The Five Thrusts and 9MP Financing
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Speech (6) on the Ninth Malaysia Plan
by Lim Kit Siang  
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(Parliament, Monday) :The National Mission outlined in the Plan has five thrusts:

* To raise the value add of the national economy;

* To raise the country's capacity for knowledge, creativity and innovation and nurture “first class mentality";

* To address persistent socio-economic inequalities constructively and productively;

* To improve the standard and sustainability of the quality of life; and

* To strengthen the institutional and implementation capacity of the country.

As general propositions, there can be little quarrel with these. It is the means that will be employed to achieve this Mission that raise deep and troubling questions.

The mega Plan proposes outlays of RM 220 billion. This is the largest Plan ever launched by Malaysia. It incorporates mega projects which had been previously set aside by the Abdullah administration. It would appear that policies about spending are being reversed and a return to the era of mega projects is being revived.

The macro economic framework used in framing the Plan is built upon rosy assumptions. Growth is projected at an average annual rate of 6 percent against a rate of 4.5 percent achieved during the 8^th Plan. Private Consumption is projected to grow at 6.9 percent against an achieved rate of 6.6 percent; Public Consumption is expected to grow at a slower pace of 5.3 percent against 10.2 percent; Private Investment which registered a negative rate of 1 percent is to rebound by a hefty 11.2 percent per annum. Public Investment is similarly projected to grow at 5.0 percent against an achieved rate of 3.9 percent. Increased in-flows of FDI are assumed to grow although no amounts are indicated. The Plan further assumes that inflation will remain modest thus providing price stability

Based on the past track record for projections, these projections are rosy. The downside risks of a global slowdown brought about by inevitable corrective measures to tame US budget and external deficits which could trigger a crisis are not factored in despite Malaysian linkages. Neither is any account taken of the political developments and uncertainties in the Middle East, other energy producing countries (Nigeria, Venezuela, Central Asia ) that could lead to a sharp rise in oil prices and bring turmoil to global trade, payments , capital flows and contribute to overall economic instability. Additionally, the loss of competitiveness and the growing attraction of China and India as destinations for massive capital flow diversions are largely ignored in the Plan framework.

The Plan framework asserts that domestic price stability will be maintained. The case made is far from compelling. It is pertinent to note that the CPI recorded an increase of 3.0 percent in 2005 and the pace of increase has risen. Moreover, the CPI is not an appropriate measure of overall inflation as it only relates to one component of GDP, the best measure of overall economic activity. A more appropriate measure is either the GDP deflator or the Producer Price Index. The GDP deflator in 2005 rose by 4.5 percent whilst the PPI for local production rose by 7.9 percent. (Table 2-5) Thus, inflation is sharper than that indicated by the CPI. These danger signals are apparently being ignored.

The Plan framework is wholly silent on the inflationary impact of the planned outlays of RM 220 billion under the 9^th Plan. Expenditures on this scale will undoubtedly contribute significantly to inflation in the domestic economy. Yet no account appears to have been taken. Prudence and caution appear to have been jettisoned as the Government goes on a spending binge. Irresponsible policies if pursued will be catastrophic.

How does the Government propose to finance this spending spree?

Optimist assumptions are made about Revenue growth at 6.9% -- inconsistent with GDP growth of 6.0 percent. Revenue is projected to grow from RM 533 billion in the 8th Plan to RM779 billion in the 9^th Plan. Similar optimistic assumptions are made with regard to Operating Expenditure, projected to grow at a lower rate of 6.5% in the next five years compared to the increase of 11.0 percent during the 8^th Plan. (Table 2-6) Given the larger borrowings, higher interest rates, debt service will increase sharply. This is unlikely to be countered by cuts in other operating expenditures.

The financing of the public sector assumes that the surplus to be generated by the Non-Financial Public Enterprises (NFPE)  will grow from RM 57.6 billion to RM 172.9 billion, an almost three fold increase. No details are provided as to how this is to come about.

Taking these highly optimistic projections together, the Plan forecasts that the Overall Public Sector Deficit will move from a deficit of RM29.9 bill to a surplus of RM 79.12 billion over the next five years. This is a turnaround of almost RM 110 billion. It would appear that optimism has no bounds.  (Table 2-6)

The Federal Government, which ran a cumulative deficit of RM 97.8 billion during the period of the 8^th Plan, (initially projected at RM 29.9 billion) will see a deficit of RM 107.65 billion in the new Plan. Thus the Federal Governments deficit will amount to 3.4 percent, marginally lower than the 3.8 percent recorded in the 8^th Plan period. The deficit will be financed by Domestic borrowing of $106 billion, an increase from RM 81.05 billion in the previous Plan,  along with foreign borrowing of RM 1.34 billion.

Taken together Total Debt increases from RM 228.7 billion to RM 351.3 billion by 2010 ( an increase by 53 percent) with the Domestic component increasing from RM198.6 billion to RM 319.9 billion and the foreign component increasing from RM 30 bill to RM 31.3 billion.

It is patently clear that the Government is abandoning the policy to gradually bring the deficit under control, reaffirmed when the Budget for 2006 was presented to this House in September 2005. This marks a very fundamental and radical policy U-turn: deficit financing is no longer a means for pump priming; it is now a permanent feature of fiscal policy.

