The 2019 first quarter GDP will be out on May 16. Since we live in an age of trigger warning, let us play the game first:

How fast do you think did the Malaysian economy expand in 1Q19 from a year ago?

  • Slower than 3.6% (17%, 4 Votes)
  • 3.6% - 4.0% (26%, 6 Votes)
  • 4.1% - 4.5% (30%, 7 Votes)
  • 4.6% - 5.0% (26%, 6 Votes)
  • 5.1% - 5.5% (0%, 0 Votes)
  • Faster than 5.5% (0%, 0 Votes)

Total Voters: 23

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The consensus views are that growth for the quarter will be weak, possibly in the lower half of the 4.0%-5.0% range. Some are even betting on something lower. There are at least two justifications for the pessimism.

One, industrial production grew only 2.7% YoY during the quarter, largely due to contraction in mining production. Supply disruption continued to bedevil the sector after a major incident in Sabah last year. Manufacturing did largely okay, except in February. This leads us to the second factor.

Exports. Exports plunged quite drastically in February and a bit in March. While some of it had to do with supply constraints in the mining sector, manufactured goods exports also dropped, which indicated weakness in external demand. The country until recently had benefited from the trade war through trade diversion and business relocation. This could be seen from FDI and trade data. But prolonged and wider trade war would slow the expansion of global trade volume, possibly to a point where trade diversion would not overcome effects from slower trade growth. If the February and March export trend continues (exports for the quarter was down and in fact, so did export volume) in the second quarter, that might indicate we have reached that point where positive trade relocation factor is giving way to volume growth slowdown. The the escalating China and the US trade conflict is very likely the one major contributing factor to Bank Negara Malaysia cutting its policy rate by 25 basis point rate last week.

These two trends could hit the domestic economy in terms of employment. But so far, employment statistics have been going strong. It has not budged from 3.3% and anecdotally, there has been no story of widespread layoffs caused by weakened domestic and external demand. There were layoffs, but those appear directly induced by government policy, not demand per se. For instance, the non-renewal of contracts for political appointees and other politically-linked projects, which are not quite demand-driven.

There are complaints of economic slowdown among the public and in the media for awhile now, but again, that has not quite affected employment statistics by one bit. This makes the slowdown in the past few quarters puzzling to me. A pure supply-driven slowdown could explain this and there were supply problems. It is also possible that firms are hoarding labor supply, with a view of better economic performance in the near future.

From pure GDP growth statistics perspective, there might be some good news. Imports might fall more than exports and this observation is based on volume indices published by the Department of Statistics. Export volume index fell 2.2% YoY for the first quarter; import volume dropped 3.1%. The usual goods exports decreased 0.7% versus import drop of 2.5%. This could boost the GDP growth up by way of net exports, even if it is just math at work. If the actual GDP growth does surprise the market on the upside, I think it would come from here.

The downside is, the import volume drop suggests private consumption growth had slowed down. After all, imports are just a reflection of domestic demand. But to be honest, the consumption growth in the past several quarters have been extraordinarily high due to the changes in the tax regime. Such growth should decelerate and we would only see a “normal” growth rate for consumption in the fourth quarter of this year once the tax factor has been equalized across the relevant period (This of course is purely from year-on-year perspective and this is where quarter-on-quarter calculation offers a quicker and a better way of measuring changes).

As for government spending, it should be on the recovery mode and I think the worst should be behind us (or nearby, if it is not behind). As for gross fixed capital formation, I would want to say the same thing, but I really do not know.

When the Malaysian consumer price index dipped 0.7% an 0.4% year-on-year in January and February this year, there were hysterical claims that Malaysia was experiencing deflation, never mind that deflation is characterized as persistent decline in prices rather than temporary dip. And never mind that the bad deflation is one associated with decline in demand, rather than supply-driven, which was what the dips in January and February of weighted average consumer prices were.

Just for context, the prices for January and February were heavily affected by the drop in retail petrol prices, on the back of the shift from GST to SST. But by March and April, retail petrol prices were on the way up and for RON95 and diesel, it hit the ceiling set by the government. RON97 continues to be on the prices as crude prices now soars to above $70 per barrel.

Additionally, we know when inflation would stabilize as we know when retail petrol and diesel prices were stabilized. Given the structural changes and its effect on year-on-year calculation, year-on-year and headline figures should not be the focus at the moment.

