Malaysia needs bolder economic reforms beyond fuel subsidy rationalisation

IT is high time for Malaysia to embark on bold economic reforms, a crucial step towards ensuring our nation's prosperity and growth.

I spent the Wesak Day public holiday watching a YouTube channel called "The Game of the Impossible", where former minister in the prime minister’s department Datuk Seri Idris Jala is interviewed by his son, Leon Jala.

For those of us who do not know Idris, he is the architect of the Government Transformation Programme (GTP) and the Economic Transformation Programme (ETP), which the government implemented between 2009 and 2018.

In 2014, Bloomberg recognised Idris as one of the top 10 most influential policymakers in the world. He is also the chairman of Pemandu Associates, a global consultancy firm focused on public sector transformation and business turnaround. Leon is a board member of Pemandu Associates.

The podcast is great to listen to because Idris shares his unique insights on the GTP and ETP and the challenges leaders face. He related this to his personal experiences with Shell Malaysia and Malaysia Airlines — companies he worked with before he was appointed minister.

Idris tells us we need to go big and bold. I cannot agree more.

When it came to making big and bold decisions, Idris and Pemandu did not shy away because they also had very supportive political leadership from former prime minister Datuk Seri Najib Razak.

I remember spending a few weeks in the famous Pemandu Labs, where many great GTP and ETP initiatives were conceived. The GTP and ETP worked at the end because that is what the data tells us. The GDP growth rate averaged around 5.0% annually, with notable peaks such as a 7.4% increase in 2010 as the country rebounded from the global financial crisis. This consistent growth elevated Malaysia's GDP per capita from RM7,028 in 2009 to RM11,373 in 2018, reflecting an increase of approximately 62%. These programmes targeted key economic sectors and aimed to propel Malaysia towards becoming a high-income nation, contributing to enhanced public services, reduced corruption, and greater public sector efficiency.

During this period, Malaysian households also saw significant improvements in income levels. The median monthly household income rose from RM2,830 in 2009 to RM5,228 in 2016, an increase of about 84.7%. Similarly, the mean monthly household income grew from RM4,025 to RM6,958, marking a rise of approximately 72.8%. Additionally, the poverty rate dropped significantly from 3.8% in 2009 to 0.4% in 2016, underscoring the effectiveness of the transformation programs in enhancing living standards and reducing poverty. The unemployment rate remained stable and low, fluctuating between 3.0% and 3.5%, further reflecting the robustness of Malaysia's economic growth during this period.

This brings us to the next question. Is Malaysia thinking and acting big and bold today?

One of Najib’s administrations made several seminal decisions, such as implementing the Goods and Services Tax, or GST. The GST aimed to broaden the tax base, increase government revenue, and reduce fiscal deficits. However, the implementation faced several challenges. The public and businesses expressed concerns about increased living costs and the tax system's complexity. Also, the GST became a political football, eventually leading to Barisan Nasional’s defeat in the 2018 general election. The new government, led by Tun Dr Mahathir Mohamad, fulfilled its campaign promise by repealing the GST on June 1, 2018, and reintroducing the sales and service tax (SST). However, the full effect of the GST’s repeal is being felt now especially after the former government’s spending spree during the Covid-19 pandemic.

After the current government assumed power, it introduced its own economic framework. The Madani Economic Framework, or MEF, launched on July 27, 2023, aims to promote inclusive and sustainable economic growth, social justice, and environmental stewardship. It focuses on reducing income inequality, fostering innovation and economic diversification, investing in education and healthcare, ensuring good governance, and promoting balanced regional development. The framework seeks to create a resilient, equitable, and sustainable economy that benefits all Malaysians, ensuring long-term prosperity and stability while safeguarding the environment.

The MEF's aims and aspirations are great and noteworthy. However, to achieve them, the government must be big and bold. It must be ready to make painful choices to ensure long-term sustainability. The government plans to achieve the goals of the MEF through initiatives focused on economic diversification, fostering innovation and technology, investing in education and healthcare, and promoting environmental sustainability. It aims to reduce income inequality, ensure equitable access to resources, and enhance social justice. Good governance is prioritised through strengthened institutions and public participation, while balanced regional development efforts seek to reduce urban-rural disparities, creating a resilient, equitable, and sustainable economy for all Malaysians. However, what is absent is a clear and compelling roadmap to achieve this. The government needs to take a leaf out of Idris’s playbook by developing the ETP and GTP 2.0.

As a start, the government has sought to reform the fuel subsidy system. Previous governments tried but with varied success. The government plans to gradually phase out diesel subsidies to reduce fiscal burdens and address fuel smuggling issues. The goal is to implement a targeted subsidy scheme where only eligible low-income groups and essential sectors, such as agriculture and fisheries, continue to receive subsidies. This approach aims to ensure that subsidies are more efficiently utilised, reducing wastage and benefiting those who genuinely need financial support while encouraging more sustainable and efficient energy use.

In the next stage, petrol subsidies will be reformed to ensure they are targeted and operate efficiently. Some have advocated the total removal of subsidies, but that will not work. Whether we like it or not, subsidies are an equaliser to address wealth disparities because they provide financial support to lower-income groups, making essential goods and services more affordable. By reducing the cost burden on necessities such as fuel, food, and healthcare, subsidies help improve living standards, reduce poverty, and ensure more equitable access to resources and opportunities, narrowing the wealth gap in society.

However, the government must think beyond subsidy rationalisation and re-look at the GST. It is time to implement the GST and probably bite the bullet now. In 2015, at the height of the GST debate, I remember coming across statistics that said almost all governments that brought in the GST lost power except Singapore. India’s government returned to power in 2019 after implementing the GST in July 2017. While political considerations are material, they must not win over economic well-being and long-term financial stability.

So, while the reforms on fuel subsidies are a good start, the government must now act boldly.