Published November 19, 2009

WB warns KL against early fiscal exit

But it adds that extending support could hamper consolidation

By S JAYASANKARAN
IN KUALA LUMPUR

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THE World Bank straddled the fence on Malaysia yesterday, warning that while the country should not exit fiscal spending too early, it should not extend it too long either.

Tall order: Malaysia needs to achieve 5.4% growth a year in order to attain high-income economic status

In a country report on Malaysia released yesterday, the World Bank said that stopping spending prematurely would choke off economic recovery. At the same time, it warned that extending fiscal support could 'hamper the credibility of medium-term fiscal consolidation, reduce room for future stimulus packages, increase the risk of asset price bubbles and constrain the private sector once demand picks up'. The institution did not, however, give any timeframe on what period was too short or too long.

Kuala Lumpur expects a budget deficit of 7.4 per cent of gross domestic product (GDP) in 2009. This is the highest shortfall in two decades and is largely due to RM67 billion (S$27.7 billion) in additional spending to mitigate the effects of the global financial crisis.

Even so, Prime Minister Najib Razak expects the deficit to be pruned to 5.6 per cent of GDP in 2010 by sharp cuts in both operating and development spending. Indeed, yesterday, Sidek Hassan, the nation's top civil servant, said that some departments could face spending cuts of up to 14 per cent. It is not clear if the spending cuts fell into the World Bank's category of exiting too early.

Still, the global financial institution was considerably more upbeat on Malaysia's prospects for 2010 than Mr Najib's administration. The government expects the Malaysian economy to shrink 3 per cent this year and to expand by the same percentage next year.

The World Bank begged to disagree. 'With East Asia leading the recovery and advanced economies showing progressive improvement, the Malaysian economy is projected to grow at 4.1 per cent in 2010, following a contraction of 2.3 per cent in 2009,' it predicts in its report.

And it could get better. On Tuesday, World Bank senior economist Philip Schellekens said in a seminar here that Malaysia's growth in 2012 could reach 6 per cent because of Mr Najib's economic reforms and the global recovery. He said that the reforms had 'encouraged more private sector participation and greater productivity'.

In an immediate response to the World Bank report, the minister in charge of the Economic Planning Unit Nor Mohamad Yakcop said: 'Three to 4 per cent economic growth is good but it's very anaemic.' He was presumably referring to the fact that Mr Najib had said recently that while the official growth was 3 per cent, he was actually hoping for 5 per cent through private sector participation.

'At that growth, there is no excitement,' Mr Nor Mohamad told reporters when asked to comment on the World Bank report. 'The excitement comes at beyond 5 per cent, and at 6 per cent, of course, it is very exciting.'

According to government planners, Malaysia needs to achieve at least 5.4 per cent growth a year in order to attain high-income economic status by 2020.