KUALA LUMPUR: Malaysia's economic recovery is likely to rebound from the forecast 3.3 per cent growth in 2021 to 5.8 per cent growth in 2022, driven by healthy domestic demand and continued growth in exports.
Lead economist (macroeconomics, trade and investment) Dr Apurva Sanghi said the 3.3 per cent forecast is not a surprise given the severity of the lockdown this year and the mobility restriction.
"Now, with the easing of the economy, we have seen a bounce back, especially in the private consumption and return on investment on the back of high vaccination rate in Malaysia," he said in a press conference after the launching of the latest edition of the World Bank Malaysia Economic Monitor: Staying Afloat, yesterday.
However, he cautioned that Malaysia's fiscal space was shrinking due to the Covid-19 pandemic as the government expenditure in 2021 is expected to reach 21.1 per dent of GDP.
Meanwhile, revenue to GDP is likely to decline to 14.6 per cent in 2021, largely reflecting expected shortfalls across direct tax revenue and investment income excluding Petronas dividend.
"Revenues have been consistently dropping for almost a decade. The government fixed expenditure commitment such as pension and emoluments accounting for more than 60 sen of each ringgit raised in revenue, underscoring the narrowing of Malaysia's fiscal space," he said.
Apurva said external demand in Malaysia could be adversely impacted by the uncertainties around the new Omicron variant, a longer global supply chain disruption, and a slowing Chinese economy, as well as the possible resurgence of the US-China trade war.
He said the new variant might threaten Malaysia's health system with the likelihood of higher vulnerability of the affected business that could cause constraint recovery and growth.
Apurva said the total value of economic stimulus packages for 2021 accounted for about 15 per cent of the country's GDP with the direct fiscal injection of 1.7 per cent of GDP.
"Fiscal deficit in Malaysia is expected to widen to 6.5 per cent in 2021."
Additionally, he said Malaysia's debt limit was raised from 60 per cent to 65 per cent of GDP to accommodate higher spending.
However, he said increasing the debt limit in the absence of higher revenue and rigid expenditure - paying more to services - has contributed to narrowing Malaysia's fiscal space, increasing fiscal rigidity, and crowding out discretionary spending.
Apurva said the 2022 Budget indicated Malaysia's fiscal space would likely remain constrained, and the government was considering imposing a comprehensive revenue raising strategy.
This includes windfall tax (prosperity tax), sugar-sweetened beverages, and tax exemption foreign income removal.
However, in the short term, improving the targeting of social spending and at the same time phasing out generalised and regressive subsidies, such as fuel subsidies, will help raise the efficiency of government spending.
World Bank Group said limited fiscal space would remain a key challenge for Malaysia while noting that the federal government revenue declined since 2013.
World Bank country director for Brunei, Malaysia, Philippines and Thailand, Dr Ndiame Diop said the pandemic has further constrained Malaysia's already limited fiscal space.
"Government revenue is expected to decline while rigid expenditures remain high. Therefore, the government should accelerate efforts to rebuild fiscal buffers by collecting more and spending better," he said.
He said targeted social spending should remain a short-term priority due to the high degree of uncertainty over the health and economic outlook moving into 2022.