizon is the 12th Malaysia Plan, which outlines the country's development for the next five years. This budget will set the tone for its roll-out.

Malaysian MPs attend a session of the lower house of parliament in Kuala Lumpur on Monday. Photo: Handout / EPA

This is a make or break moment for Malaysia's economy. While I argue that a short-term focused reallocation of resources can help get it back on track, more structural reforms will be needed down the line. For this, greater investments in upskilling and education can lay the groundwork for greater adoption of new technologies that increase labour productivity and per capita income.

Through this, more Malaysians across ethnic and socio-demographic divides can reap the rewards of an enlarged economic pie. Perhaps then Malaysia will be closer to achieving the developed economy status that it has sought for close to 30 years.

Dr Ismail Bakar is the former Chief Secretary to the Government of Malaysia, and Senior Advisor with Vriens & Partners, Southeast Asia's leading government affairs consultancy. The views expressed here are the author's own.

This article originally appeared on the South China Morning Post (SCMP).

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