Malaysia Cuts Growth Target, Widens Deficit Goal in Road Map

(Bloomberg) -- Malaysia pared its economic growth target and abandoned a plan to balance its budget by 2020, as it places greater focus on addressing income inequality amid struggles to rein in debt.

Prime Minister Mahathir Mohamad is targeting average gross domestic product expansion of 4.5 percent to 5.5 percent in 2018 to 2020, according to his mid-term review of the 11th Malaysia Plan. That compared with the 5 percent to 6 percent target for the 2016-2020 road map set by the previous administration under Najib Razak. The budget deficit, which was set to be balanced in two years, is now estimated to widen to 3 percent of GDP.

“Cost-saving measures for 2018 to 2020 could hurt economic growth, but this is only temporary,” Mahathir said in parliament as he tabled the revised plan on Thursday. “I am confident that steps to combat leakages and development projects will contribute to economic growth and the people’s well-being.”

Mahathir is seeking to rein in the country’s more than 1 trillion ringgit ($241 billion) of debt and liabilities, worsened by state guarantees on bonds issued by troubled fund 1MDB as well as billions of ringgit of potentially missing tax refunds. He has shelved some big infrastructure projects and cut spending on development projects, but he may need to do more to diversify state revenue, including with levies on online transactions and a possible carbon tax.

Focus on Inequality

Since taking power in May, the Pakatan Harapan administration has unraveled initiatives set by former leader Najib, pledging to better focus on inequality. The government seeks to address lagging productivity growth, limited fiscal space, low compensation of employees and inequality in household incomes in the coming years.

“If everything contained in this document is implemented, I am confident that Malaysia will roar again as an Asian Tiger,” Mahathir said.

Mahathir is counting on the private sector to fill the 40 billion ringgit gap left by a cut in state development spending, which was lowered to 220 billion ringgit for 2016 to 2020.

Malaysia plans to widen its sources of income by raising contributions from indirect taxes and non-tax revenues such as licenses, permits, fees and rentals. The government will study a tax on online transactions, while coming up with more initiatives to improve compliance. The country will look to model its financing governance and debt management after Indonesia and Thailand, and regularly report its borrowing position to the public.

Operational spending will also be reined in to maintain the current-account surplus, by reforming state agencies, improving procurement process, and reviewing programs and development projects. The government will especially look into project governance to reduce the risk of delays and cost overruns.

Revised Targets

Here are a few more changes to the 2018-2020 targets, from initial ones set for 2016-2020, in the revised 11th Malaysia Plan:

  • Average annual inflation at 2 percent to 3 percent, from 2.5 percent to 3 percent
  • Average gross exports growth at 6.2 percent a year, from 4.6 percent
  • Real public investments seen contracting 0.8 percent a year on average, from previous target for 2.7 percent expansion
  • Real private investments expected to climb 5.7 percent a year on average, from 9.4 percent growth
  • Gross national income seen reaching 47,720 ringgit per capita in 2020, from 54,100 ringgit
  • Mean monthly household income seen at 8,960 ringgit in 2020, from 10,540 ringgit
  • Unemployment seen below 3.5 percent through 2020, from 2.8 percent

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