Package to stimulate growth


  • Business
  • Tuesday, 20 May 2003

Prime Minister Datuk Seri Dr Mahathir Mohamad will unveil the Government's long-awaited economic stimulus package tomorrow. WONG SULONG provides a layman's guide to why the government is taking this initiative and the outlook for the Malaysian economy. 

QUESTION: Why is the Government announcing an economic stimulus package mid-way between Budgets? Is the economy in trouble? 

ANSWER: Let’s tackle the second question first. Is the economy in trouble? Yes and no. Basically the economic fundamentals remain strong, meaning the economy and financial system are in good shape, capable of withstanding external shocks; inflation is low, and there is political and social stability.  

But the economy is finding it increasingly difficult to get sufficient traction to surge ahead. Instead, it has slid backwards in recent months. The reasons are largely external. The world’s leading engines of growth – the US, Europe and Japan – are not firing properly despite a low interest rate regime, low inflation and huge tax cuts. Therefore demand for Malaysian exports in the past year have been rather subdued. On top of that, you have the US-led attack on Iraq, and the outbreak of SARS (Severe Acute Respiratory Syndrome). 

The Government has therefore revised its growth target for the country for this year – from a targeted rate of between 6% and 6.5% made in last September’s Budget to 4.5% at the release of the Bank Negara annual report in March. Despite this sharp downward revision, many private sector economists and analysts say it would be difficult for Malaysia to achieve 4.5% growth for the year. Many are projecting a growth rate of between 3% and 4%, which is low for a country with so much potential. 

Given this scenario, it is therefore timely for the Government to take pre-emptive measures to check the slide, and give a boost to the economy through a stimulus package. 

 

DECISION MAKERS: Dr Mahathir getting ready to chair the 2004 Budget Dialogue at the Treasury Department in Putrajaya Monday. On the left is Dr Jamaludin.

Q: The economic stimulus package was supposed to have been announced in early April. What is the reason for this delay? 

A: When Second Finance Minister Datuk Dr Jamaludin Jarjis announced in February that the Government was working out an economic stimulus, the Government had been receiving signals that the economy was sliding. Also to be taken into account was the potential fallout from the US attack on Iraq. The Government was working on three scenarios on the Iraq war – short, medium term and a protracted war. As it turned out, the US attack on Iraq was over in less than a month (a short war), and its impact on the Malaysian economy was only marginal. 

But SARS was far more devastating and immediate, particularly to the tourism, hotel and retail sectors. Since it was difficult to get an accurate picture of the impact of SARS on the economy, the Government decided to wait a little longer. Hopefully, Malaysia can now be regarded as SARS-free, and the disease appears to be under control globally. When Dr Mahathir unveils the economic package tomorrow, he would be getting a far better perspective of the economic challenges ahead than six weeks ago. So the delay in announcing the economic package was necessary and prudent. 

 

Q: What sort of initiatives can we expect from the economic package? 

A: That’s a 64 million-dollar question. We have read all sorts of predictions. Only the Prime Minister knows. 

From what I gather, the package would touch on five broad areas: 

(i) Helping SARS-affected sectors to recover from its devastating impact. These measures could range from lower electricity tariffs for hotels, soft loans to travel agents and suspension of the Government’s 5% service charge for food and hotel outlets. 

(ii) Encouraging the private sector to be the engine of growth. Measures could include cutting government red tape and bureaucracy in obtaining approvals and licences. The Foreign Investment Committee is expected to be liberalised to attract foreign and domestic investment. 

The small and medium-size enterprises (SMEs) have been singled out as the micro-engines of growth. The Government is expected to provide more funds and easier access to credit for the SMEs. 

(iii) Developing new growth industries. The Government has identified education, health care, tourism and information technology as new growth industries for the country. Dr Mahathir is therefore expected to announce new incentives for these sectors. 

(iv) Improving the nation’s competitiveness. A Cabinet committee, chaired by Deputy Prime Minister Datuk Seri Abdullah Ahmad Badawi, has been looking into this challenge and has submitted its proposals for implementation. 

(v) Socio-economic goals of the Government. Apart from stimulating growth, the Government will be using the economic package to advance social justice. Low and medium-cost housing is expected to be given a big boost in the economic package with a host of incentives for buyers. The Government believes that a boost to housing and construction is an effective way to jump-start the economy given its wide spill over effects. 

Over and above those measures, the Government is expected to announce incentives to encourage private consumption. Possible initiatives include an interest rate cut, a mid-year bonus for civil servants or even a cut in Employees Provident Fund contributions. 

 

Q: Is the Government using the economic stimulus package to win votes in the coming general election? 

A: Every major government economic initiative will have a political dimension, whether intended or unintended and every government will design economic policies helpful to its public image and electoral prospects. This is an accepted part of politics unless the programmes are downright pork barrelling. 

 

Q: What is the outlook for the economy for the rest of the year and next year? 

A: If SARS is contained by May or June and taking into account the expected boost from the Government’s stimulus package, I think the economy should recover in the second half of the year. Already, there are signs that people are going back to what they have been doing before the war in Iraq and SARS, i.e. shopping, eating out and going on holidays. But the damage to the tourism and hospitality industry has been done, and it needs all the help it can get from the Government and consumers. 

I believe Malaysia should be able to achieve 4% growth for this year, roughly about the same as in 2002 (4.2%). This would not be a bad figure given the very difficult global and local environment. Moving forward from this consolidation, I believe the economy can grow by 5% to 6% next year. 

 

Q: Many people are worried about the future of the country. There is war, terrorism, and SARS. Foreign investors are going to China and not coming here. Has Malaysia lost its competitive edge? 

A: The year has turned out to be far worse than most people had expected, and it’s understandable if people are confused and fearful. But Malaysia has actually escaped the worst of the vicissitudes of 2003. For that, we have to be thankful. 

Malaysia has to accept the fact that the future manufacturing centres for the world will be China and India. It is already happening. But we need not fear China or India. We can no longer rely on the old policy of exports based on cheap labour. New growth industries have already been identified to lift the economy onto a higher plane, although structural reforms needed may cause some painful social dislocation. That’s inevitable. There is no reason to fear Malaysia has lost its competitive edge. As long as the Government can create a conducive environment, Malaysians, who are an innovative and resourceful people, will respond to the challenge. 

 

Q: Can Malaysia achieve Vision 2020?  

A: Vision 2020 targets Malaysia to be a fully industrialised, developed country by 2020. This implies an annual economic growth rate of 7%. Such a high annual growth rate appears to be unachievable following the 1997 Asian financial crisis. Malaysia’s future growth rate is likely to be between 5% and 6% and based on this lower rate, Vision 2020 should be achieved between 2025 and 2028. Would Malaysians have any problem with that? I don’t think so. 

Related story:PM set to unveil stimulus packageEffectiveness of fiscal support vital 

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