Anyway, the March numbers that will the out tomorrow should reflect this, as has been highlighted as early as January. And so…

How do you think did the consumer price index change in March 2019?

  • It fell (14%, 1 Votes)
  • It did not change (0%, 0 Votes)
  • It rose (71%, 5 Votes)
  • Unsure/Do not know (14%, 1 Votes)

Total Voters: 7

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I first began supporting Ajax in the late 1990s after watching Edwin van der Sar playing for the team. I do not remember when exactly, but possibly after finding out Ajax won the 1995 European Cup.

That team was a magical one. Marc Overmars. The de Boer brothers. Nwankwo Kanu. Jari Litmanen. Clarence Seedorf. Danny Blind.

As a teenager, I kept drawing Ajax’s Dutchman logo on my belongings. Pencil case, exercise books, tabletop. I remembered every line that needed to be drawn. And when I played Championship Manager, I only played Ajax and nothing else.

It has been ups and downs with Ajax. But since the late 1990s in general, until Frank de Boer arrived to manage the team, it is not an exaggeration to say it had been a downhill journey. I have stayed true to the team for all those years, but being dismissed as a has-been second-rated team was an insult I am sure many Ajax fans had to endure.

That is not to say there were no great players during the interim. Rafael van der Vaart. Wesley Sneijder. Luis Suarez. Christian Chivu. John Heitinga. Zlatan Ibrahimovic. The names go on and go. Yet, they could not quite make it super big at Ajax, and Ajax could not hold on to them. There was not enough money to go around. So they went away, doing great things at bigger clubs outside, getting paid multiple times more than what they got in Amsterdam.

But this current team, well…

I watched some ESPN clips commenting about the Ajax-Juventus fixture. All of them were dismissing Ajax with a halfhearted hand wave. “Ajax is good,” they said. “But they lack the experience,” they claimed.

And there was Cristiano Ronaldo.

This team that forced Bayern Munich to work for their one point and embarrassed Real Madrid in Santiago Bernabeu so badly, could not beat Juventus so supreme in the Serie A and so certain to win the Italian League, they believed.

And Ajax, oh well, Ajax is only at the top of the second-rated division, ahead of PSV Eindhoven by only goal difference.

Who is Ajax?

But Ajax has been in a serious rebuilding mode since the early 2010s when several of the 1990s veterans joined the management. There were infighting, but Frank de Boer rebuilt the team. He left in 2016 but he left a great foundation for Ajax to run on that they reached the final of the 2017 Europa Cup, losing to Manchester United after a great run. But well, that is second-rated competition. Who cares?

And now, in 2019 Ajax is in the semifinal after beating Juventus. Do not let anybody say it was luck. It was actually Ajax working brilliantly with confidence and experience.

And those ESPN commentators?

Eating Ronaldo’s smelly socks, no doubt.

Recently, there was a column complaining about taxes on the middle class, claiming the middle class is being overtaxed.[1]

The origin of the complaint is easily understood because a slew of measures have announced by the government and those new taxes include departure levy and the imposition of sales and service tax on some digital services. These are generally taxes on not-so-basic goods and in more than some instances, they are arguably luxury goods.

The new taxes are part of the government plan to diversify its revenue and widen its revenue base. These are highly targeted taxes, and it hits specific groups instead of the wider population, which fits the philosophy of the government that is anti-broad base taxes like the GST.

I am not here to debate the philosophy and I take that as a constraint to policymaking. Instead, I am here attempting to explain whether the middle class is overtaxed.

The short answer in this day of too long, didn’t read culture, I would argue, is no.

Here comes the longer answer to a difficult question.

THE STARTING POINT: GOVERNMENT REVENUE AND INTERNATIONAL COMPARISON

It is a difficult question requiring some homework to be done. After thinking about it, I think the best starting point for the discussion is total taxes collected by the government from individual taxpayers. We know this number as it is accessible online from both the Treasury’s and the central bank’s database.

The actual total 2018 revenue figure is not available yet but we know the government has estimated it to be RM236 billion. For 2017, the government collected RM220 billion.

This may look large but in context, it is a very low figure. At about 16% of GDP, it is well below the average for a class of countries that includes Malaysia. Data from the IMF shows that “emerging market and middle-income economies” on average have their government revenue at 27% of GDP. Here for the extra boom: Malaysian government revenue is so low that it is closer to the levels seen among low-income countries that averaged at 15%. In advanced economies, the revenue level is about 36% of GDP.[2]

The low revenue-GDP ratio, and by implication the low tax burden, should give you an idea of how low the tax burden is in Malaysia relative to other countries. It is already a libertarian wet dream.

