Malaysia Plans New Taxes to Shore Up Budget Burdened by Debt

Malaysian PM Mahathir Mohamad has announced that his government is planning to institute new taxes and sell off state assets in an effort to get a grip on the country’s 1 trillion-ringgit ($250bn) debt burden.

After meeting with the Nobel Prize-winner and former World Bank chief economist Joseph Stiglitz, Mahathir outlined his plans which will form part of a key budget speech, to be delivered by Finance Minister Lim Guan Eng at the beginning of November. The news that Mahathir intends to start tackling Malaysia’s mountain of debt will undoubtedly come as a relief to Malaysians and foreign investors alike, after months of economic uncertainty.

As part of his fiscal review, Mahathir has scaled back planned mass transport projects and is debating issuing additional bonds, including stakes in as-yet-unidentified ‘non-strategic’ companies – possibly including the state oil firm Petroliam Nasional Bhd. – to raise funds towards hitting Malaysia’s fiscal target deficit of 2.8 percent of GDP this year.

Mahathir’s economic policies could backfire

Past history, however, suggests that Mahathir’s economic policies should be taken with a healthy dose of scepticism. In fact, ratings agency Moody’s has warned that the economic measures Mahathir has started to implement, such as reintroducing fuel subsidies, will actually widen Malaysia’s fiscal deficit. Immediately after triumphing in the elections, Mahathir announced that the goods and services tax (GST) would be eliminated, eventually to be replaced with a significantly lower sales and services tax (SST).

Mahathir argues that the GST has raised living costs and that a fairer SST levy applying equally to manufacturers and suppliers of goods, as well as consumers, would be a simpler system while still providing the government with income. Critics, however, suspect that the new levy will yield less than half the $11 billion the GST netted the government each year—around 18 percent of its total revenue. Mahathir is hoping that the current uptick in crude prices will plug some of the gap in funding, but economists warn against the obvious danger of managing a national budget that’s at the mercy of petroleum prices.

Former controversies could come back to haunt the PM

The elimination of the GST isn’t the only thing about Malaysia’s new government which is spooking investors. Mahathir espoused some controversial policies during his first stint as PM, from 1981 to 2003, including his peculiar obsession with Proton auto manufacturing – an obsession he’s now apparently rekindling – and his special treatment of ethnic Malays, at the expense of other citizens.

Many of Mahathir’s pet projects were inherently flawed, leading to the introduction of inconsistent policies and – inevitably – to ignominious U-turns further down the line. As a result, Mahathir’s two-decade rule was peppered with failed experiments and false starts. The PM has a fresh opportunity to eschew the corruption, nepotism and cronyism that exemplified his former administration, but critics fear that far from becoming wiser in his old age, Mahathir has simply become more set in his ways.

As a case in point, rather than distancing himself from his former racially biased policies, Mahathir has confirmed his intention to continue promoting policies to help the ethnic majority Malays, in an effort to avoid, he says, conflict with ‘richer’ ethnic groups such as the Chinese.

The Malaysian soap opera is rattling investors

If Mahathir’s policy choices weren’t enough to cause ripples in Malaysia’s governance, the political drama that presaged the election is threatening to overshadow it completely. In a plot twist worthy of a TV soap, Mahathir is relentlessly pursuing his predecessor, Najib Razak, while effecting a high-profile reconciliation with another former PM, Anwar Ibrahim, whom he previously had thrown in jail on trumped-up sodomy charges.

As prime minister in the 1990s, Mahathir destroyed the political career and personal reputation of his protégé and current ally Anwar Ibrahim after Anwar questioned Mahathir’s financial policies. Fast forward to 2018 and it is widely expected that Mr Anwar, 71, will become Malaysia's eighth premier when Mahathir, who is 93, eventually steps down. After years in prison, Anwar received a full pardon in May—his reward for supporting Mahathir in the elections.

While Mahathir has buried the hatchet with Anwar, even going so far as to campaign for him to win a seat in parliament, he is yet again relying on the judiciary to eliminate a political rival. Prosecutors have slapped more than twenty charges relating to the multi-billion-dollar 1MDB scandal on former PM Najib Razak, prompting Mahathir’s former political party to comment that “it’s 1998 all over again, and Najib will suffer Anwar’s fate”.

This uncertainty that has characterised Mahathir’s young government, as well as the concern that his persecution of Najib is a convenient way to avoid a genuine crackdown on corruption, has caused money markets to wobble. The ringgit was stable in the immediate aftermath of Mahathir’s win, but the currency is now sliding. The benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index has fallen nearly 10 percent since May, partly because of escalating trade tensions between the US and China but also due to nervousness over the new government’s policies.

The rocky road to recovery

Mahathir’s newfound determination to chip away at Malaysia’s mountain of debt is a welcome sign, but the country’s economy will nevertheless remain hampered if Mahathir’s quirks and obsessions are allowed free rein. His determination to introduce a ‘national car’ only resulted in Malaysians paying ludicrously high prices for sub-par vehicles; the notion that this vanity project may be resurrected is worrying – the last thing Malaysia needs is another failed car company that has to be subsidised via higher taxes.

Naturally, the prime minister lays the blame for the country’s parlous financial situation squarely at the door of the previous government. But Mahathir has offered little in the way of new economic policy, other than an attempt to revive ill-fated schemes from his previous stint in office. Coming up with positive economic policies, as well as stabilising Malaysia’s volatile political situation, would go a long way towards restoring investors’ confidence.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes