Subsidy Reform, Higher Tax Rate May Be Unpopular, But Malaysia Needs Them -- Economist

By Harizah Hanim Mohamed

KUALA LUMPUR, July 12 (Bernama) -- The bold actions undertaken to revitalise Malaysia's economy under the leadership of Prime Minister Datuk Seri Anwar Ibrahim may involve unpopular measures, but they are essential for the country's progress, said Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid.

He said the diesel subsidy reform and a higher service tax rate would enable Malaysia to withstand any potential future economic challenges. “More importantly, it is to allow more fiscal space for the government to spend more on areas that can bring more productivity for the country, especially in areas relating to education, healthcare and infrastructure,” he told the Bernama World television programme today.

Mohd Afzanizam noted that these reform measures have received a good response from various stakeholders, especially from financial markets, which translated into better performance of the ringgit and equity market. Elaborating further, Mohd Afzanizam said Malaysia has been dealing with the issue of budget deficit for decades and the deficit has been in existence irrespective of the economic cycle.

“Ideally, the balanced budget should be achieved when the economy has fully recovered from any form of shocks, but I think more than that, what we saw is that the deficit has been ongoing and has become structural.

“So I think that this present administration is making a bold move to ensure that our fiscal position, especially in respect to the deficit and debt level, will be reverted to a level that is more sustainable,” he continued.

Mohd Afzanizam reckons that the current administration's strategies would also appeal to foreign investors, particularly because a stronger financial position would result in a higher credit score.

“This fiscal deficit or government debt is closely associated with credit risk and credit risk is always being assessed by the credit rating agencies such as S&P and Fitch Ratings.

“Rating agencies have been giving positive reviews on Malaysian markets and this would become the selling point for our Malaysian markets, which ultimately would drive more foreign funds to Malaysia and perhaps would contribute to the further appreciation of the ringgit,” he added.

However, Mohd Afzanizam acknowledged that the current unpopular moves needed better communication and the government needed to be clear in conveying the message so that people would understand the objective of the measures. “The public needs to know what sort of outcomes that they would be experiencing going forward,” he concluded.

-- BERNAMA