kuala lumpur: Economic growth in 2023 is expected to be lower than the 4% expected this time last year. Although this is positive, it is slower than in the past as we move into a new era in which the fundamental growth rate will decline due to the damage caused by the coronavirus pandemic. Growth in 2024 is expected to be around 3.5%, compared to the consensus of 4-5%.
Also in line with our expectations, headline inflation slowed to 1.5% in December and 2.5% for the year. We expect headline inflation to remain low at approximately 2.1% in 2024. Core inflation is slightly higher than normal at 1.9%, but has fallen and is expected to continue to slow. Against this backdrop, Bank Negara (BNM) has kept interest rates unchanged, which is the right policy.
The cost of living is a major challenge for everyone below the T20 threshold, prices remain high and there is not much that can be done to bring them down. Therefore, the focus in 2024 must be on increasing income.
Although the unemployment rate is low, underemployment remains high. Labor market reform must be prioritized.
Although investment approvals are at a high level, actual investment in the private sector remains at a moderate level, after having been on a downward trend since around 2016, for both domestic direct investment and foreign direct investment.
Low investment is holding back growth potential, and this is a structural problem that needs to be addressed.
Net trade remained positive, albeit lower than usual, with external factors holding back exports, while imports also fell. Exports will benefit from a weaker ringgit in 2023, which will continue until 2024.
Fiscal policy appears to be stronger in 2024, with only a small increase in spending in the 2024 budget, revenue is expected to rise, and the deficit is expected to fall both in aggregate and proportionate terms.
Many of our current problems are due to earlier government policies that caused significant structural damage, closed many businesses, and wiped out the savings and pensions of millions of people.
Despite these legacy problems, Prime Minister Datuk Seri Anwar Ibrahim, as finance minister, stabilized the situation and laid the foundations for reforms.
Nevertheless, we do not expect any significant economic impact from this year’s key reform areas. Gasoline subsidies, which account for more than 80% of the total, will not be subject to subsidy rationalization. The progressive wage model will be implemented in a very small pilot program, so there will be no major changes to wages until at least the end of 2025.
Civil service pension reform only affects new hires and does not affect pension costs in the short term. Although the tax changes are small-scale and ad hoc impacts can cause cascading effects, particularly in the logistics sector, there are no significant fiscal policy benefits from this resource.
The challenges and opportunities for Malaysia’s economy in 2024 are clear, and despite external uncertainties, there is domestic stability to support reforms.
In this environment, monetary and fiscal policy should be conservative and major changes should be avoided. Tax reforms such as electronic payment tax to replace GST should be considered to find better sources of funding. Good governance is essential to reduce waste, leakage and corruption.
The new Purdue database lays the foundation for targeted subsidy rationalization, which should place greater emphasis on increasing incomes and improving employment prospects. Investment and supply-side reform remain key challenges, and the New Industrial Master Plan offers little to address this issue.
The social economy must focus on pensions, social protection through PADU, long-term care for the aging population, and the abolition of student loans. These reforms are achievable now that the macroeconomic environment is stable.
Overall, 2024 will be a year of further transitions with a focus on structural reforms.
This article was contributed by Professor Paolo Casadio, an economist at HELP University, and Professor Geoffrey Williams, an economist and professor of research and innovation at the University of Science and Technology Malaysia. The views expressed are those of the author.