(Petaling Jaya, Saturday): Although the Prime Minister and Finance Minister, Datuk Seri Dr. Mahathir Mohamad presented the 2003 Budget yesterday as a “paradigm shift” to “re-engineer growth strategies” to reduce dependence on foreign investments and trade because of “volatilities” in the business cycles of major investment and trading partners, there was little that was new for he had belaboured this very point in his 2002 Budget speech 11 months ago.
In fact, Mahathir’s remarks in calling for what represents on the face of it a radical departure from past strategies which were based on attracting foreign direct investment (FDI), were in one sense an admission that Malaysia had failed to capitalize on its previous record.
The Economic Report, presented in Parliament, indicates that FDI in 2002 is expected to be in the region of RM 3 billion as against RM 9.4 billion in 1999. That sharp decline is a ringing indictment of the failure of policies – policy u-turns on capital controls, the ringgit peg, rising levels of corruption, the growth of cronyism and blatant bailouts and a total disregard of the rule of law.
Significantly, the Prime Minister had nothing to say about the need to nurture capital flows. Nor did the Economic Report carry a forecast of the likely size of FDI in the year ahead.
The main theme of Mahathir’s speech was that domestic resources and savings were sufficient to finance investment, growth and development. The thrust of the policy is an inward looking policy framework that downplays the export driven strategy of the past. Mahathir is trying to make a virtue out of necessity. The question is whether such an economic strategy under the political, economic and social constraints of the Mahathir government can work.
Mahathir announced that GDP growth in 2002 was estimated to grow by “ at least 4 percent” and would grow in the year ahead by between 6 and 6.5 percent.
The impetus for growth is to emanate from domestic economic activities in line with the Budget strategy which emphasizes domestic-led growth. The services sector is to become the largest contributor to the increase in GDP, while the manufacturing sector is expected to record the highest growth.
The private sector expenditure is expected to recover strongly with private investment increasing by 16.5 percent and consumption by 10 percent. The public sector is expected to continue to play a supportive role, with Public investment increasing marginally by 2.4 percent while public consumption by 10.1 percent.
How and why the private sector would suddenly resume a pre-eminent position as the engine of growth was not spelt out. Beyond, a long list of palliative and cosmetic measures, no grand vision or a dramatic change in the policy frame was outlined.
The many needed reforms – greater accountability, transparency, a restoration of the rule of law, actions to overcome the cancer of corruption, greater deregulation but stricter supervisory oversight – did not even merit mention. It would appear that threats and fiats are deemed sufficient to bring about fundamental change.
Recent data about global economic prospects for 2002 and the year ahead,
particularly given current tensions and uncertainties, show a global slowing
down especially in the industrial countries that are our major markets. These
render expectations that Malaysia will achieve growth of between 6 and 6.5
percent in the year ahead unrealistic
Prudence would demand greater caution from forecasting
growth at rates that are clearly unrealistic.
It is noteworthy that the Economic Report in Table 1.1 cites Advanced
countries as growing at 2.5 percent (US at 2.6 percent, Japan at 1.1 percent ,
Germany at 2.1 percent) in 2003 but mentions no
source for these estimates, which
are at variance with forecasts, that are lower, put out by the IMF, the OECD and
national governments. Indeed, the Managing Director of the IMF has in recent
weeks cautioned that the world economy may be slowing down. No economy as open
as the Malaysian economy can isolate itself from global trends – yet the 2003
Budget is presenting a very different global economic picture.
In 2002, net external borrowing is projected at RM9.79 billion, accounting
for 58.3% of the financing needed for the year. This as an increase
from RM 6.3 billion in 2001 which is
explained as largely to meet restructuring of the Malaysia Airlines and
other corporate restructurings and the establishment of the Venture Capital Fund
for ICT development.
During the year, net domestic and external borrowings are projected to
increase the Federal Government debt by 15.2% to RM167,835 million or 47.1% of
GDP. Domestic debt is expected to grow at 7.3%, external debt is expected to
increase by 54.5% to RM37.57 billion. The external debt, as a percentage of
total Federal Government debt, is projected to increase from 16.7% to 22.4%,
indicating a greater use of external sources of financing in 2002.
These are alarming trends. The
cost of servicing the debt of the Federal Government in 2002 is estimated at RM
9.7 billion of which RM 1.77 billion will go to external creditors. That amount
would be an increase from RM 1.15 billion in 2001, an increase of
RM 623 million or astronomical 54
percent. Curiously, the amount paid to domestic lenders will decline by RM
547 million despite additional borrowings of almost RM 8 billion during
Hidden in these arcane numbers is a devastating revelation. That the
Government borrowed heavily for bailouts; that it short-changed local lenders (largely
depositors in Banks and EPF contributors) who were compelled to lend at low
rates essentially so that the Government could bailout its cronies.
The structure of the Federal Government’s domestic debt is equally
revealing. Of the total domestic debt, 56 percent was owned to the EPF and
another 19 percent to banks and insurance companies. Thus, in the ultimate
analysis, over the years ordinary Malaysians have loaned the Federal government
as much as RM 90 billion to squander in the name of “development” – to
finance mega projects and bail out crony companies.
The absence of transparency and accountability in the investment decisions of the EPF Board assume a new meaning when the declining dividends paid out to contributors are in part at least due to the low interest rates paid by the Federal Government for its borrowings from the EPF.