Resetting the Malaysian economy

THE 2025 instalment of the annual pre-budget dialogues at the Treasury is upon us again, as the Madani government prepares for next year’s spending plan to be presented to parliament this October.

It is not going to be easy, as the Malaysian economy faces the threat of stagnation. In the last test survey, Malaysia just lost seven positions in the World Competitiveness Index: we are sliding back instead of moving forward. In fact, our analysis of prospects for 2025 leads to concern that the Madani Economic Framework is in danger of being derailed, if the unity government fails to initiate serious fiscal reform measures in this coming budget that are long overdue.


Bank Negara Malaysia recently announced that 1Q 2024 growth was 4.2%, a growth rate that exceeded the expectations of most economists. On a q-o-q basis, the growth in the first quarter of 2024 saw an increase of 1.4%.

The encouraging growth for the first quarter rested on higher household spending, more robust exports and higher tourist arrivals. Most components of GDP saw healthy increases: private consumption growth by 4.7% (a 0.5% q-o-y increase), private investment too recorded an expansion of 7.3%, and so did public investment (11.5%).

Exports did note an uptick, but the figure for net exports was less convincing since there was a 24.5% contraction. This is a first sign of trouble ahead.

A positive story emerged for most sectors; they witnessed higher growth, though to varying degrees. The services sector had a 4.7% increase in growth and an increase was noted for manufacturing (1.9%), mining (5.7%) and construction (11.9%). Two aspects of sectoral growth are hardly satisfactory. Manufacturing enjoyed a growth of less than 2% and although agriculture grew by 1.6% it contracted against 4Q 2023 by 0.3%.

Manufacturing needs a greater boost than has been experienced. We must take note that in the previous quarter this sector contracted by 0.3%. Malaysia cannot afford to have a weak manufacturing sector for many reasons. The recently US imposed sanctions on Malaysian semiconductor exports does not bode well for the future of our biggest industry which the Madani government plans to expand further.

As for agriculture being barely able to maintain a positive growth rate (though less than 3Q 2023), it must be emphasised that the lack of food security and high dependence on food imports, imply that the sector is grossly underperforming. New urgent action in this area, recognized by the government, is most urgent.

The fiscal situation

The economy’s fiscal situation demands close attention. Revenue in 1Q 2024 stands at RM70 billion. This is a 13.1% contraction from the previous quarter and a clear decrease from 1Q 2023 (RM76.2 billion; -8.2% y-o-y). Without belabouring the point, more urgent measures have to be taken to raise government revenue.

The government has successfully reduced the overall balance from -40.1% in 4Q 2023 to -26.4%. It is noteworthy that the Madani government is committed to reducing the deficit. But it is being done at great cost. The net development expenditure in 1Q 2024 was a mere RM18.7 billion, a significant dip from RM31.1 billion in the preceding quarter. The y-o-y decrease is an astounding contraction of 29.3%, implying that the narrowing of the deficit is being undertaken at considerable cost in terms of expenditure on development. This, again, is an issue that requires urgent deliberation and action.

Fiscal Policy Institute (FPI) takes the view that a structural reset of the economy cannot be delayed any further if the Malaysian economy is to perform closer to its potential.

If the right reforms are to be put in place in the immediate term, FPI’s preliminary forecasts indicate that the economy can achieve a whole-year growth of 5.0- 5.5% for 2024 and about 6% for the following year.

A fuller study is available, but there are a few key points that FPI wishes to highlight:

There is an urgent need to re-introduce the GST possibly because of the threat of inflation due to the simultaneous implementation of subsidy rationalisation, set at a lower level of entry than 6%, This is also in order to plug the loopholes in the current SST, to complement the capital gains tax and the windfall tax already introduced. With the anticipated growth of the digital economy, new financial charges may be considered in the upcoming Budget to introduce a financial transactions tax, especially with the rise of digital payment systems.

FPI is of the opinion that the current attempt to rationalise subsidies is misguided for three reasons.

First, any subsidy rationalisation exercise can only be done delicately and in stages since subsidies are very much a part of the utility maximisation function of individuals. Any attempt to execute the rationalisation rapidly will invite a backlash.

