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    Analysis of Macroeconomic Policies: Fiscal Policy

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    Shubham Aggarwal
    Malaysia has experienced moderate inflation of around 3% annually over the last decade, driven mainly by food, housing, transportation and fuel costs. Unemployment has remained low at 2.9% due to steady economic growth and job creation, particularly in the services and manufacturing sectors. However, labor productivity still lags countries like the US and South Korea. While fiscal and monetary policies have helped stabilize the economy, Malaysia faces challenges like the middle-income trap and losing competitiveness to neighboring countries that have lower costs.

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    Analysis of Macroeconomic Policies: Fiscal Policy

    Uploaded by

    Shubham Aggarwal
    41 views6 pages
    Malaysia has experienced moderate inflation of around 3% annually over the last decade, driven mainly by food, housing, transportation and fuel costs. Unemployment has remained low at 2.9% due to steady economic growth and job creation, particularly in the services and manufacturing sectors. However, labor productivity still lags countries like the US and South Korea. While fiscal and monetary policies have helped stabilize the economy, Malaysia faces challenges like the middle-income trap and losing competitiveness to neighboring countries that have lower costs.

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    Inflation and unemployment

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    Inflation and Unemployment

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    Malaysia has experienced moderate inflation of around 3% annually over the last decade, driven mainly by food, housing, transportation and fuel costs. Unemployment has remained low at 2.9% due to steady economic growth and job creation, particularly in the services and manufacturing sectors. However, labor productivity still lags countries like the US and South Korea. While fiscal and monetary policies have helped stabilize the economy, Malaysia faces challenges like the middle-income trap and losing competitiveness to neighboring countries that have lower costs.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    41 views6 pages

    Analysis of Macroeconomic Policies: Fiscal Policy

    Uploaded by

    Shubham Aggarwal
    Malaysia has experienced moderate inflation of around 3% annually over the last decade, driven mainly by food, housing, transportation and fuel costs. Unemployment has remained low at 2.9% due to steady economic growth and job creation, particularly in the services and manufacturing sectors. However, labor productivity still lags countries like the US and South Korea. While fiscal and monetary policies have helped stabilize the economy, Malaysia faces challenges like the middle-income trap and losing competitiveness to neighboring countries that have lower costs.

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    Inflation and Unemployment

    Inflation -
    Inflation remained moderate at an average rate of around 3% per annum over the last decade.
    The main contributors to inflation were food, housing, water, electricity, non-alcoholic
    beverages,
    transport, gas, and fuel. These three categories accounted for 80% of the overall increase in
    consumer prices.

    Unemployment -

    The economy continues to be in full employment with the unemployment rate remaining at 2.9%
    This can be attributed to the steady economic growth and improvements in the labour market.
    Around 3.2 million jobs were created in the last decade mainly in the services and manufacturing
    sectors. Labour productivity has still been an
    issue for Malaysia. As per the 10 th Plan report, Malaysia’s labour productivity was estimated
    to be 32.4% when compared to US and 56.1% with respect to South Korea. The Malaysian
    economy is still driven by traditional factors of production consisting of physical and human
    capital, which contributes to about 70% of GDP growth.

    Analysis of Macroeconomic Policies


    Fiscal Policy
    Fiscal policy is used by government to adjusts its spending levels and tax rates to monitor and
    influence a nation's economy.
    Fiscal Deficit
    In 2010, the fiscal deficit of Malaysia was 5.3% which has overtime reduced to 3% in 2018.
    The government spending has been majorly offset by the growth in the tax revenue and
    dividends from the government agencies. Many favourable events like petroleum price rose
    to almost double when it used to be the net exporter of oil helped it recover the expenditure,
    the introduction of GST in April, 2015 at 6% tax on almost all goods increased revenue to
    reduce deficit and to meet other federal obligations.

    In order to facilitate fiscal consolidation, many structural reforms were taken by the
    government during last decade like establishing the Fiscal Policy Committee, adopting
    Outcome-Based Budgeting, and implementation of GST. The government also rationalised
    the subsidies on fuel by the introduction of the managed float system for retail RON95 and
    diesel prices.
    Monetary Policy
    The apex monetary authority of the country consisting of the central bank or currency board
    uses monetary policies to control the cost of very short-term borrowing or the value of
    monetary base, targeting an interest rate or inflation rate to ensure price stability and general
    trust in the currency.
    Interest Rate
    The central bank of Malaysia has kept the interest rate at 3.25% for the current quarter in
    2018. The average interest rate from 2004 until 2018 has been 2.99% due to various reasons
    like strong private investment and consumption, low unemployment. Malaysian economy has
    been fundamentally strong with steady economic growth and capital account surplus. The
    country has second lowest interest rate in the ASEAN country after Singapore which has
    1.45%. Hence, lending is cheaper in the country which spurs the private consumption and
    investment.
    The malaysain currency ‘Ringit’ has not been internationalised since September 1998 by the
    Bank Negara Malaysia due to the aftermath of Asian financial crisis in 1997. It has been
    pegged with dollar and the current traded price is RM4.2 for $1 as of 28 th Novemebr, 2018.
    Many attempts has been made in 2012 and 2014 to internationalised but the central bank
    recently said that the ringgit will be internationalised when it's ready.
    Other Policies
    Subsidies and taxes:

    Malaysian government provides subsidies on lots of essential items like cooking oil, palm oil,
    petrol, rice, flour, bread and other essentials to keep their prices under market prices so that
    cost of living low is kept low. It used to provide subsidy on petrol till 2014 which was 12% of
    the government expenditure on subsidy. Post 2014, it moved to ‘managed float’ system.

