Policies should prioritize the poor and the vulnerable as the economy is projected to recover in 2022

The Malaysian economy is projected to expand by 5.8 percent in 2022, as domestic and external demand recovers, according to the latest edition of the World Bank Malaysia Economic Monitor: Staying Afloat, launched today. The forecast for the year ahead follows growth estimates of 3.3 percent in 2021. It remains clouded by several downside risks, including new COVID-19 outbreaks and weaker-than-expected global and regional growth.

Limited fiscal space remains a key challenge. Federal government revenue, which has been declining since 2013, is projected to reach 14.3 percent of GDP in 2022. Meanwhile, rigid operating expenditures – namely emoluments, retirement charges, and debt service payments – have grown markedly over time and are expected to take up two-thirds of federal government revenue next year, increasing fiscal rigidity and crowding out discretionary spending.

“The pandemic has further constrained Malaysia’s already limited fiscal space. Government revenue is expected to decline while rigid expenditures remain high. Therefore, the government should accelerate efforts to rebuild fiscal buffers by collecting more and spending better,” said Ndiame Diop, World Bank Country Director for Brunei, Malaysia, Philippines and Thailand.

A Fiscal Responsibility Act (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 generalized and regressive subsidies, such as fuel subsidies, will help raise the efficiency of government spending. Targeted social spending should remain a short-term priority due to the high degree of uncertainty over the health and economic outlook moving into 2022.

“Even before the pandemic, many low-income households were already struggling to make ends meet. The pandemic has caused disruptions to income, leading to many households being vulnerable to poverty, especially those in the B40 and most vulnerable categories. The jump in Malaysia’s poverty rate from 5.6 percent in 2019 to 8.4 percent in 2020 is a humbling reminder for the government to ensure that no one is left behind,” said Datuk Seri Mustapa Mohamed, Minister in the Prime Minister’s Department (Economy).

The pandemic has exacerbated existing challenges faced by poor and vulnerable Malaysian households. According to the High-Frequency Phone (HiFy) survey commissioned by the World Bank in Malaysia, the pandemic had worsened many socio-economic aspects of households, potentially adding to long-term inequalities, besides slowing future growth.

Low-income, less-educated, and younger workers were more likely to have faced job losses during the pandemic. Informal workers were also among the worst hit and have been more susceptible to income losses. Moreover, despite receiving government assistance, households still had to use personal savings and reduce consumption to cope with the financial challenges. The survey also revealed learning gaps between children from different socio-economic groups that existed even before the pandemic. School closures resulting from movement restrictions have widened these gaps as low-income households struggle with resources and support for their children undergoing home-based learning.

To ensure Malaysia fulfills its growth potential in the next coming years, it is a very critical and opportune time for the country to address pre-existing gaps as well as newly emerged challenges from the crisis. In the short term, the focus should be on maintaining financial support for the poor and vulnerable, achieving greater inclusivity, including facilitating learning for all children. Over the longer term, measures should aim to address the shortcomings in the current social protection and education systems to make them more impactful in addressing poverty and inequality and more responsive to shocks. At the same time, it will be necessary to manage the pandemic’s lasting impact on livelihoods, well-being, and human capital development.