'No More Surplus' Might Mean No Recession : In Malaysia, a Deficit Whose Time Has Come 
International Herald Tribune
May 12, 1998
Thomas Fuller

During the boom years, the Malaysian government held one thing sacred: There would be no return to the debt-plagued 1980s. For five straight years, it kept its balance sheet in the black, and its budget surplus peaked last year at 6.6 billion ringgit ($1.74 billion)

With Monday's headlines, however, came a watershed: "No More Surplus."

"We admit that it is no longer possible," Anwar Ibrahim, the country's finance minister, said Sunday.

Mr. Anwar's comments mark a shift from the fiscal austerity that has been preached in Malaysia since Asia's financial and economic crisis started last year. It contrasts as well with the gospel of tight spending that has been preached throughout the region by the International Monetary Fund.

"We need to do more in terms of expenditure to cater for the poor, those most vulnerable due to the economic downturn," Mr. Anwar said.

But the government's likely return to red ink this year amid the region's financial crisis does not have many analysts worried. On the contrary, Malaysian economists said the shift was necessary.

"If the government had dogmatically maintained a fiscal surplus, it would have driven the country into a deep recession," said Jomo K.S., an economics professor at the University of Malaya.

Mohamed Ariff, executive director of the Malaysian Institute of Economic Research, agreed.

"The government here has been obsessed with budgetary surpluses," he said. "They're seen as symbols of fiscal discipline. That makes sense in good times, but at times such as this it doesn't make any sense at all."

Mr. Anwar declined to say how large he expected the deficit to be, but he said it would "not be too huge as to disrupt the stability and the long-term macroeconomic management of the economy."

Mr. Ariff estimated that the deficit would be about 5 billion ringgit this year and said the government could use previous surpluses to finance the gap.

Mr. Anwar said the spending would be used "to support education, health, poverty eradication and housing" and small and medium-sized companies.

Malaysia's prime minister, Mahathir bin Mohamad, also said Monday the economic slowdown was crimping Malaysia's budget, the Bernama news agency reported.

Mr. Mahathir, speaking in Cairo while attending a Group of 15 summit meeting, said the 15 biggest companies in Malaysia were expected to see their profits drop to a total of 1.5 billion ringgit from 9 billion ringgit in 1997.

Until recently, Mr. Anwar, who is also deputy prime minister, had battled hard to produce a sixth year of surpluses. Prodded by the International Monetary Fund, the government slashed spending on everything from large construction projects to stipends for Malaysians studying abroad.

Mr. Anwar's vigor in cutting spending had led analysts to comment that Malaysia — which, unlike Thailand, Indonesia and South Korea, declined to seek IMF help during last year's economic crisis — was implementing an IMF program without the IMF.

"Many of the cuts would probably have pleased the IMF but are in my judgment totally inappropriate," Mr. Ariff said, citing the reduction in education spending. "These are long-term investments in human capital, and this current crisis is just a short-term phenomenon."

Abdul Razak Abdullah Baginda, executive director of the Malaysian Strategic Research Center, said the government needed an "enormous" injection of capital to pull the country out of crisis. "We have decided not to go to the IMF," he said. "We now have to find alternative sources of investment." Deficit spending was one source, he said.

The regional economic crisis is not the only reason Malaysia will slip into a budget deficit this year. Oil prices have collapsed and agricultural production has declined because of drought and the haze from forest fires that have plagued the region intermittently over the past year.

"We're talking about a collapse in the revenue base for the government," Mr. Jomo said. "Many companies will probably not be paying much income tax at all this year."

Another factor is that, in recent years, sales of government assets such as power and telephone companies greatly contributed to budget surpluses.

But, given the depressed state of the financial markets, the government cannot easily turn to asset sales to raise revenue.

And then there is the issue of pride. Malaysia wore its growth rate and budget surpluses as a badge of honor during the boom years.

"It's not even a question of pride any more," Mr. Razak said. "We've lost that already."

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