It is importantly to realize that not all of government revenue is collected from individuals. Based on official 2017 figures, I estimate at most 48% were collected from individuals in the form of income tax, consumption tax along with various duties, licenses and fees. This is an upper estimate because it is difficult to know who paid those duties, licenses and fees exactly without delving deeper into the data; it is highly likely a significant portion is paid by companies instead of individuals. This means, total taxes collected from individuals for Malaysia is about 8% of GDP.

This number gives insight to the question of tax burden because government revenue derived from individual taxpayers is the tax burden of the taxpayers. And when government revenue from these sources is low, it suggests the tax burden on individuals is low.

The rest of the revenue comes from companies and other sources like asset sales.

Now here comes the tough part. We need to know who pays the 48%. This is a difficult endeavor to carry out without intense research because there are at least three types of taxes here: income tax, consumption tax and various duties. The nature of the three taxes is quite different from each other, hitting different segments of individual taxpayers.

What we know is that income tax makes up only about a 27% of the estimated revenue derived from individuals. Consumption tax makes up 42% and the rest belongs to a various other duties and fees.

INCOME TAX

The income tax hits only the non-poor. This is easy to determine.

The threshold to pay income tax is so high that only about 2-6 million people pay it out of a population of 32 million, and out of a labor force of 16 million with generally low unemployment rate. Again, this is a very low number and I have written why that is so back in 2017.

And since a person would only be taxed if his or her income is RM2,500 per month or more, (more accurately, RM30,000 or above annually), we know from the 2016 Household Income Survey published by the Department of Statistics that about 23% of individuals in the Malaysian labor force do not need to pay income tax. And with all the exemptions given by the government, this number can easily cover all of those in the bottom 40% income earners and slightly more. This is a theoretical number because not all income earners are registered taxpayers. They are people who should pay tax among the top 60% income earners who do not register as taxpayers.

Nevertheless, we can conclude that a huge chunk of the income taxpayers belong to the middle class (discussion on what is middle class can be complicated but for convenience, let us take it as the next 40% income earners).

Now, is it fair?

The income tax rates in Malaysia are progressive. That means the more you make, the higher your tax rate would be. It might not be as progressive as some people would like but the truth is, the tax rates in Malaysia starts from a very low base and it rises very gradually to cover the whole middle class. So low in fact that it is difficult to say if anybody is overtaxed on this front.

CONSUMPTION TAX AND OTHER TAXES

Consumption tax sweeps a wider segment of the population. The best proof is the that fact the GST generated RM44 billion for the government in 2017 and that was slightly double the RM29 billion individual income tax revenue.

But this government abolished the GST and introduced the SST in 2018. In 2019, the consumption tax is expected to collect only RM22 billion. And not all of the RM22 billon hits the consumers directly because SST is really two separate taxes: sales tax and service tax. For sales tax, it is really more of a production tax than a consumption tax: that means consumers do not bear the full burden of the tax. It is only the service tax that the consumers have to pay in full. Based on previous experience, service tax revenue formed about 40% of total SST, which further shows that the individual consumers do not pay the full RM22 billion.

In short, tax burden on the population as a whole has fallen, including the middle class after the GST-SST shift. To say otherwise is downright false.

Other taxes are quite small and transactions that attracted those taxes or duties happen at a very low frequency.

NEW TAXES

But the question is, would the new tax mitigate the reduced tax burden and in fact increase the tax burden on the middle class?

No.

No because the government has estimated that these new taxes would generate a revenue of about RM5 billion annually. That is considerably less than the RM22 billion drop arising from the GST-SST shift (that is the 2019 SST collection subtracted from the 2017 GST RM44 billion; the drop should be bigger because the GST collection in 2019 should be bigger).

There are plenty of new separate taxes and that creates a negative perception as if the tax burden is increasing on the middle class. But when all of that combined, total new tax collection would not be enough to negate the reduction in tax burden from the GST-SST change. The numbers show it and here is how it would look like in graphics:

As you can see, there is still a net reduction in tax burden after accounting the GST-SST change and the new taxes.

But, still, what about the middle class? How does the so-called middle class benefit?

GOVERNMENT SPENDING ON THE MIDDLE CLASS

But discussion on merely who pays taxes is not wholesome.