Federal government debt will  “balloon”  to  RM351.3 billion, or 48.6 percent of the GDP by the end of the 9th Malaysia Plan in 2010. Over half of the debt is a result of deficit spending from 2000 to 2010. (Table 2-7)

These forecasts and projections are indicative of the adoption of highly irresponsible and high-risk fiscal policies and an abandonment of fiscal prudence. While past prudence has been rewarded by the markets with good ratings, this turning away and the pursuit of a reckless policy will not go unnoticed by markets and rating agencies.

In a globalized world, countries, more so open and vulnerable economies such as Malaysia, cannot afford the luxury of going against conventional norms. If they so chose, markets take corrective steps and mete out punishment. This was one of the critical lessons from the East Asian crisis of 1997 and the earlier Mexican crisis. It would appear that Malaysia has either not drawn lessons or is bent upon following a course of open defiance.

The ramifications of continuing with unsustainable Federal deficits are  complex and far-reaching. The deficit can be attributed to several factors that include:

·         A large subsidy bill: The size of the bill is hard to fathom given the less than transparent way in which the Federal budget is detailed.

·         Debt servicing of public debt which has mushroomed over the past decade: Debt service now consumes well over 20 percent of recurrent expenditure.

·         A bloated and inefficient public service: For a country of the size of Malaysia (26 million) well over 10 percent (over 1 million) of the labor force is on the public payroll. Low productivity and inefficiency are legion.

·         The cost of goods and services acquired by the Government are high because of non-competitive bidding practices employed by the Government. These practices also contribute to corruption. The additional “rents” generated represent a cost to the Government and ultimately to the nation.

·         Tax fraud and lax enforcement contribute to unmeasured revenue losses.

The regulatory regime now in place highlighted and personified by the system of licenses, approved permits for importing a range of goods, (motor vehicles being only one) the introduction of Guidelines on Foreign Participation in Distributive Trade against the vehement opposition of the business community contribute in a variety of ways to reducing competitive forces and provide the means for price distortions. Other practices that merit attention are the manner in which utility prices are set. The granting of toll increases and the secret agreements governing independent power generation are yet other examples of flawed policies having an impact on price levels.

The government’s response to rising inflation has been rather inapt and inept as wel as grossly  insensitive of the plight of the low-income Malaysians.

The decision to withdraw petrol subsidies may be prompted by the desire to  reduce the Federal deficit and correct market distortions. However, the manner in which this decision was arrived at and announced is an indictment and displays a lack of even a rudimentary understanding of basic economics. While reducing subsidies and removing distortions are laudable objectives, why pick on petroleum products is inexplicable. Elementary assessments would have led to the conclusion that any rise in petroleum prices would be rapidly transmitted across the entire economy beyond motorists. Any rise would impact on the transportation industry - taxies, buses, road haulers, -- they would in turn pass along increased costs to consumers.

Despite denials, it is inevitable that power and utility rates will rise. These increases will inevitably affect manufacturing costs impacting on goods produced for both the domestic and export markets. These denials ring hollow and it is a matter of time before consumers are confronted with increases. Were the Government to hold the line and not grant increased tariff rates for instance to TENAGA, it will be compelled to increase subsidies or alternatively force this GLC to go into the red. A saner policy would have been to review all subsidies and to develop a comprehensive plan for the reduction and eventual elimination of all distorting subsidies over an extended time frame.

The recent reduction of fuel subsidies did  not touch the generous subsidies that Petronas extends to independent power producers (IPPs), which built a string of gas-fueled electricity generating plants in the 1990s. Since the 1997 crisis, Petronas has supplied heavily subsidized processed gas not only to Tenaga but also to the IPPs. According to Petronas these subsidies have totaled RM25 billion. These special arrangements enrich a handful of well-connected, wealthy tycoons. The Edge identified Genting Sanyen Power, YTL Power, Malakoff Bhd and Tanjong Plc/Powertek Bhd, as the beneficiaries.

It is legitimate to ask: Why this favored treatment? Why are subsidies still being paid? Why are these agreements a secret? It is time for answers. It is time that the Government comes clean.

Finally on inflation, the  Government needs to move away from the state of denial. The present CPI, the key measure of inflation, is flawed as it over-represents the index disproportionately with consumer items whose prices are controlled and set by the Government. The present index thus understates inflation.

While this may not  matter much under more normal conditions, it is important when inflation is accelerating. A flawed measure can lead to complacency and smugness, with the decision makers  acting on the basis of wrong information. This appears to be the case in the current circumstances. It is imperative, therefore, that the Government seeks independent and objective advice to re-calibrate the index.

A serious and objective assessment of the current economic scene confirms the need for a package of coordinated and integrated set of policy measures to meet the challenge of inflation. Appropriate policies that target the core and fundamental economic shortcomings need to be adopted and implemented over current policies.

The key targets of policy need to be a combination of measures that that lead to a sizable reduction of the fiscal deficit; an exchange rate policy that frees the ringgit; and a monetary policy that takes account of the openness the Malaysian economy. Economic fundamentals cannot be ignored. Additionally, restoring the Malaysian economy to health will demand actions that remove distortions brought about by a regime of controls, a system of licensing, and other anti-competitive processes.

(03/04/2006)