Three ways for Malaysia to finance stimulus

11-Apr-2020 Intellasia | The Star | 7:07 AM Print This Post

The World Bank has outlined three ways the Malaysian government can finance the additional fiscal measures to soften the impact of Covid-19, given its expected shortfall in revenue and constraints relating to its statutory limits.

It said the government’s ability to finance additional fiscal measures in the event of a prolonged pandemic was constrained by its statutory limits on federal government debts, including the requirement for the country’s operating expenditure to be financed by revenue, and not through borrowings.

In a report, the World Bank said one option would be for the government to recalibrate selected items of its operating expenditure, although it noted that the savings might not be sufficient to fund additional stimulus measures.

In this option, it said the government could relook the areas of supplies and services, grants to statutory bodies, as well as fuel subsidies and education-related aid.

The second option is for the government to raise additional non-tax revenue, such as higher investment income from Petronas and Khazanah, as well as sales of physical assets.

The third option would be a parliamentary intervention to temporarily lift the statutory limits governing public debt management, the World Bank said.

The Loan (Local) Act 1959, the Treasury (Local) Act 1946 and the Government Funding Act 1983 collectively specify that the government’s operating expenditure must be financed by its yearly revenue, and the statutory limit of the federal government outstanding debt instruments must not exceed 55% of GDP.

“It remains unclear whether the government could convene an emergency sitting of Parliament to temporarily lift these laws during the crisis period.

“The government would also have to carefully balance the need to relax these binding fiscal limits against the potential erosion of its medium-term institutional credibility in fiscal management, ” it said.

The World Bank, in a report yesterday, said it is projecting a revenue shortfall of between RM22.6bil and RM29.4bil for the Malaysian government this year, leading to a fiscal deficit of about 7%.

The revenue shortfall is anticipated to be mainly due to lower petroleum-related revenue. It said the lower revenue, coupled with larger government spending – owing to economic stimulus measures – meant the fiscal deficit could widen to around 7% this year in the absence of any new revenue measures.

It also expects federal government debt to exceed the self-imposed limit of 55% of GDP in 2020. In the report, the World Bank also noted that the government’s recent economic stimulus packages of RM260bil totalled about 17% of GDP, although direct fiscal injection accounted for only about 2.3% of GDP at RM35bil.

“The components of the stimulus package are mostly off-budget measures with a relatively small direct fiscal injection, ” it said.

Under its baseline scenario, The World Bank expects Malaysia’s real GDP growth to fall to -1% this year, before recovering to 6.4% and 4.8% in 2021 and 2022.

The estimates are based on the country’s slower growth momentum from the second half of 2019, but more significantly, a scenario whereby the disruptions to economic activities, due to the pandemic, would extend for most of the year, before a partial recovery in the fourth quarter.

Under the World Bank’s lower case scenario, however, which sees the pandemic prolonging into 2021, Malaysia’s real GDP growth is seen to shrink to negative 4.6% this year, before recovering to 4.1% in 2021.

The downside risks to its outlook, it said, were a prolonged outbreak leading to a more severe economic downturn, the country’s increasingly depleted fiscal space, political uncertainty and the stability of the ruling coalition.


Category: Malaysia

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