The 12th Malaysia Plan – cautious optimism (and need for real economic variable analyses in fiscal strategy)

It entails continuous “high” levels of deficit spending which are only moderated in response to conditions in the real economy.

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Published in Astro Awani & BusinessToday, image by BusinessToday.

The much-anticipated 12th Malaysia Plan/12MP (2021-2025) is finally out and has been presented in Parliament by Prime Minister YAB Dato’ Sri Ismail Sabri Yaakob.

The 12MP (as a medium-term strategic plan and framework) seeks to “[reset] the economy; [strengthen] security, wellbeing and inclusivity; and [advance] sustainability” – as the three themes. Whereas, the four catalytic policy enablers are to focus on “developing future talent; accelerating technology adoption and innovation; enhancing connectivity and transport infrastructure; and strengthening the public service” (Preface, 12MP).

Among the 14 game changers are (p. VIII, 12MP):

  • Catalysing strategic and high impact industries to boost economic growth;
  • Transforming micro, small and medium and enterprises as the new driver of growth;
  • Transforming the approach in eradicating hardcore poverty;
  • Multiplying growth in less developed states especially Sabah and Sarawak to reduce development gap;
  • Revitalising the healthcare system in ensuring a healthy and productive nation;
  • Embracing the circular economy; and
  • Enhancing digital connectivity for inclusive development.

EMIR Research has been at the forefront of championing the four policy enablers and 14 game changers since our inception.

Achieving the strategic goals and thrusts of the 12MP as embodied in the policy enablers and game changers require not only concerted and sustained investment by both the public and private sectors, i.e., from a micro-economic sense.

Just as critically, from the macro-economic perspective, it entails continuous “high” levels of deficit spending which are only moderated in response to conditions in the real economy (i.e., with reference to the private sector and household spending decisions).

This means, as EMIR Research has consistently called for, medium-term fiscal consolidation has to be flexible in its definition and shouldn’t be reduced “too soon” – bearing in mind the scarring and structural effects of the lockdowns (which incidentally only appeared once in the 12MP document).

The Leader of the Opposition Dato’ Seri Anwar Ibrahim has insightfully and astutely highlighted the absence of any analysis under 12MP on the specific context of the closure (gulung tikar) and insolvency of the small-and-medium sized enterprises (SMEs) with the multiplier impact on employment, household spending and aggregate demand in his speech on September 28 in Parliament (noon time).

Under the 12MP, the fiscal balance is targeted to be between -3.5% and -3% (negative = deficit) of GDP in 2025 (p. 1-30, 12MP) which is the typical “formula”/goal – reflecting a pedantic (i.e., rules-based) approach.

Rather, the “fine-tuning” of the fiscal balance should be a dynamic (i.e., real-world) approach based on response to real variables such as the rates of unemployment and under-employment and GDP growth, etc. – all of which points to the level of expenditure in the economy set against potential output (i.e., the availability of productive resources and potential capacity in the economy).

According to former Minister for Entrepreneur Development and Cooperatives Datuk Seri Dr Wan Junaidi Tuanku Jaafar, small- and medium-sized enterprises (SMEs) lost about RM40.7 billion in 2020 – the biggest ever.

And current Minister for Entrepreneur Development and Cooperatives Noh Omar reported to Parliament (September 28) that over 37,000 SMEs and some 200 sports-related companies have shut down their operations following the lockdowns up until the third round of the movement control order (MCO 3.0).

Again, the multiplier effect – from the macro-economic dimension – shouldn’t be under-estimated.

Closure and insolvency not only mean less revenue to be collected – tax (personal, corporate, sales and service, import duties) and non-tax (licenses). It also results in zero income (rent) for landlords many of whom in turn are in debt to banks.

By extension, it triggers the rise of non-performing loans (NPLs) in the economy which could affect market interest rates – making loans more expensive in the future.

Thus, this further constricts loan growth for SMEs, thereby stultifying and stunting our economic growth (for a scholarly analysis of the Malaysian context, especially in the aftermath of the Asian Financial Crisis/AFC, see “Is the relation between lending interest rate and non-performing loans symmetric or asymmetric? Evidence from ARDL and NARDL” by Wan Athirah Bahruddin and Mansur Masih, December 31, 2018, Munich Personal RePEc Archive). Such an analysis is absent in the 12MP.