    Government follows a progressive income tax rate system where rates go up to 26% which is
    quite similar to other ASEAN country. The govt has roll back the GST which it has
    introduced three years back in 2015 at a rate of 6% to increase the revenue and reduce the
    burden of fiscal debt on the government. The annual collection shot up to $14 billion. But it
    was not welcomed by the people of Malaysia and opposition govt after coming to power
    reintroducing SST (Sale and Service Tax) which is not considered as efficient and the
    collection fell to half.

    Foreign Investment policy - Ease of doing business and FDI


    Malaysian government has been seen working well majorly on all the 10 parameters of the
    index to make Malaysia a business hub and reduce its dependency on agriculture and mining
    since the last decade. FDI inflow was $9.5 billion in the year 2017. Services was the major
    constituent with 52.6% following by manufacturing and mining. The major reasons for FDI
    to increase is high domestic consumption fuelled by high per capita income and low
    unemployment in the country, availability of important natural resources and proximity to the
    vast Asian market with Malaysia being a key controller of Strait of Malacca. Though
    constraints like high labour cost and bureaucratic and regulatory burden creates a negative
    sentiment in the minds of investors.
    Overall, the regulatory and business environment in the country is conducive for growth and
    development of the people and Malaysia is on track towards achieving their vision of
    becoming a high income economy.

    Challenges and future prospects


    Malaysia plans to showcase its growth story and become a high-income nation by 2020.The
    current per capita income of US$9,850 needs to reach the threshold income level of $12,236
    to be considered as high-income nation according to the World Bank.
    Malaysia is growing at a rapid pace but still it faces certain challenges that might damage its
    growth trajectory.

    The middle-income trap is prevalent in Malaysia. It is described as an economic phenomenon


    where rapidly growing countries get stuck at a stagnant income levels and is unable to move
    to high earning income level from its current middle-income level.
    According to an article by The Economist it was found that only 13 countries were able to
    escape the middle-income trap in history and as of now Malaysia is absent from the list.
    Malaysian economy has been adversely impacted as a result of middle-income trap.

    There has been a loss of comparative advantage in manufacturing costs when compared to
    neighbouring countries like Myanmar and Cambodia. Malaysia lacks the technological
    acumen and innovations to compete in high-quality goods market and is unable to compete
    with developed economies.

    GST implementation has further reduced the purchasing capacity of citizens due to higher
    commodity and real estate prices.
    Ordinary citizens spend a huge portion of their monthly income to pay up for the property
    instalments and paying rents.

    Due to the weakening of consumer sentiment and rising cost of living, households have
    begun to save more by decreasing their spending levels.

    The investment levels will have a negative effect. Lower disposable income will lead to
    lower consumption level and diminish the intention of investments. The Global Competitive
    index have also pointed out that Malaysia has fell from its previous rank of 18 th to current
    ranking of 25th.

    The 1MDB scandal and the oil glut along with the plummet of Ringgit has worsened the
    situation. It is further causing the cost push inflation due to weak Ringgit used for import of
    raw materials and consumer goods. It is further leading to capital outflow which may further
    deteriorate the floating exchange rate.

    There has been a significant increase in administrative and compliance costs for new business
    due to GST. Investors are unwilling to invest due to cautious spending pattern and would opt
    to invest in more promising economies.
    This will adversely impact the economic prospects of the country and will definitely deter the
    plan of breaking through the middle-income trap.

    Loss of human capital due to middle-income trap is also being observed as a result of outflow
    of skilled human capital. There has been a stagnant real growth in wages which is further
    worsening the issue of brain drain in Malaysia. The new generation of people are moving
    overseas in search of better education and employment opportunities.

    Possible Solutions to Tackle and Breakthrough the Trap


    According to a report published by World Bank, it has been found around 65% of the total
    employment opportunities in Malaysia has been generated by small and medium enterprises
    which contributes to nearly 36% of the GDP and hence is considered as the backbone of the
    local economy.
    The Ministry of International Trade should help the SMEs as they face huge challenges in
    getting loan approvals from banks, purchasing raw materials from other countries due to
    weak exchange rates. This will allow them to expand their business and boost their revenues
    by promoting the products of the SME’s in the global market.

    The initiative to make Malaysia a favourable place for doing businesses and investment is
    crucial for the future growth of the country and to improve the consumption pattern of the
    households. Governments should strategies new policies to keep the investments within the
    country which is currently flowing out to the neighbouring economies and create new
    business destinations and policies to attract more investments into the country by providing
    them better infrastructure, productive workforce, and tax reductions/exemption during the
    initial years of operation.

    Government should plan accordingly against cost-push inflation and implement a certain
    level of protection to nullify the impact of rising cost towards household consumption.
    The short-term solution can be provided by fixing ceiling price of the basic necessities,
    increase the minimum wage of employees, and give subsidies to vulnerable groups.

    In long run this may lead to budget deficit leading to another financial crisis.
    Therefore, households can start investing a part of their savings. The volatility of the financial
    market has caused the households to invest in lower risk investment options like bonds
    compared to the risky stock market. A structured financial plan will allow the households to
    survive during recession and drive them to grow during economic boom.

    Malaysian economy despite having a positive business outlook hasn’t benefitted from its
    growth and has been offset due to impact of inflation and weak currency. The primary focus
    should be on national growth as well as to focus on crating solutions that can mitigate the
    contributing factors of the middle-income trap. Governments should collaborate with the
    private sector as well due as they contribute a fair share towards achieving the high-income
    status. The collaborations allow different perspectives to be considered before the decision-
    making process and the most efficient solution benefiting all the sectors can then be executed
    to reach the common goal of becoming a high-income economy by the year 2020.

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