Second, the danger of a spike in inflation must be taken into account and the right institutional safeguards must be put in place, and an efficient rebate system for both small businesses and poor households. Of prime importance will be the need to curb cartels and unscrupulous traders. The Competition Commission needs to be woken up from its slumber. Currently, MyCC is not sufficiently empowered to do this.

Third, subsidy rationalisation is best executed under conditions of greater global certainty and stronger consumer expectations. These pre-conditions are unlikely to obtain presently.

It is for these reasons that FPI strongly advocates a re-introduction of the GST. FPI is not opposed to subsidy rationalisation. We do think that subsidy rationalisation is necessary from a fiscal policy point of view, but we also think that timing is of the essence.

We are of the view that the GST has an important role to play in fiscal consolidation in 2025, and this is also the view of FMM, IMF and the World Bank. The government should consider bringing back the GST as it is necessary to pop up tax buoyancy in Malaysia. Padu (using the e-invoicing system) that was introduced recently to enforce targeted subsidies, should be deployed to return back to the B60 collections from them so that the poor are not victimised as the last time by the GST system of tax collection.

Technological upgrading: role of private investment

Technological upgrading will boost labour productivity, increase salaries, curb the brain drain and reverse investment outflows (leading to a stronger ringgit). Together with serious action to retrench the national debt, which is a huge drain on fiscal revenue (RM30 billion in interest annually), further consolidation of the fiscal situation in 2025 is necessary.

FPI’s modelling exercises indicate that technological upgrading is necessary for the economy to escape the low productivity, stagnant-salary trap. The Madani government has announced the Fourth Industrial Masterplan to guide its industrial policy going forward. FPI has identified a private initiative plan (Crouching Tiger Initiative under the National Economic Reset Plan, when the FPI chairman was in MIER (Malaysia Institute of Economic Research) five years ago, in response to government call for inputs to the 12th Malaysia Plan, dubbed the Quantum Nation Project which identified areas and specific technologies that have to be introduced on the initiative of the private sector to realise the full potential of the economy.

FPI’s technology roadmap identifies private sector players who are able to fund their own investments. Among them, we have to embark seriously into the hydrogen economy under the Madani Energy Transition Plan which has Petronas as its lead agency. This activity, as well as solar energy with Tenaga National leading, has to be stepped up substantially in 2025.

In addition, technologically-intensive agriculture to address the food security issue is long overdue and urgent. There is a private sector initiative to introduce a solarised regenerative agriculture, through building pink solar greenhouses throughout the country which needs government support in order to address the food security issue.

This is a priority issue in the Madani Economic Framework. In this plan, there is a private effort in Malaysia to produce the pink solar panels for the world market, because of the availability of fine silica in Terengganu, and the lower cost in Malaysia compared to Saudi Arabia which is the other initiative. An international US$150 million on a joint-venture is being mobilized through IDB for this purpose. Malaysia is slated to train 10,00 technical manpower going forward under the auspices of a Malaysian think tank called High Value Farming Group, which has four centres of excellence under its wing for this purpose.

To complement the 5G and the digital economy implications of connectivity in today’s society and future development to complement the government’s Digital Malaysia plan through greater utilisation of 5G, an International Connectivity Congress is being organized in October 2024 to bring together the experts and knowledge to the Malaysian public in the area of quantum computing, AI and IoT. Google’s announcements of plans for a huge data centre in this region to be located in Malaysia is consistent with that plan.

We cannot afford to be stuck in 5G roll-out when other countries are already into 6G. Our engagement in semiconductors is still at a low-value added phase when India, a late-comer to the industry, is taking more aggressive steps.

Plans are afoot by a local company to bring in four Chinese electric vehicle manufacturers to assemble RHS EVs for the international market. An initial investment of US5billion to assemble, eventually 200,000 units annually are envisaged, creating 8,000 jobs, is expected from this venture. The supporting parts suppliers from China, and local investors, will accompany this manufacturing migration under the so-called China+1 process as Chinese companies adjust to the pressures of international markets. A new city to be called Heureka EV City will be built in Behrang Selangor for this purpose to accommodate a commercial centre, a theme park as well as several higher education institutions there.