With Bank Negara recently introducing the Standardised Base Rate (SBR) under the Revised Reference Rate Framework (effective August 1, 2022), essentially, it means that the reference (i.e., “basic”) rate for banks will now be the same across the board and linked solely to the Overnight Policy Rate (OPR) now at historic lows.

This could compel banks to seek significant adjustments in the spread (i.e., the added costs) to compensate for the very low OPR, among others. And although only applicable to floating rates for housing and personal loans, this could either have the effect of “under-estimating” the differences (i.e., advantages) with a fixed loan or “over-exaggerating” the differences (i.e., disadvantages).

In the case of the latter, if our fiscal deficit were to lower to 3% as part of the medium-term consolidation, this might result in our Kuala Lumpur Inter-Bank Offered Rate (Klibor) driven up and hence resulting in the floating/variable rate higher than the fixed rate.

This is simply because reserve balances (in the accounts of commercial banks with the central bank), overall, are no longer in excess. So that, there’ll inevitably be some banks with levels below the statutory reserve requirement (SRR) – pushing them to procure the funds (through Klibor) to meet any shortfall from demand in the settlement and cheque clearing process.

The upshot of this is that the rise in NPLs can’t be addressed solely with monetary policy but can only be overcome in coordination with fiscal policy – an analysis which again is lacking in the 12MP.

Again, whilst from the micro-economic dimension, there’ll always be new entrants of entrepreneurs into the economy, this has to be counter-balanced with the contracted/contracting spending from the macro-economic dimension (i.e., aggregate level).

In the final analysis, notwithstanding, the 12MP has rightly highlighted the role of the private sector and private consumption in rejuvenating and sustaining the momentum of growth (p. 2-10, 12MP) including via technology adoption and innovation alongside accelerating talent development (p. 2-17, 12MP).

This is consonant with the Prime Minister’s personal vision to revive and nurture the private sector as the leading driver of economic growth and the broader strategic roadmap encompassing successive Malaysia Plans.

For the private sector to be catalyst and impetus in the next phase our economic transformation, the State must not only continue to see through the strategic plans together with the institutional and regulatory reforms and liberalisation supported by fiscal incentives.

The federal government must also continuously provide the fiscal injection directly and indirectly (to the state governments to enable them to play their role).

For example, the 12MP has identified the aerospace industry as “one of the strategic industries to propel Malaysia into the high technology trajectory” (p. 3-16, 12MP). EMIR Research has identified aerospace as a vital non-economic (i.e., strategic) sector (“Re-envisioning FDI For the Next Lap”, March 8. 2021).

Towards that end, the 12MP should move beyond “developing a sustainable ecosystem (for nurturing to upgrade SMEs for higher level advanced manufacturing in component parts), clustering and zoning of aerospace activities, establishing an aerospace digital system and venturing into sustainable energy”.

For example, the federal government should also establish a strategic fund comprising direct funds as well as contributions from selected government-linked companies/GLCs (both federal and state) towards investment in training and development (T&D) alongside research and development (R&D) centres equipped with state-of-the art facilities – encompassing all the four strategic clusters of maintenance, repair and overhaul (MRO), aerospace manufacturing, systems integration, and engineering and design services – dedicated to the aerospace sector and related industries.

The R&D centre can have spill-over effects with multiple applications beyond aerospace engineering such as in defence (e.g., homegrown projectile/rocket weaponry based on propulsion system), telecommunications (e.g., satellite design, launchpad infrastructure), green energy (e.g., carbon-friendly air vehicles) and drone technology. It’s also critical to the success of our National Space Policy (2030).

All in all, the 12MP represents an intriguing and riveting roadmap for the next progression in economic development.

But the underlying optimism has to be translated into reality with a firm commitment to fiscal spending at current or slightly higher levels throughout the period.

Jason Loh Seong Wei is Head of Social, Law & Human Rights at EMIR Research, an independent think tank focussed on strategic policy recommendations based on rigorous research.

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