PETALING JAYA: Bank Negara has again called for accelerated structural reforms in Malaysia as economic activity remains well below pre-pandemic levels and the country’s unemployment rate has yet to fully recover.
Speaking at the launch of Bank Negara’s 2021 Annual Report, Governor Tan Sri Nor Shamsiah Mohd Yunus stressed that structural reforms were relevant to fostering a conducive investment climate and improving Malaysia’s long-term competitiveness.
“Structural reforms such as improving labor market flexibility and strengthening insolvency laws could accelerate the reallocation of resources and increase productivity,” she said.
Structural reforms are also needed to address Malaysia’s high cost of living, which has disproportionately affected low-income households with low reserves.
According to Bank Negara estimates, of the net income of RM230 earned by the bottom 40% of households (B40), approximately RM203 is spent on items subject to high inflation – excluding fuel and electricity. ‘electricity.
By comparison, the wealthiest 20% of households (T20) spend only RM922 on these items, out of their net income of RM4,081.
“Short-term fixes, while warranted in some circumstances, would not prevent this problem from recurring and could lead to unintended consequences.
“Therefore, structural reforms addressing both income and cost factors are essential to build household resilience to future shocks,” the report adds.
Economist Manokaran Mottain agreed that urgent economic reforms were needed if Malaysia was to achieve sustained average economic growth of 4% to 5% in the coming years.
The pace of reform in Malaysia, according to Manokaran, has slowed since 2020.
“We need reforms to the welfare system as we move towards an aging society. We also need to move quickly to targeted subsidies and the reintroduction of the Goods and Services Tax (GST).
“The GST is important to us in order to achieve an efficient tax management system. The government can introduce a lower rate of 3% but with a lower amount of exemptions. If possible, we should reintroduce the tax by the end of this year,” he told StarBiz.
Meanwhile, Professor of Economics at Malaysia University of Science and Technology (MUST), Dr Geoffrey Williams, has recommended reforms in liberalizing markets, restructuring the labor market to encourage greater flexibility in working practices while protecting income and social protection.
“We also need comprehensive investment climate reform and liberalization for foreign investors to reverse the decline in net foreign direct investment and create a more foreign-friendly environment here, given the competition from other ASEAN countries,” he said.
During the virtual briefing yesterday, Bank Negara also unveiled its new gross domestic product (GDP) growth forecast for 2022, forecasting an expansion of 5.3% to 6.3% this year.
This is a slightly lower forecast than the previous official guidance of 5.5% to 6.5%. By comparison, Malaysia’s GDP grew by 3.1% in 2021.
Manokaran, however, thinks even the lower end of the forecast, 5.3%, is “optimistic”.
He argued that businesses will take at least three months to regain pre-pandemic operational capacity, after the country moves into endemic status on April 1.
“Even if international borders reopen, businesses cannot recover immediately. There remain constraints in the economy such as lack of business financing and difficulties in finding suitable workers.
“I think we can only achieve GDP growth of 4% to 5% this year, that’s still healthy growth,” he said.
MUST’s Williams is even more cautious on the economic outlook, predicting just 3.5% GDP growth.
“We’re not that confident about external demand and believe there is structural damage being done to the economy, businesses and consumer balance sheets, and debt levels are weighing on domestic demand.
“We are not so confident in pent-up consumption.
“Bank Negara has also adopted a cautious rating on corporate debt and we agree with this caution,” he said.
While risks to the economy remain tilted to the downside, the central bank still expects Malaysia’s economic recovery to gain momentum in 2022.
Key growth drivers include the continued expansion of external demand supported by the tech bull cycle, the full lifting of lockdown measures and the reopening of international borders.
A further improvement in employment and income prospects, as well as continued access to targeted policy measures, would also support the growth momentum.
Meanwhile, with raw materials accounting for more than 10% of Malaysia’s total exports, the governor said rising prices would give Malaysia’s economy a new boost.
Amid the more positive outlook, Nor Shamsiah warned that the main challenges in 2022 would be developments in the Covid-19 pandemic, ongoing geopolitical conflicts, in particular the Russian-Ukrainian war, as well as high cost pressures. and prices.
Specifically on the Russian-Ukrainian conflict, Nor Shamsiah pointed out that Malaysia could not escape the impact, given the country’s status as a small open economy.
The ongoing conflict is likely to weigh on growth prospects through several channels, including disruptions from trade and financial sanctions, rising commodity prices and financial market volatility.
“But having said that, I would also like to point out that Malaysia has a diversified economy with diverse sources of growth and an export structure, which underpins our economic resilience,” she said.
Nor Shamsiah added that the Russian-Ukrainian conflict remains very fluid and “things can change very quickly”.
“How this affects the Malaysian economy…it will ultimately depend on the duration of the conflict, the extent of the countermeasures and the resulting disruption to the global supply chain.
“We will continue to monitor this closely and update our assessments accordingly,” she said.
For now, Bank Negara, in its baseline forecast, has assumed that global growth will remain above the long-term average of between 3.8% and 4.3%, and that the price of Brent crude oil will be between between 100 and 120 US dollars per barrel.
Despite the macroeconomic challenges, Nor Shamsiah said there have been notable improvements in job prospects amid encouraging signs of hiring activity in 2022.
In 2022, Bank Negara expects the total number of jobs to increase to 15.6 million people, compared to 15.29 million in 2021.
The unemployment rate is expected to fall to 4% this year from 4.6% in 2021. However, it should be noted that the projected unemployment rate is still higher than the 3.3% rate seen in 2019 before the pandemic.
Meanwhile, Nor Shamsiah pointed out that Malaysians are highly indebted, and while borrowers’ debt servicing capacity remains strong, further excessive debt accumulation can affect household purchasing power.
At end-December 2021, Malaysia’s household debt-to-GDP ratio was 89%, compared to 9.9% in the Philippines, 17.2% in Indonesia, 69.7% in Singapore and 89.3% in Thailand.
“Malaysians are heavily indebted but their ability to repay remains supported by targeted assistance and prudent lending standards,” she added.
On price pressures, Nor Shamsiah said Malaysia is expected to see an average headline inflation rate of 2.2% to 3.2% in 2022, up from 2.5% in 2021.
The governor also said core inflation is expected to rise on average between 2% and 3% this year, compared to just 0.7% in 2021.
This is because economic activity continues to recover amid high input costs for businesses.
“The inflation outlook is subject to developments in global commodity prices amid risks of prolonged supply-related disruptions,” she added.
Amid the inflation outlook, Nor Shamsiah promised that any changes to its accommodative monetary policy would be “measured and gradual”.
Changes to the benchmark interest rate or overnight policy rate, which currently sits at a record high of 1.75%, would be determined by new data amid uncertainties and rapidly changing conditions. , she said.