We have to talk about spending as well. At the very 10,000 feet view, the best number to suggest that the government is transferring money to the population or not is the fiscal balance. A surplus would mean on the net, the government takes in money from the population. A deficit means the government gives money away. And the Malaysian government has been experiencing fiscal deficit since the late 1990s.

But what about the middle class? The bottom 40% gets cash transfer and free income-replacement insurance but what about us the middle class?

Apart the subsidized petrol, subsidy for urban highway tolls in terms of compensation from the government to private concessionaires, the subsidized train rides, the subsidized residential electricity use, the subsidized water, subsidized healthcare, subsidized contraceptives, subsidized education, subsided this and subsidized that in the cities with its much better amenities, what else do the middle class get?

Of course, nothing.

I will leave you with a sketch from Monty Python’s Life of Brian.

Hafiz Noor Shams. Some rights reservedHafiz Noor Shams. Some rights reservedHafiz Noor Shams. Some rights reserved

[1] — I recently cycled 40 minutes in 33-degree weather just to save RM6 on parking when I went to a government clinic to collect my medication. I was a little peeved when the nurse told me that I could only collect two months’ worth instead of the usual three. She gave some excuse about records not tallying if patients are given three months’ supply. I suspect that government health facilities are yet again running low on medical supplies. But coming to the clinic once every two months and paying just RM1 for two packs of oral contraceptives still beats buying them at a pharmacy, where a pack can cost RM27.

So it annoyed me to read that, despite my efforts to save money, the Pakatan Harapan (PH) government is implementing three new taxes that disproportionately hit the middle class – a digital tax, a departure levy, and a tax on sugar-sweetened beverages. [Boo Su-Lyn. The overtaxed middle class. Malay Mail. April 12 2019]

[2] — Note: The IMF puts Malaysia’s revenue/GDP ratio at 20% in 2019 but this does not quite tally with Malaysian data [IMF Data Mapper. Fiscal Monitor. IMF. Accessed April 12 2019]

I am taking a break from reading everything Malaysiana that is related to my book project. And I have finally decided to read Alexander Solzhenitsyn’s For the Good of the Cause that has been resting on my bookshelf for more than a year.

Here is an excerpt which I would like to share.

But the story fell flat. Fyodor did not laugh. Grachikov knew that it was better not to revive war memories. But having started this train of thought, he now recalled what had happened the following day, when his division was suddenly ordered to cross the River Sozh and deploy itself on the other side.

The bridge across the river had been badly damaged. The engineers had repaired it during the night, and Grachikov was posted as the officer in charge of the guard on it. He had instructions that nobody was to be allowed through until the division had crossed over. It was a narrow bridge—the sides had collapsed, the surface was very bumpy, and it was important to keep the traffic moving, because twice already single-engine Junkers had sneaked up on them from behind the trees and dive-bombed the bridge, though so far they had missed. The business of moving the division across, had moved up, but they waited their turn in small pine wood nearby. Suddenly, six covered vehicles—they were brand-new and all alike— drove up to the head of the column and tried to force their way onto the bridge. “St-o-p!” Grachikov shouted furiously at the first driver and ran across to head him off, but he kept going. Grachikov may have reached for his pistol, perhaps he actually did. At that point a middle-aged officer in a cape opened the door of the first truck and shouted just as furiously. “Hey you, Major, come over here!” and with a quick movement of one shoulder he threw back his cape. And Grachikov saw that he was a Lieutenant-General. Grachikov ran up, his heart in his mouth.

“What were you doing with your hand?” the General shouted ominously. “Do you want to be courtmartialed? Let my vehicles through!”

Until the General order his trucks to be let through, Grachikov had been willing to settling things amicably, without raising his voice, and he might even have let them through. But when right and wrong clashed head-on (and wrong is more brazen by its very nature), Grachikov’s legs seemed to become rooted to the ground and he no longer cared what might happen to him. He drew himself up, saluted and announced:

“I shall not let you through, Comrade Lieutenant-General!”

“What the hell…?” The General’s voice rose to a scream and he stepped down onto the running board. “What’s your name?”

“Major Grachikov, Comrade Lieutenant-General. And I’d like to know yours!”

“You’ll be in the stockade by tomorrow!” the General fumed.

“That may be, but today you take your place in the line!” Grachikov shot back and then planted himself right in front of the truck and stood there, knowing that his face and neck were flushed purple, but quite determined not to give in. The General choked with rage, thought for a moment, then slammed the door and turned his six trucks around. [Page 95-96. For the Good of the Cause. Alexander Solzhenitsyn. Sphere Books. 1971]

That is integrity at work.

