KUALA LUMPUR, Dec 21 — A strengthened focus on policy options will help Malaysia stay afloat and gradual easing of fiscal pressures will help to put the economy back on track for a greater economic prospect in 2022 as the nation emerged from year-long rollercoaster ride, the World Bank said.

The World Bank Group lead economist, macroeconomics, trade and investment Apurva Sanghi said the global economic recovery, which began earlier this year, had since slowed down due to the resurgence of the pandemic and lingering supply chain disruption.

"This is a reminder once again that the pandemic remained in charge with the unknown of Omicron variant,” he said during the virtual presentation of the World Bank Malaysia Economic Monitor report titled "Staying Afloat” today.

He said the strengthening of economic activities in the East Asia and Pacific region varied across countries with China, Malaysia’s largest trading partner, gaining the most spread.

"Malaysia this year, somewhat saw a rollercoaster on output, with the first quarter 2021 (Q1 2021) growth saw a contraction, a strong expansion by 16 per cent in Q2 2021 and a contraction again in Q3 2021 by 4.5 per cent,” he said.

He said the Q3 2021 performance was not surprising as Malaysia experienced the most stringent pandemic related restriction which saw output falling across all economic sectors with construction most severely affected and manufacturing the least given the strong continued demand for manufactured goods and commodity exports.

"In fact, Malaysia’s export outpaced the world and region particularly in electronic and electrical (E&E) equipment.

"Malaysia had been a major innovator in the E&E in the region, however, its export market share of E&E notably declined with the rise of China and Vietnam,” he said.

On the employment, he said unemployment rate fell from its peak of 5.3 per cent in June this year to 4.5 per cent as wage subsidies helped prevent vast unemployment but under-employment remained elevated.

On inflation, he said wage and food subsidies had helped to contain inflation at 2.2 per cent in Q3 2021 as well as the current monetary policy which remained accommodative.

However, he said the inflationary pressure is relatively rising recently given a marked surge in the price of food items such as poultry and vegetables due to supply shortages amid adverse weather conditions and shortage of foreign labour.

On Malaysia’s fiscal policy, he said the policy had been rightly countercyclical given that the government needed to spend more because of the pandemic.

He said the fiscal deficit is expected to widen to 6.5 per cent in 2021 to accommodate higher spending with debt service charges breaching the 15 per cent of revenue limit and is expected to rise to 17.4 and 19.4 per cent in the next two years.

"But increasing debt in the absence of higher revenues and rigid expenditures also means paying more to service it.

"Taking into account the fixed expenditure commitment such as pension and emolument or more than 60 sen of a ringgit raised in revenue goes towards meeting fixed expenditure.

"This underscores the narrowing of Malaysia’s fiscal space which the higher share of revenue is channelled to servicing debt rather than to a priority need of socio-economic future spending,” he said.

Apurva said the declining trend in federal government revenue is expected to continue in 2022 despite the announcement of a number of new revenue measures.

"Raising the money is one-half of the coin and the other half is spending it efficiently, effectively and transparently,” he said.

He said the government currently formulating a Fiscal Responsibility Act (FRA) intended to increase accountability and transparency in fiscal policy and to ensure long-term fiscal sustainability aimed to establish a single dedicated law.

In that contact, he said FRA in 2022 is necessary to address the shrinking fiscal space over the long term.

"Such an act if properly designed and implemented should help establish the path in medium-term fiscal consolidation and also helped deepened the public trust in government spending,” he said.

Besides that, he said it is also essential for the Malaysian government to avoid premature unwinding of assistance measures until economic recovery is firmly underway and the negative output gap is overcome.

"In that contact, continue strengthening health system plus the booster campaign remained vitally important

"The government must also keep in place targeted social spending in the near term to protect those affected and at the same time, action should be taken to improve targeting to reach out to those that had been excluded,” he added. — Bernama