Political stability is the key to macroeconomic stability and growth – SERC

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KUALA LUMPUR (July 9): The Center for Socio-Economic Research (SERC) says political stability is key to macroeconomic stability and growth amid the protracted Covid-19 pandemic and looming recession.

“We must always use common sense and strong political will must prevail to reset our national development agenda,” Executive Director Lee Heng Guie said today at the Economy Tracker for 2020 virtual press conference at SERC.

“If you have a stable political situation, it will strengthen the confidence of domestic and foreign investors in the direction the country is taking,” he said.

Noting that macroeconomic and political stability is essential to ensure a sustained economic recovery, Lee stressed that it is important to see the continuity of meaningful policies and reforms as well as to avoid policy reversals.

Thus, the government must continue to implement credible economic policies as well as institutional and political reforms, he said, and also ensure fiscal discipline, political stability and institutional quality.

He urged to further strengthen institutional quality with wider implementation of open and competitive tenders, as well as stronger fiscal transparency and governance to promote fiscal responsibility and accountability.

“The government is responsible and there should be no compromise on fiscal discipline and governance,” he said, noting that the federal government debt stood at 823.8 billion ringgit, or about 58 billion. , 8% of gross domestic product (GDP), at the end of March 2020.

As this exceeded the self-imposed administrative limit of 55% of GDP, parliamentary approval is required to ease the binding fiscal limits.

Already, rating agencies such as S&P Global Ratings and Fitch Ratings have lowered Malaysia’s long-term foreign exchange outlook from stable to negative, both highlighting concerns about weakening government debt over the next few years. as well as political volatility.

But Lee said the debt-to-GDP ratio shouldn’t be a cause for alarm just yet, as 60% is seen as a prudential limit. Historically, Malaysia has previously experienced even higher debt levels, ranging from 60.1% to 93.1% from 1982 to 1991, Lee added.

“It is important to strike a balance between binding higher debt limits and eroding fiscal credibility,” he said, adding that fiscal consolidation should only resume when the economy recovers, because Putrajaya can work to replenish a surplus when times are better and more stable.

“We saw how Malaysia reduced the budget deficit at the 2009 high from 6.7% to 3% in 2017. So the risk of downgrading [from rating agencies] is very minimal at this point.

“When the economy recovers, it (the government) must continue to commit to reducing the budget deficit and taking all measures to control the debt and also to rationalize spending and subsidies, including whether it is necessary to reintroduce the GST (goods and services tax) to improve the tax base, ”he said.

While economic activities have only recently resumed after an almost three-month hiatus caused by the pandemic, SERC estimates that GDP this year will contract by 3%, before rebounding next year by 5.5%. .

PRIHATIN’s economic stimulus plan and the national economic stimulus plan (PENJANA) total RM295 billion or 21.1% of GDP, and are expected to contribute 3-4% to overall GDP growth.

“Reintroduce the GST, but with a lower rate”

While the reintroduction of the GST may be unpopular with the rakyat, Lee proposed its reintroduction, but at a rate 3% to 4% lower, rather than its previous rate of 6%.

Timing is important, however, and should be done when the economy is stronger and more stable.

“I think the rationale for reintroducing the GST is first to improve the revenue base, given that the price of oil at the current level has an impact on revenue and the need for the government to maintain a deficit. fairly large budget at least for this year and next. year.”

Lee said the government may consider exempting more items for low- to middle-income earners as well as increasing the level of turnover at which the tax applies to small and medium-sized businesses to alleviate the cost. business for small businesses.

“Give the government more time to educate the population. Whether it’s more popular or not, it depends more on how you handle it and how you ensure compliance. “

He believes the time has come to review the GST because the economy is in a state of deflation.

When asked if the government should impose a one-off tax on companies that are currently making huge gains, like rubber glove makers, Lee was not in favor of the idea because it would drive investors away.

“I don’t think the government should impose a windfall profit tax on companies like [in] the glove sector. If you impose a one-off tax on all those companies that make a profit, it will scare off investors, discourage long-term investors, and dampen the interest of foreign investors to engage in investments in Malaysia. “


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