World Bank expects Malaysia’s fiscal deficit to widen to 7% of this year’s gross domestic product (GDP) on the back of increased expenditure as well as downward pressures on revenue.
The latest edition of World Bank’s Malaysia Economic Monitor (MEM) showed that Malaysia had a relatively elevated level of government debt and a low revenue level at 52.5% and 15.4% of 2019 gross domestic product (GDP), respectively, when it entered the Covid-19 crisis.
World Bank said the widened fiscal deficit would see the government in a very tight spot should additional stimulus be needed.
The Sun Daily reported that World Bank’s forecast is higher compared to Finance Minister Tengku Datuk Seri Zafrul Aziz’s projection of Malaysia’s fiscal deficit increasing by 5.8% to 6% of this year’s GDP.
The country’s fiscal deficit stood at 6.7% of GDP during the 2008-2009 Global Financial Crisis.
On whether the widened fiscal deficit of 7% would place Malaysia’s credit rating at risk, Richard Record, Group Lead Economist of Macroeconomics, Trade and Investment at World Bank, explained that the country’s credit worthiness will not only depend on the amount it borrows.
“Malaysia’s credit worthiness depends on not just how much the government borrows but the nature and strength of economic activity during a slowdown and the nature and strength of recovery which comes afterwards,” The Sun Daily quoted Record as saying.
According to him, Malaysia’s credit worthiness can be ensured by protecting those who need it most, preserving the economy’s structures, protecting the long-term human capital of the population’s vulnerable sectors and helping small and medium enterprises.
The World Bank suggested some immediate options for the government to limit the hike in this year’s fiscal deficit.
It noted that while its savings may not be enough to cover the drop in revenue, the government could recalibrate certain items within its budget. Other non-taxable revenue measures can also be explored, it said.
Meanwhile, options to fund additional fiscal measures are hindered by statutory limits that could be amended via a parliament sitting.
Costs related to the Prihatin package and Penjana plan are anticipated to lead to a hike in government expenditure at RM35 billion this year. The dependence on non-fiscal mechanisms to fund the bulk of the Prihatin package as well as the Penjana plan mirrors limited fiscal space that is available to the government.
The weakening global oil prices also placed additional downward pressure on the already falling government revenues. World Bank calculations indicate that the federal government will see a RM22 billion revenue shortfall this year from its RM245 billion budget estimate, primarily due to significant loss of petroleum-related income. The tax exemptions offered by the government in the Penjana plan could also mean loss of potential revenue.
With this, the World Bank expects Malaysia’s economy to contract 3.1% this year, on the back of a significant slowdown in economic activity due to the Covid-19 outbreak. While the near-term outlook remains uncertain, World Bank sees growth resuming at 6.9% next year.