Standard Chartered Bank Malaysia expects the economy to record strong growth of 6 pct in 2007 due mainly to a "pre-election boom" in government spending. Joseph Tan of Standard Chartered Bank said that fiscal spending will rise ahead of a likely elections in 2008 and to counter economic weakness.
Already the government has announced a spate of big ticket projects for the coming 18 months. While the fiscal spending is likely to cover the economic weakness in the short term, Malaysians should be concerned about the quality of projects announced. Some of the infrastructure and construction projects may not bring productive benefits to the economy.
Inflation is forecast to remain high before it trends lower inthe second half of the year, bringing the average inflation rate for 2007 to 2.5 pct. Bank Negara Malaysia is unlikely to cut its overnight policy rate in the short term, given that inflation is expected to stay at a relatively highlevel before March. The consumer price index rose 3.1 percent from a year earlier after gaining 3 percent in November, according to the median forecast of 16 economists in a Bloomberg News survey.
Still, the government allowed five companies operating highways in andaround Kuala Lumpur to raise tolls by as much as 60 percent this month.Water rates in Kuala Lumpur, Selangor and Putrajaya were raised by as much as 18 percent in November. Inflation rate is likely to stay 3 percent throughout 2007.
Malaysia's government workers have asked Abdullah for a pay rise, saying the nation's poorest civil servants, paid less than $5 a day, are struggling with rising fuel, electricity and road- toll costs. Some civil servants have been forced to take second jobs as taxi drivers and security guards to makeends meet, Omar Osman, president of the Congress of Unions of Employees inthe Public and Civil Service, said last week.
Falling crude oil prices may pose a risk toMalaysia's budget deficit target of 3.4 pct of gross domestic production(GDP) for 2007. Against the backdrop of falling world oil prices, rising government spending and lower revenue as a result of the cut in the corporate tax rate,there is a "risk of budget deficit overshooting, " added Tan.
Oil related revenue is expected to account for 39.9 pct of Malaysia's total revenue in 2007, compared with 37.3 pct of the total in 2006, according to official data. Malaysia's over dependence on natural resources to fund its development and government's expenditure can be detrimental to its intention to become a knowledge economy.