Now that the dust has settled somewhat and the conditions are now more conducive for rational discussion, I would like to discuss about the nature of the debt and liabilities of the Malaysian government. This an non-accountant view, so pardon the terminology.

I know the current government’s approach in the matter has diverged from the norm. So unorthodox that it has caused some complications in various calculations enough that there are parties out there unconvinced with the appropriateness of the new approach.

Yet, there is sound logic behind the government’s approach and is backed by an actual standard maintained by the IMF. But to understand that, we require comprehension in traditional definitions of debt, government guarantees, the nature of liability and weaknesses relating to the various definitions.

Traditional definitions

First, we will talk about the definition of debt, which is the easiest part to grasp. This is the case of the government borrowing money from the market, and what is borrowed has to be repaid. The ownership of the debt and the party responsible in servicing the debt are clear: the government. The instruments used to raise these debt are the typical ones found in the market, namely the Malaysian Government Securities (MGS, the bonds) and its Islamic counterpart, the Government Investment Issues (GII, the sukuks). There are other novel instruments which can be read at a page maintained by the central bank, Bank Negara Malaysia.[1] These government debt are used to finance the government’s fiscal deficit and the government’s development (capital) spending like the building of schools and hospitals.

The second definition we need to understand is government guarantee. GGs as it is called and easier to type, is exactly what it is: the government guarantees a non-government debt (like that of a company). In case of default, the government would come in to take over the debt and start servicing it. So, the ownership and the burden of servicing the debt belong to the company but in case of default, both factors will be transferred to the government. In Malaysia, GGs are generally given to government-linked companies for various large infrastructure projects like airports, highways and railways. There are also cases of bailouts but the bottom line is, a guarantee is provided by the government to a company to lower the latter’s cost of borrowing and increase the financial viability of the company (for the uninitiated, under normal times, government debt has the lowest interest rates in the market and any other kinds of debt almost always have interest rates higher than the ones enjoyed by the government proper).

For the whole of 2018, total government debt stood at MYR741 billion, or 52% of the GDP.

For 2018 government guarantees, its value were RM266 billion, or 19% of the GDP.

Both government debt and government guarantees as far as its definitions go are not controversial and well-established in the mainstream understanding of public finance.

Weaknesses with the definitions

And so, there are two important factors to consider: the ownership of debt, and on who exactly the liability of that debt falls onto. In the traditional case, both belong to one party.

Human ingenuity has created instruments and financing methods circumventing limits set by these definitions by playing around questions relating to ownership and the servicing responsibility of the debt. These innovations make the traditional definition deficient in the literal sense, defeating the spirit of the definition of debt while obeying strictly to the letter. What this means is that with use of these innovations, the financial burden of the government can be actually heavier than what the official debt tell us.

And indeed that is the case for Malaysia and that is the prime mover behind the current government’s unorthodox reporting of debt and liabilities, which is an attempt to refocus attention away from the letter, towards the spirit of debt.

Abuses relating to GGs

It is simplest to start with abuses relating to GGs. Now, in spirit and in theory, as long as the beneficiaries of the GGs do not default on their debt obligations, then the government does not bear the burden of the debt. Therefore, that kind of GGs do not count as part of the government debt and liabilities. It may be contingent liabilities, but it is only that, contingent.

But in reality, that description does not describe all of the GGs. Many GGs are designed in such a way that the one servicing the company’s debt is the government. This is because the company in truth has no resources at all to service the debt and without direct funding from the government allocated in the government budget, the company would default in no time.

This is not a matter of the government providing temporary support waiting for the company or the project to breakeven and achieve profitability some time in the future, which would allow the company to pay back the government later. To the contrary, this is largely a case of the company or the project will never be able to service its debt through its internal operations.

But government’s full support ensures the company will not default, and so avoiding the guaranteed debt from becoming government debt. To put it simply, the ownership of the debt belongs to the company, but the burden of servicing the debt falls on the government regardless of default.

Since that is the case, it begs two questions:

  • First, is such GGs merely a way for the government not to classify a debt as government debt?
  • Second, is such GGs in the spirit of government debt?

If one holds to the view that only ownership of the debt matters, then the answer would be no. This is a strict adherence to the letter of the definition.

