Published October 5, 2009

MALAYSIA INSIGHT

Najib & his debut budget

He must be tough on wasteful govt spending

By S JAYASANKARAN
KL CORRESPONDENT

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THE good news is that Malaysia seems to be getting out of the woods. The bad news is that both its debt and budget deficit remains high.

For the first part, listen to central bank governor Zeti Akhtar Aziz. Last week, Ms Zeti said that Malaysia's growth would be better than the official projections of a 5 per cent contraction and that growth would turn positive in the final quarter of this year.

Certainly, the numbers are turning around. The broader money supply aggregate (M3), a reflection of the economy's buoyancy, jumped 7.5 per cent year on year in August, the strongest spike in six months, compared to 5.3 per cent in July.

On the other hand, the budget deficit is expected to rise to close to 8 per cent of gross domestic product (GDP) this year and what could be an alarming number the next if steps aren't taken to throttle back spending.

Meanwhile, Kuala Lumpur's debt stands at 41 per cent of GDP. That is not unduly worrying because most of it is ringgit-denominated but it has to be balanced against the fact that the same item was 32 per cent of GDP in 1997 when Malaysia was staring down the barrel of the Asian financial crisis.

The key obviously lies in cutting spending. Unfortunately, that is particularly tricky as turning off the fiscal stimulus tap could kill the recovery.

The government has indicated that the tap will be turned off next year, which will give everyone some breathing space. But Prime Minister Najib Razak has made some right moves.

For one thing, he raised premium petrol prices by 14 per cent last week. Subsides - for fuel, food, and fertiliser to name a few - account for over 20 per cent of the budget, which is inordinate.

Mr Najib has done the right thing here. Still, he could do a lot more by tweaking the other subsidies by a couple of percentage points.

He will be tabling his first budget at the end of the month. What he has got to look at is the government's operating expenditure which has been skyrocketing under the tenure of his predecessor Abdullah Ahmad Badawi

In 2005, a year after Mr Abdullah took over from Mahathir Mohamad, the allocation for operating expenditure - which, in theory, denotes a fixed cost - was RM90 billion (S$36.8 billion). This shot up, progressively, to RM107 billion, RM123 billion, RM150 billion and RM154 billion last year.

That way lies madness, if not profligacy. If he is serious about cutting the deficit, Mr Najib has to tackle the soaring operating expenditure. Cutting subsidies would be one way.

Another would be the amount of money doled out in scholarships and loans to undergraduate and graduate students. This is a huge sum annually and we are, in no way, suggesting that it be stopped. But a vast number of loans aren't repaid. What we are suggesting is that loans must be repaid and that repayment be enforced. In Singapore, this is enforced by 'guarantors' who the authorities go after if the students go AWOL. A similar practice here would ensure compliance.

Lastly, there is much wastage of public funds through leakages and negotiated tenders. Open and competitive bidding for all government projects could alleviate this problem. Mr Najib should put his foot down and just do it.