Omicron could restrain economic recovery


THE uncertainty of the Omicron variant might threaten Malaysia’s health system and the vulnerable business environment which could constrain economic recovery and growth. 

World Bank Group lead economist, macroeconomics, trade and investment Dr Apurva Sanghi said the new Covid-19 variant, pro-longed global supply chain disruption, slower China economy and the possible resumption of US-China trade tension could directly affect Malaysia’s external demand. 

He expects Malaysia’s economy to rebound from the projected 3.3% growth in 2021 to 5.8% in 2022. The 3.3% forecast is not a surprise given the severity of the lockdown this year and the mobility restriction. 

“With the easing of the economy, we have seen a bounce back, especially in the private consumption and return on investment on the back of high vaccination rate in Malaysia,” he said in a press conference after the launch of the 25th Malaysia Economic Monitor “Staying Afloat” yesterday. 

Apurva cautioned Malaysia’s fiscal space was shrinking due to the Covid-19 pandemic as the government expenditure has risen to about 6.5% of the GDP this year while revenues have been consistently dropping for almost a decade. 

“Malaysia’s debt limit was also raised from 60% to 65% of GDP to accommodate higher spending. However, increasing debt limit in the absence of higher revenue and rigid expenditure, paying more to services has contributed to narrow- ing Malaysia’s fiscal space, increasing fiscal rigidity and crowding out discretionary spending. 

“Budget 2022 indicated Malaysia’s fiscal space would likely remain constrained and the government was considering imposing a comprehensive revenue raising strategy. This includes prosperity tax, sugar-sweetened beverage and tax exemption foreign income removal,” he added. 

Apurva said the government’s Fiscal Responsibility Act (FRA) 2022 was urgently required. 

“If it is properly designed and implemented, it should help to establish a medium-term fiscal consolidation and deepen public trust and government spending,” he added. 

World Bank Group country manager for Malaysia Dr Yasuhiko Matsuda said long-term economic planning should not be rigid and focus on a broader perspective to guide economic policy. 

He said Malaysia requires a long-term FRA and larger fiscal space for prudent spending and increase revenue collection through a more progressive tax framework. 

“The FRA, expected to be proposed in 2022, could pave the way for medium-term fiscal consolidation. 

“However, in the short-term, improving the targeting of social spending and at the same time phasing out generalised and regressive subsidies, such as fuel subsidies, will help raise the effi- ciency of government spending,” he said.