If one appeals to the spirit of the definition by considering both the ownership and the actual responsibility over the liability, then the answers would be in the affirmative instead. From this perspective, the use of GGs in such a way is a paper shifting exercise designed to make the reporting pretty, while the actual liability falls on the government regardless of the owner of the debt.

In my opinion, the latter view is a more holistic approach to government finance, and more robust in terms of reporting compared to the former, which is a narrow model to use.

Further discussion on committed GGs

One criticism about the inclusion of GGs as part of the MYR1 trillion figure is that these GGs are not new. As the criticism goes, all the GGs have always been listed and publicly acknowledged by the previous government. And so, the revelation by the government is not really a revelation but only a repackaging exercise for political consumption.

This criticism misses the nuance about where the liability of these guaranteed debt falls.

The nuance is that the current government classifies the GGs into two classes:

  • One, non-government debt guaranteed by the government which are not currently serviced by the government. This class is called uncommitted GGs (more simply, both the ownership and the responsibility of servicing the debt do not fall to the government). Examples are debt owned by Khazanah Nasional or Tenaga Nasional that are guaranteed by the government but are fully serviced by the companies with their own revenue.
  • Two, non-government debt guaranteed by the government which are currently serviced by the government. This class is called committed GGs, committed in the sense that the company has not defaulted but the government carries the burden of the debt anyway (ownership belongs to the a company but the liability explicitly falls on the government). Examples are 1MDB and Prasarana Negara (if I remember correctly).

It is the latter class that is being included into the MYR1 trillion calculation, and not all GGs. Although those who track GGs religiously could make accurate guess about which GGs fall under the second class, the nature of the debt servicing of these GGs had not been explicitly and systematically disclosed to the public previously.

This government has done so, explicitly and systematically, for the first time.

Abuses relating to lease payments

GGs were the favorite way to circumvent the definition of debt. That was until it became too big to escape notice. After a while, rating agencies which are fiscal hawks when it comes to debt, began questioning the ballooning GGs even when the size of government debt itself relative to the GDP remained largely stable. This partly fueled the needs to find other ways to circumvent the definition of debt. Here is where lease payments come in.

Lease payments under cash accounting system the government currently runs on is a creative method used to avoid classifying certain liabilities as debt. How it happens is that a company borrows a large sum of money to fund a project that the government wanted built. The government then supports the project by signing a lease contract with the company in a way that lease payments from the government match the interest payments the company needs to pay, as well as other items like construction cost. So in the government’s books, it is recorded as lease payment when in fact in spirit, the government is servicing the interest payment of a debt (and in fact the interest to the whole project cost plus margin) held by the leasor. Or again, to put it simply, the government does not own the debt but the liability is completely transferred to the government by way of lease. Example for this is Pembinaan BLT.

Summary government debt and government guarantees

As you can see, both GGs and lease payments have been abused in a way to place the debt outside of the government proper, but with the government still services the interest payments of the debt. Even if the owner of the debt is not the government, the liability of the debt falls on the government.

It is in this recognition that the government has decided to account for the relevant GGs and lease payments as part of the MYR1 trillion government debt and liabilities.

The reform that is accrual accounting

Another factor making the orthodox accounting used by the government at the moment prone to abuse is that the government runs on cash accounting, which only records a transaction only when it happens, while ignoring the full liability effects relating to the transaction. This makes circumventing the definition of debt doubly easy.

The current government is preparing to adopt accrual accounting by 2021, which would provide the public a full view of the government’s total liabilities beyond increasingly deficient definition of debt that is dependent only on the question of ownership. Under the new basis, all transactions including those committed in the future but have not been paid yet would systematically be included as the government’s liability list. This is unlike currently where calculation of such committed GGs and lease have to be done manually, which is a painful process.

Upgrading from IMF Government Finance Statistics Manual 1986 to 2014

Finally, the current government calculation is not unorthodox as much as it is old. More than 30 years old in fact. I am not an expert in standardization but I have been informed that the Malaysian government runs on cash account based on a IMF standard from 1986.

But such standard has been updated several times and the latest one came in 2014. Surprise surprise, it is an accrual standard. You can read more about this at the IMF website.[2]

This has bearing on how Malaysia reports its debt officially to international bodies like the IMF and the World Bank. As long as Malaysia is still under the GFSM 1986, Malaysia will always officially report its government debt to the IMF database as it is. When smart alecks smiling feeling smugly highlighting seemingly inconsistencies between the MYR1 trillion with international reporting, this is the side that they do not know. Once accrual accounting under GFSM 2014 is adopted, suffice to say, there will be a massive break in the series.

