KUALA LUMPUR, Dec 7: Malaysia will need continued macroeconomic prudence in the short term and sustained structural reform in the longer term in order to navigate the uncertainties ahead, said The World Bank Group chief economist for East Asia and Pacific region Dr Sudhir Shetty.
“Right now, I think Malaysia is going through an adjustment process to the fact that commodity prices are lower. I think in the longer term, they will have to adjust some of these structural issues that are facing the economy. Things like education and skills, performance of the public sector and improving performance of the services sector,” he told reporters at the 10th Asia Economic Summit last Friday.
He expects Malaysia’s gross domestic product (GDP) to grow at 4.7% this year and shrink to 4.2% next year before gradually rising in 2017.
In his presentation titled “Navigating the Global Uncertainties: Challenges and Opportunities for Malaysia” during a round table session at the summit, Shetty said the short-term priorities for Malaysia include continued macroeconomic prudence and ensuring an appropriate policy mix, especially in letting the exchange rate depreciate in response to a permanent terms of trade shock.
He said there is not much room for counter-cyclical fiscal and monetary policies.
He also highlighted the need to look at short-term tax policy measures such as limiting tax expenditures, reducing Goods and Services Tax (GST) exemptions and expanding the personal income tax base.
Shetty said reducing tax expenditures on corporate income tax would raise more revenues and the country could begin by publishing tax expenditure statements.
On GST exemptions, he said exemptions should be quantified and made transparent while personal income tax base should be expanded as only 20% of income earners are currently paying.
“If you are doing it in a way that captures people at the upper income end, you probably won’t lose too much in terms of domestic consumption,” he added.
Meanwhile, the medium-term priorities include structural reforms such as improving public sector performance, accelerating human capital development and re-engineering economic growth.
To improve public sector performance, the government could look at improving tax administration, examine ways of increasing non-tax revenue from GLCs and improving expenditure efficiency.
On developing human capital, Shetty said Malaysia’s education system is far behind comparators while educational attainment and outcomes are unequal across socio-economic groups.
He said quality of basic education is a major challenge and it would be hard for Malaysia to move towards an innovation-based economy without quality education.
Shetty also suggested that Malaysia look at re-engineering economic growth through the services sector.
“Countries like Malaysia have under stressed the potential gains from spurring services growth,” he said.
He said services sectors include many high value added tasks thus it can be an engine of growth and high-end employment.
“Many modern services are increasingly traded due to technological advances. Services are also complementary to high value added manufacturing,” he added.
He said the way forward is to address skills gaps especially management, English and IT, improve access to soft technologies such as management practices, reduce restrictiveness in the policy environment, remove bottlenecks in the regulatory environment and use trade agreements as a way of addressing policy barriers.