It is apparent that the Budget will be an exercise in gimmickry designed to accentuate the "feel good" factor to provide a prop to the election campaign of the Barisan Nasional. In the process the long term interests of the nation and its economic health will be sacrificed.
The outlines of the content of the Budget have clearly emerged and are a cause for concern. The Finance Minister will undoubtedly prefix his Budget proposals with a message that the economy has recovered by pointing to the "success" of the policy of capital controls and the pegging of the ringgit.
Nothing would be further from the truth. Stanley Fischer, the Deputy Managing Director of the International Monetary Fund (IMF), in remarks made in Singapore earlier this week clearly stated that capital controls were nowhere as successful as claimed. He alluded to the price to be paid down the road by way of reduced capital flows, the missed opportunity to undertake meaningful structural reforms and warned that major issues remain unaddressed.
Various market analysts have also indicated that exit taxes and uncertainties about the government policy hang as a heavy cloud precluding the inflow of funds. This is vindicated by the fact that there have been outflows in excess of RM 1.3 billion in the past several weeks.
The various reports of rifts between Tun Daim and the Prime Minister in the context of the forced merger of banks - and the policy U- turns - have added to the disarray in the ranks of the Barisan Nasional regime.
The bottom line is that the country needs a revival of capital flows if it is to have a real and sustainable recovery, but the policy path being charted runs counter to that goal.
Daim will tell Malaysians that the recovery in growth will exceed 1%. The fact of the matter is that even a 3 or 4 % growth in GDP for 1999 cannot mask the fact that what growth occurs in 1999 will be entirely due to the surge in Government spending.
Independent estimates indicate that the budget deficit for 1999 is likely to be in excess of 6 % of GDP. This is before account is taken of the huge amounts of off-budget spending and the orgy of borrowings to finance the spending spree.
The private sector continues to languish - Loan demand from the banking sector continues to be sluggish; the Non-Performing Loans (NPLs) of the banks remain high, but concealed by the six-month criteria; the banks are pre-occupied with the issue of mergers and not focused on their business as banks; consumer spending remains weak; inventory levels remain high; excess capacity is an overhang - as evident from the empty skyscrapers and unsold housing units.
This has caused many to ask whether the recovery is an illusion as the effects of an economic recovery are not being felt in the real economy by the ordinary people while deep-seated and fundamental issues affecting the economy are being swept under the carpet in an irresponsible manner. The seeds of a deeper crisis are being sown.
Through the 2000 Budget,the nation will be given sweeteners in the form of tax reductions and rebates that will contribute to lower revenues. This would be in the tradition of the Barisan Nasional to bribe the electorate prior to an election.
The country will also see a sharp jump in expenditure - not on essentials but on more mega-projects,- such as Putrajaya, a third link, an expansion of Kuala Lumpur International Airport (KLIA) ( a vastly underutilized facility), bailouts of cronies, and other wasteful projects. These expenditures will increase the deficit well beyond current levels.
The deficits will be financed through borrowings domestically and abroad. The nation will sink in a flood of debt, to levels that are unsustainable.
The cost of borrowing will rise as rates increase domestically - crowding out the private sector in need of capital. Abroad, the Government will pay penal rates given the low rating levels of Malaysian bonds.
The Government's intention about borrowings became clearer when the Second Finance Minister, Datuk Mustapha Mohamad indicated in Washington that it would be borrowing more from the World Bank in the year ahead --- yet another U-turn because Mustapha in mid-year had proclaimed that the Government would not borrow further from the Bank as it had ample funds!
Daim will project a growth rate of 5 to 6% for 2000. But this will be built on a house of cards.
The outlines of economic policies that have emerged in recent months are indicative of a combination of unsurpassed incompetence and greed. The nation is being seriously damaged as a consequence.
True recovery remains a distant light at the end of a long and dark tunnel. The Barisan Nasional needs a reality check. True recovery will only come when private consumption and private investment revive. That is unlikely so long as the powers-that-be remain in a state of denial and pursue policies that are against the best interests of the people with the focus being solely on the chosen few.
Restoring confidence should be the first and primary objective. Daim should, if he has the true interests of the country at heart, take the first steps next week to announce policies that are designed to contain the mushrooming of the deficit by curtailing wasteful expenditures on grandiose projects such as Putrajaya, a halt to bailouts of unviable crony corporations that must bear the costs of past mismanagement and plundering of the public.
I further call him to stop all privatization of essential services given the dismal record of toll roads, water supplies and sewerage which have harmed the public interest. The budget deficit must be contained.
I further urge him to stop painting rosy scenarios about the economy and to own up to the true state of affairs that the economy faces. This will go a long way in restoring market confidence in the direction and shape of economic policies.
For a start he should repudiate the statement that the forced merger of banks will not lead to retrenchment of staff made by the Second Finance Minister in Parliament on Tuesday and now repeated by the Transport Minister, Datuk Seri Dr. Ling Liong Sik and the Bank Negara Governor, Tan Sri Ali Abul Hassan Sulaiman.
That statement made a mockery of the whole rationale for mergers - rationalization of the finance sector to enhance its competitiveness. If indeed workers are not to be retrenched, how then are the banks to increase productivity?
Either the Barisan Nasional is engaged in a major disinformation exercise about retrenchment and downsizing of banks, or it does not have a clue about how the sector is to be restructured without doing irreparable damage.
(22/10/99)