And there are countries that run on GFSM 2014. The UK is an example of a country that uses the standard that Malaysia is migrating towards.[3]

So, Malaysia is not that special when it comes to wanting to have a more holistic view on debt.

Is the government lying?

No.

The opposition likes to claim the government is lying about its debt position. The truth is that, the opposition is overly focused on definitional issues without carrying for the spirit of the definition, and ignorant of the implications relating to accrual accounting.

Mohd Hafiz Noor Shams. Some rights reservedMohd Hafiz Noor Shams. Some rights reservedMohd Hafiz Noor Shams. Some rights reserved

[1] — For conventional instruments, see here. For Islamic instruments, please click here.

[2] — The Government Finance Statistics Manual 2014 (GFSM 2014),1 and it predecessors are the internationally recognized statistical reporting framework, aimed at helping national authorities to strengthen their capacity to formulate fiscal policy and monitor fiscal developments. The GFSM 2014 supports the balance sheet approach to analyzing economic policy by bringing together stocks and flows in a transparent and consistent framework. The GFS framework provides a basis for analyzing public investment while providing a “common language” that fiscal analysts can use to develop a consistent approach to handling new, and often complex, government operations that create challenges in fiscal reporting and analysis. Also, the GFSM 2014 is better suited for inclusion in a quantitative macroeconomic framework because it yields source data for the measures of government saving, investment, and consumption; these measures have been harmonized with the national accounts framework. Equally important, the framework forms an integral part of the IMF’s effort to promote international standards for transparency in fiscal reporting. [About Government Finance Statistics. IMF. Accessed March 15 2019]

[3] — If a country adheres to Special Data Dissemination Standards Plus (SDDS Plus), it is required to publish data for the General Government Operations (see Annex table 3.1) using the Government Financial Statistics Manual 2014 framework (GFSM 2014), as set out by the International Monetary Fund. Data should be compiled on a quarterly basis for all components and should be disseminated within 12 months of the end of the reference period. [Economic Statistics Transformation Programme: Enhanced financial accounts (UK flow of funds) Government tables for the special data dissemination standards plus (SDDS Plus). Official of National Statistics. Accessed March 15 2019]

The Department of Statistics will be releasing the 2018 fourth quarter GDP statistics tomorrow.

I was wrong about expecting the 2018 third quarter GDP growth to quicken based on the faster consumption growth. Consumption growth did rise spectacularly and as stated earlier, there was no austerity. But external pressures prevented overall GDP growth from going off.

But I will repeat myself. I think we have hit the trough in the third quarter and so, we should see a rebound. Trade balance in the fourth quarter expanded slightly unlike in the previous quarter when it contracted. At the same time, consumption should grow healthily (in fact, stronger versus historical standard) albeit at a slightly slower pace. Meanwhile, pressures faced by the agriculture and the mining sectors should moderate.

But enough of me quacking.

How fast do you think did the Malaysian economy expand in 4Q18 from a year ago?

  • Below 3% (4%, 1 Votes)
  • 3.0%-3.9% (22%, 6 Votes)
  • 4.0%-4.5% (37%, 10 Votes)
  • 4.6%-5.0% (33%, 9 Votes)
  • 5.1%-5.5% (4%, 1 Votes)
  • 5.6%-6.0% (0%, 0 Votes)
  • More than 6.0% (0%, 0 Votes)

Total Voters: 27

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I rarely use plastic straws for my drinks. I am not religious about it but if I could help it, I would avoid it. I think I started doing so since at least 2010-2011, partly to allay my guilt for breaking a rule I made up when I was in college: use less paper. That is not something easy to do out there in the working world.

But reduce plastic straws is way easier than reducing paper use.

But in the past year or so, I have noticed that it is becoming a trend in Malaysia to reduce straw usage, at least in the greenwashing corporate social responsibility kind of way (don’t get me started on CSR and the tax system).

I figure it might have something to do with a video of a poor turtle having a tough straw stuck in its nostril. The footage showed volunteers struggled to pull the straw out, bleeding the turtle in the process. The turtle seemed healthy afterwards. I would, if I had a piece elongated plastic stuck up my… erm… nose. Wouldn’t you?

