by Tricia Yeoh. First published in The Sun 10 December 2015
The 2016 budget came as a rude shock to some, since there were massive budget cuts in most of the ministries, including the Ministries of Education, Energy, Finance, Urban Wellbeing, Housing and Local Government, as well as Transport. It did not help that the Prime Minister’s Department actually had an increase in its allocation from RM19 billion this year to RM20.3 billion in 2016.
For many years, Malaysia was considered a nation blessed with the resource of oil; indeed, we have for a long time been an oil-exporting country. Whilst true that we escaped the ‘resource curse’ or the ‘paradox of plenty’, where oil-dependent countries in fact perform economically worse than their counterparts not similarly endowed all things being equal, one must admit that oil and gas resources have certainly been a lucrative contribution to the country’s development.
The contribution of oil and gas to Malaysia’s economy cannot be understated – Petronas has played a central role in the development of our administrative capital Putrajaya, the Formula One race circuit, the twin towers in Kuala Lumpur, amongst other major national projects.
At one point, oil revenues contributed 40 percent of our national budget, but this has steadily declined to an estimated 19 percent today. This proportion is expected to drop further to about 14 percent in 2016.
And so, it is fair that analysts have expressed concern given the sharp fall in global oil prices – this would directly affect the Malaysian budget and by extension, the ability of government to spend.
For instance, the 2015 budget was at the time formulated with the assumption of oil hovering around US$100 per barrel, but by January this year oil had fallen to below US$50 per barrel (Brent crude oil prices). The 2016 budget has assumed oil prices at US$48 per barrel, but the rate has actually fallen to a near seven-year low since 2009 to US$40.76 this week itself.
A roundtable discussion hosted by IDEAS recently discussed this very issue of how the fall in oil prices would impact upon the Malaysian economy. It was noted that the government had foreseen these challenges, and hence initiated its fiscal reform over the last year or so; implementing the goods and services tax, abolishing fuel subsidies as well as making the decision to freeze civil service recruitment this year.
Renowned economist and retired banker Tan Sri Dr Lin See Yan, however, presented a bleak global context in which Malaysia operates, one that is possibly on the verge of a global recession given deficient global demand and the slowing down of China and the emerging market economies. In such a scenario, the price of oil is only but one element in the world economy.
Given that oil prices are not expected to rise any time soon, this has several deep implications, namely the urgent need for the government to reduce any unnecessary expenditure.
First, there is obviously a need for more efficiency in government administration. It is all well and good that there is a freeze on civil service recruitment currently, but the existing civil service itself is bloated and its size needs to be evaluated, which of course is a politically unpopular option. Emoluments – salaries and benefits for the civil service – form a whopping 26 percent of the entire expenditure amount.
Second, it is a tremendous opportunity for the government to examine its procurement contracting system. Research has shown that government can save a minimum of 4 percent of its expenditure by having transparent procurement processes. In an IDEAS policy paper published last year, we showed that there could be potential savings of between RM2.7 to RM4.5 billion a year if the government engaged in transparent practices, assuming that between one third to half of the existing public procurement is not currently transparent.
Finally, there ought to be a more coherent process of planning for the future, and co-ordination between various ministries. It is well known that even government officials find it difficult to obtain data and information from other agencies or ministries. If they cannot locate the right data, what hope is there for researchers such as us?
It is positive that the Ministry of Finance will soon implement the outcome-based budgeting method in the year to come, but even this process needs to be publicly known – so much could be done with more stakeholders engaged in the process, including gaining the trust and feedback from citizens. One part of the government is now embarking on an open data agenda via www.data.gov.my but perhaps not all ministries are aligned or willing to make their respective information publicly available.
Oil has certainly contributed to the rapid reduction of hardcore poverty in Malaysia since its discovery in the 1970s, and we must attribute our country’s success over the last few decades to it. But that era is over, and the government must now detach itself from depending on these revenues.
Our economy must be ready to jump into the deep end of the ocean, truly developing the non-oil sector in what is today a competitive and liberalised world. This is what a new economy in a new world will be like in the near and fast-approaching future – one in which the low oil price is here to stay, especially given global dampening demand and OPEC’s refusal to cut oil production leading to a world glut of crude oil. Malaysia has little choice but to adapt and do so quickly.
Tricia Yeoh is the Chief Operating Officer of IDEAS