Malaysia Seeks World Bank Help to Cut Spending, Trim Deficit

November 11, 2010, 4:28 PM EST
By Soraya Permatasari and Barry Porter
Nov. 12 (Bloomberg) -- Malaysia will ask the World Bank to help in the country’s efforts to cut government spending as Prime Minister Najib Razak seeks to reduce the budget deficit from a 22-year high.
The nation is asking the Washington-based lender to review all areas of government expenditure, including how state contracts are awarded, to prevent waste from inefficiency, Second Finance Minister Ahmad Husni Hanadzlah said in an interview in Kuala Lumpur yesterday. Malaysia hopes the study will bolster the government’s credibility, he said.
“We just want a third party as a check and balance,” said Ahmad Husni, 58. An annual audit of spending at state agencies has shown “some negative findings and we hope that with the involvement of the World Bank, in the future we can see a clean sheet,” he said.
Narrowing the fiscal gap that dates to the Asian financial crisis more than a decade ago would help boost chances of lifting Malaysia’s credit rating, which is currently below that of China and Taiwan. Greater confidence in the Southeast Asian nation’s finances may also help bolster Najib’s efforts to lure investment and rejuvenate an economy that may be overtaken by neighboring Singapore this year.
Growth slowed to an average 4.7 percent a year in the past decade from 7.2 percent in the 1990s, when then-Prime Minister Mahathir Mohamad developed highways and built the world’s tallest twin towers.
Halving Gap
Najib, 57, plans to halve the budget gap in the next five years by cutting subsidies, widening the tax base and reducing expenses, according to a five-year plan he unveiled in June that targeted a shortfall of 2.8 percent of GDP in 2015. The finance ministry expects the budget gap to narrow to 5.4 percent of GDP in 2011 from 5.6 percent this year.
Still, the prime minister refrained from detailing plans to reduce subsidies further or introduce a goods and services tax in his Oct. 15 budget speech.
“There was criticism that Malaysia was too light on reducing operational expenses,” said Vishnu Varathan, an economist at Capital Economics in Singapore. “Malaysia wants to show that efforts to reduce the budget deficit will be addressed promptly and that’s why they are seeking the help of an international organization.”
The government is also doing a study with a consultant to recover an estimated 5 billion ringgit ($1.6 billion) in revenue that it believes it’s failed to collect, Ahmad Husni said. He didn’t say where the additional funds will come from.
Credit Rating
Last year’s budget shortfall of 7 percent of gross domestic product was the biggest since 1987, and the country hasn’t had a surplus since 1997. Standard & Poor’s rates the country’s debt A-, the fourth-lowest investment grade that places the Asian nation below China, Hong Kong, Taiwan and Singapore.
Malaysia’s credit standing “is constrained by its weak fiscal position,” S&P said in June.
The country said in October it will further postpone the implementation of a goods and services levy intended to broaden the tax base. Najib trimmed subsidies for sugar, gasoline, diesel and liquefied petroleum gas in July to save more than 750 million ringgit in government expenditure. Malaysia spends about 73 billion ringgit a year on subsidies, he said in April.
The reduction in subsidies will be done gradually, Idris Jala, a minister in the Prime Minister’s department, said in an interview in Putrajaya, outside Kuala Lumpur, yesterday. The government aims to keep inflation below 4 percent even as prices rise with the subsidy cuts, he said.
Singapore Overtakes
Singapore’s GDP will rise as much as 15 percent to about $210 billion, while the economy of Malaysia will expand 7 percent to $205 billion, government forecasts show.
In September, Malaysia’s government unveiled private sector-led projects worth $444 billion that it said can spur investment. The country plans to build six highways, a mass- transit rail system and a 100-floor, 5 billion-ringgit tower in and around the Kuala Lumpur.
Gamuda Bhd. and MMC Corp., which proposed the mass-transit system, will likely be the master planners, assuming they come up with the best pricing, Ahmad Husni said. Once approved, the project will be broken down into smaller packages that will be tendered openly, he said.
The economy may expand 5 percent to 6 percent next year after growing 7 percent in 2010, according to the Ministry of Finance. Husni said the country aims to achieve 6 percent growth next year.
The World Bank said this week Asian economies may need to turn to capital controls as quantitative easing by the U.S. threatens to spur asset bubbles in the region.
Malaysia isn’t considering capital controls for now, though the central bank is monitoring inflows and officials at a recent Asia-Pacific Economic Cooperation meeting discussed the idea of joint, “multilateral” measures in the future should the need arise, Ahmad Husni said.
“We are benefiting from the capital inflows and the appreciation of the ringgit,” he said. “It’s not affecting our property market like many other countries.”
--With assistance from Ranjeetha Pakiam in Kuala Lumpur, Shamim Adam in Singapore, Patrick Harrington in Tokyo and Paul Allen in Hong Kong. Editors: Stephanie Phang, Chris Anstey
To contact the reporters on this story: Soraya Permatasari in Kuala Lumpur at soraya@bloomberg.net; Barry Porter in Kuala Lumpur at bporter10@bloomberg.net
To contact the editors responsible for this story: Sandy Hendry at shendry@bloomberg.net; Chris Anstey in Tokyo at canstey@bloomberg.net

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