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Asia-PacificMay 2 2017

Pemandu chief takes Malaysia down moderate path

The CEO of Malaysia’s Performance Management and Delivery Unit, more commonly known as Pemandu, tells Stefania Palma how his decision to avoid a high-leverage economic model is benefiting the country.- 
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Idris Jala

Idris Jala became the CEO of Malaysia’s Performance Management and Delivery Unit (Pemandu) in 2009, when the country’s economic indicators were signalling some risks – government debt was growing by an average of 12% a year and fiscal deficit was equal to 6.7% of Malaysia’s gross domestic product (GDP).

“In 2009, I said that if Malaysia was going to continue on the path it was on, it was going to end up like Greece… Either we continued on that path or we picked a mildly expansionary growth option where the private sector, not government spending, was going to lead the way,” says Mr Jala.

In 2010, Pemandu organised 12 'labs' where 500 representatives of the private and public sectors co-operated to build a new economic framework for Malaysia. Mr Jala underscores that austerity was never an option. “We just wanted to stop a high leverage growth model leading to unbridled economic growth,” he says. “If you borrow money and you can repay the debt, it’s okay. But in today’s competitive world market, it might be hard to maintain both a trade and fiscal surplus.” 

One of the labs’ outcomes was that the government scaled back infrastructure spending and private investors filled the gap. Private investors are expected to account for 91% of Malaysia’s overall infrastructure spending ($444bn) between 2011 and 2020.

Fiscal consolidation

This development could contribute to fiscal consolidation, which is another priority for Pemandu. As of 2016, Malaysia’s fiscal deficit more than halved to 3.1% of GDP and its current debt-to-GDP ratio is 53.5%: 1.5% below the debt ceiling set by the law.

According to Mr Jala, improving tax revenue is also crucial to fiscal consolidation. To that end, Malaysia introduced a universal 6% goods and services tax (GST) in 2015, which replaced what he deemed a dysfunctional sales and services tax that ranged between 6% and 10%, depending on the product.

He says: “The informal economy and small and medium-sized enterprises in Malaysia are doing great, but they don’t pay taxes. That’s why we implemented the GST. The key is enforcement.”

Stabilising the ringgit

A stable Malaysian currency would help Mr Jala’s work further. In the past two years, the ringgit has been one of Asia’s worst performing currencies, due to record capital flows spurred by US Federal Reserve (Fed) rate hike expectations or market volatility following the election of US president Donald Trump.

The expectation of Fed rate hikes in 2017 might still affect foreign exchange markets, says Mr Jala. But a new measure launched at the end of 2016, which forces Malaysian exporters to convert at least 75% of their revenue into local currency, will increase ringgit liquidity and help stabilise the currency further, he adds.

“At RM1485bn [$337.5bn] in 2016, Malaysia’s total trade is larger than our GDP, but although we had a current account surplus of RM25bn in 2016, our currency still weakened. We were being too liberal [in letting exporters keep all revenues in foreign currency]. Other countries have already implemented this policy before us,” he says.

Pemandu’s work is bearing fruit. The fiscal deficit is dropping and Malaysia is moving towards high-income status. Per capita gross national income has grown from $8280 in 2010 to $10,570 in 2015, with the World Bank high-income benchmark sitting at $12,276.

Risks and scandals

But there are potential sources of volatility within and beyond Malaysia’s borders that could dent this performance. At home, state development fund 1Malaysia Development Berhad (1MDB) has been accused of international embezzlement and money laundering. But Mr Jala believes the 1MDB scandal, which embroiled former 1MDB advisory board chairman and current prime minister Najib Razak, has neither damaged foreign direct investment into Malaysia, nor was it the key reason for a weak ringgit.

Malaysia’s 2018 general elections could disturb Pemandu’s work, however. “We cannot get distracted in the prelude to elections. I hope we don’t get as distracted as we normally do before elections,” says Mr Jala.

In the West, he considers Mr Trump’s protectionist rhetoric and the UK’s choice to leave the EU to be two potential sources of instability. What is more, the high-leverage model now followed by several developed economies – the model Pemandu avoided back in 2009 – makes Mr Jala pessimistic about global markets.

“As [International Monetary Fund managing director] Christine Lagarde says, we are just kicking the can down the road. Quantitative easing was just about borrowing money to do patch-up work. The key question is, how do you grow economies and decrease overborrowing?” he says.

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