FPC: Economic Rebound Ahead

Chaired by the Prime Minister and who’s who from the financial institutions, the Fiscal Policy Committee met for the second time this year to discuss Malaysia’s current economic conditions as well as the fiscal situation, medium-term fiscal projections, and debt position of the Government.

The meeting report points to the prospects for economic recovery in the near term appear being more favourable, supported by the National Recovery Plan’s systematic re-opening of various economic sectors, including social activities such as dining-in and tourism. Adding that timely implementation of the various stimulus and assistance packages has provided additional impetus to economic recovery.

  1. Some of the key indicators showing the economy is recovering includes the strong rebound in the monthly GDP growth, from a decline of 28.8% in April 2020, to surges of 40.1% and 19.8% in April and May 2021, respectively. However, GDP growth in June fell by 4.4% due to the impact of the MCO 3.0 which began in mid-May, and Phase 1 of the NRP in early June. A recovery in the labour market, with the unemployment ate improving to 4.8% in July 2021, from a high of 5.3% in May 2020; Increased manufacturing sector sales by 0.6% to RM119.8 billion in July 2021, compared to a 33% reduction in April 2020; External trade expansion, with exports expanding by 18.4% to RM95.6 billion in August 2021, while imports improved by 12.5% to RM74.2 billion; and Increase in the Leading Index by 0.5% in July 2021, after a 6.0% drop in April 2020, which indicates a gradual economic recovery in the near-term and improved economic prospects by 2022.

“As a small and open economy, Malaysia’s recovery is highly dependent on the global economic recovery, particularly that of our major trading partners. As such, Malaysia’s 2022 growth is expected to rebound in line with the recovery in the global economy and trade throughout the second half of 2021 and next year, particularly as more countries step up their vaccination efforts. Furthermore, the continued implementation of economic and fiscal stimulus measures will also support Malaysia’s economic growth, which is expected to remain strong at 6.0% and 5.8% according to the IMF and the World Bank, respectively” Finance Minister Tengku Zafrul

As for the country’s 2021 fiscal position, the Government has raised the deficit target to range between 6.5% to 7% to GDP from the initial target of 5.4%, taking into account additional fiscal injections in four assistance packages announced this year, totalling RM225 billion or 14.8% of GDP.

For the fiscal outlook for the coming year, as well as its medium-term fiscal trajectory, the Government’s fiscal policy will continue to be centred on providing constant support in promoting a sustainable economic recovery and the smooth implementation of the recently announced Twelfth Malaysia Plan, 2021-2025. However the immediate priority will be in restoring the nation’s potential growth capacity to allow communities and businesses to adjust to new norms, as well as to invest for future growth and better job opportunities. Given the need for spending flexibility during this unprecedented pandemic crisis, the Government will table a motion during the current Parliamentary sitting to raise its statutory debt limit from 60% to 65% of GDP.

The FPC reiterated that the Government remains committed to fiscal consolidation in the medium term as outlined in the 12MP, with a deficit target of 3.5% of GDP by 2025. To achieve this, the committee also deliberated on the application of a variety of fiscal tools to balance the Government’s spending needs with fiscal sustainability.

Measures include improving revenue collection, enhancing spending efficiency and managing debt more prudently. To achieve long-term macroeconomic and fiscal stability, the Committee had agreed that medium-term fiscal consolidation will have to be more robust than previously planned, while keeping pace with expected economic recovery.

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