On the social well-being front, as a carry-over from the work of the Health Advisory Committee of the first PH government, a National Health Trust Fund under a Real Estate Investment Trust (REIT) aimed at monetizing MOH hospitals should now be launched in the coming budget to ease fiscal pressure on the consolidated funds and for Malaysia to regain the higher health for all standard it has gained previously and lost. A similar monetisation plan is being studied for higher education financial consolidation.

FPI is confident that with these initiatives and economic reform measures, Malaysia can achieve a higher growth trajectory if the government is willing to put in place the right policies that often do not depend on government funding.

At the same time, plans are afoot in Yayasan Mahkota to introduce a universal credit system, called National Gold Equity Plan under its Islamic Economic Model to introduce a decentralised micro-finance system to complement the Amanah Ikhtiar Scheme first introduced in the 70s and the recently introduced Madani government’s Sara system.

National Economic Reset Task Force implementation model

As with previous efforts the initiatives by government and the private sector will come to nought if the implementation is not properly geared. Whatever happened to the National Task Force to Recover National Assets previously and an early effort launched by the government? Either its work is so secretive that we hear nothing of its work, or it has done no work. The rakyat has the right to know.

There are only two occasions where Malaysia saw effective coordination and monitoring of implementation of projects: 1) in the early years of the NEP, and 2) during the NEAC when Malaysia was facing the Asian financial crisis.

Now, the FPI calls on the government to show the same resolve and commitment to reset he economy. The Madani government should set up a similar high-powered task force as the NEAC called whatever: National Reform or Reset Task Force, to be chaired by the prime minister himself and comprising of selected experts, businessmen and technocrats as were the case before, for a period to put in place or launch initiatives from the private or public sector expeditiously, immediately if we are not to miss the boat again. – June 23, 2024.

* Tan Sri Kamal Salih is chairman of the Fiscal Policy Institute.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.

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  • Why these so called researchers REFUSED to acknowledge the root cause of Malaysia's woes are ...... Article 153, NEP and other discriminatory policies? Here's my take.


    Forcing applicants to buy a home but not allowing permanent residency? What oxymoron!! Reducing monetary requirements is NOT a trade off. To the ultra-wealthy, money is NO object. Peace of mind, quality of life and safe guarding their investments are. Even our own citizens "cabut" because of discriminatory policies.

    So why should the ultra-rich stay and invest in Malaysia when there are other more attractive destinations giving them permanent residency and not subjecting their lives and investments to government initiated discriminatory policies, eg countries like Abu Dhabi, Portugal, US, Australia, New Zealand, Singapore etc?

    Zombie Companies

    Malaysia are adding more and more zombie companies to a list already containing Tabung Haji, Felda, MAS, LTAT (eg Pharmaniaga, Boustead Plantations), etc

    Government CANNOT restructure them into more profitable enterprises WITHOUT diluting "bumi" equity, control or curtailing vested interest (read removing the gravy train). The ultra-racists will scream their lungs out.

    Now we can add MAHB due to Mr. Madani misguided biased foreign policy.

    Would taxpayers money be pumped into a bottomless sewer FOREVER without hope of payback? Our debt will keep on increasing.

    Food Security

    Why don't the government lease out land for agriculture and husbandry to ANYONE interested irrespective of race, religion or even nationality. We have plenty of land and a small population. Then we would be alright.

    Look at Cameron Highlands for guidance. They can even export to East Malaysia and Singapore.

    I can go on and on eg, Bursa Malaysia, housing, education, civil service, etc, but the reply will be too long so I save them for another day.

    Why do we lose competitiveness to Thailand and Indonesia. Because they DON'T have Article 153, NEP and other discriminatory policies so they can formulate public and economic policies optimally.

    On the other hand, our policies are constrained by them rendering them ineffective and useless.

    IMO, Malaysia will be bankrupt by 2040. I am preparing for that day.

    Posted 1 month ago by Malaysian First · Reply