Calling Dr M’s bluff on Anwar’s leadership

 

From Amar Ramachandran

Dr Mahathir Mohamad says he has no confidence in Prime Minister Anwar Ibrahim’s leadership, citing the latter’s approach to economic management at the time of the Asian Financial Crisis (AFC) in 1997/98.

Mahathir went on to state that we are in an “economic crisis” now and doubts the current leadership’s ability to come up with good strategies.

This is a doltish observation in the face of expected 2022 gross domestic product (GDP) growth of 8-9% (9.3% actual GDP growth, Q3 2022).

While Mahathir did not specify the “various problems we are facing”, I would concede that we are in the midst of a cost of living challenge and that 2023 will possibly see a global slowdown or even a short stint of stagflation in major economies.

Yet, we may be able to engender a soft landing through prudent fiscal management as follows:

• Optimising operating expenditure by cutting largesse while maintaining budget deficit to GDP at less than -5.5% for 2023.
• Deploying subsidies with agility and having a short turnaround time in import/export permits for perishable products so that food inflation (the largest contributor to inflation) can be mitigated. For example, Malaysia may be a net exporter of a food produce but if we are facing a shortage in the domestic market, then there must be a temporary ban on exports.
• Laying the foundations for more value-added industries/businesses to be set up in Malaysia. This can start to show up in the 2023 federal government budget incentives as this is a long-term aspiration.
• To consider innovative means to support local businesses and a glide path for an optimum tax regime for corporations. This should include a wholesome review of federal government revenue, noting evidence that lower direct taxes have a correlation with economic growth.
• More than 40% of our trading is done with the United States, China and Singapore. These markets may be susceptible to a slowdown in 2023. How can we then optimise our relationship with other markets that make up 60% of the balance?

All these considerations are within the competencies of the Anwar administration and some of these were debated when Parliament sat for the first time last week.

On monetary policy, Bank Negara Malaysia (BNM) has front-loaded interest rate hikes and a slowdown would enable it to react more effectively though the central bank should be able to start deploying policy tools besides just utilising interest rate management.

The currency peg and capital controls instituted during the AFC were admirable. Notwithstanding the 2001 Harvard University Working Paper, “Did the Malaysian Capital Controls Work?”, there is nothing to indicate that the International Monetary Fund (IMF) proposals would not have worked. If at all, our financial regulations and market reforms would have occurred sooner.

Mahathir had proposed pegging the ringgit to the USD in 2018 and also this year, with BNM and other observers countering that the current economic scenario was unsuitable for the reintroduction of a pegged exchange rate.

It appears that he thinks that a pegged exchange rate regime is the solution to even a nominal trend depreciation of the ringgit.

I would have thought that given his criticism of Anwar, Mahathir understood the differences in the economic environment and our prudential regulations during the AFC compared with recent years but, evidently, he does not.

Pegging is an unorthodoxy — it is costly on its own as colossal foreign reserves must be utilised to defend the peg. Hence, it can only be effectively implemented with capital controls, including not recognising the ringgit in circulation abroad.

During the AFC, to stem large capital outflows, we had to implement a 12-month ban on repatriation of monies by non-residents, thus damaging investor sentiment.

More subtly, pegging distorts monetary policy independence, which is critical in the present time (given the extraordinary US rate hike cycle) and we would need to think how to gradually unwind the peg with minimal consequences.

One has to wonder what Mahathir’s view would be on Perikatan Nasional’s (PN) economic management prowess?

Mahathir’s bluff has to be called.

A fair gauge of whether he managed our economic development to its optimum would be to compare the growth in our GDP per capita (in USD) in the 22 years he helmed the federal administration with what Singapore had achieved in the same period.

Malaysia’s GDP per capita was at US$1,769.10 in 1981 whereas Singapore’s was US$5,596.59.

By 2003, ours was at US$4,454.50 (4.3% in compound annual growth rate, CAGR), while Singapore’s was US$23,730.20 (6.8% CAGR).

This average attainment is the sum total of Mahathir’s policies of racism, nepotism and authoritarianism. - FMT

Amar Ramachandran is an FMT reader.

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.