While the internet is a powerful tool to spread lies and conspiracy theories of no sense (like how the Ministry of Finance for somehow is banning private companies from handling haj, which is patently untrue), I suppose there are times when it is a tool to do good. Like the no-straw fad.

At McDonald’s several months back, the fast food chain ran a campaign to reduce straw use. When I first noticed it, I gave it a thumb up. But after a while after understanding the new way they give out the straws, I suspect its campaign is utterly counterproductive. Why? Because instead of reducing use, it has the potential to increase its usage instead.

Previously before McDonald’s ran its campaign, straw dispensers were placed in the dining area where customers could take the straws freely. Freely, but usually the number of straws taken would match the number of drinks. Those who would not use straw would simply not take it.

Now, I have noticed McDonald’s have removed the dispensers. What happens now instead is that the persons behind the counter preparing, serving or delivery the meals would automatically place straws into the meal tray regardless whether the consumers would want it. No question asked.

As a result of this change in method, my use of straws at McDonald’s has increased from none to at least one.

I could say no and ask the person behind to counter to take it back, but the whole procedure adds a process that makes the default position as having a straw. Ironically, the previous default position (as in the presence of straw in the tray) before the no-straw campaign began was not straw. The nudge economics here is messed up that it goes against the campaign: it encourages straw use instead by setting up a new barrier to having no straw.

One of those nights when I got off work late, with weary eyes and empty stomach at KL Sentral, I would have no mood to say, “Oh hello, sorry, I do not need the plastic straw.” I would like to just eat and go as quickly as possible. Damn the straws. I would not use it, but it would in the tray and it would go to the trash regardless of use. And this is a person who default position was no-straw: I am now encouraged to use the straw.

Now, imagine those who do not even think of not using the straws. The default yes-straw position just discourages them from not using straws. Or in other words, the default position encourages them to keep the status quo of keeping on using straws.

The economist in me wonders, how much straws are being used now versus before the campaign started. My hypothesis is, ironically, probably more just because of the change in the default position.

In absence of data, I would think to make the no-straw campaign credible, I feel McDonald’s should probably revert to a no-straw default position. That is, do not give the customers straws, unless requested.

Mohd Hafiz Noor Shams. Some rights reservedMohd Hafiz Noor Shams. Some rights reservedMohd Hafiz Noor Shams. Some rights reserved

p/s — I have received several feedbacks stating one of two cases: they agree with me about yes-straw default position being practiced, or that they contradict me by stating they would have to request for straws at the counter. Quite possible that some branches are tighter than others with its straw-dispensing default procedure. My personal experience at 3 branches (2 in KL and one elsewhere) is that of the former case.

Development in the United States, the United Kingdom and elsewhere in Europe where racist and fascist sentiments are hogging the headlines is worrying. It has been going on for some years now and it is proving to be a long-term trend rather than just an election-cycle blip.

One of many reasons why it is a concern worldwide is that major countries that used to be associated strongly with liberalism now are more reluctant in defending liberal values globally as they struggle to contain domestic problems at home. Some are even uninterested in doing so because, arguably, they no longer believe in liberal values. For instance, it is quite fanciful to think that Donald Trump believes in liberal values.

But it is not all bad news. Difference circumstances exist throughout the world. Indonesian and Malaysian societies for instance, exist in a context that is different from the one in the US and the UK.

Liberals in places like Malaysia from time to time get accused as being Western puppets or having their minds colonized by the West. When the Western world was the leader of the free world so-to-speak, the accusation had been used by local conservatives to mean that liberalism was alien to the local society and served foreign interest. When Bersih was busy protesting, the BN machinery was quick to link the movement to outside interest like George Soros. To be fair, Malaysian liberals do look abroad for help and inspiration while living in an environment that might be unfriendly to them.

I do not think such accusation is a uniquely Malaysian experience. When a large Iranian protest partly fueled by Iranian liberals erupted in 2009, one of the most popular opinions out there was for the US then led by Barack Obama to not be too vocal in their support of the protest and instead let the locals do their thing, out of fear the Iranian religious establishment would run the propaganda that the protest was fueled by outsiders, and ignore the legitimacy of the protest.

However, today, I think that accusation is starting to lose its traction.

I believe so because liberalism in the Western world – I use the West here in the general popular sense referring to the North America and Europe while keeping in mind the problematic definition as well as the fact there are places where liberal values are still held closely, like in Canada – is in trouble and as a result, the West is losing its role as the prime example of a liberal society.

As the West loses its role, liberals elsewhere get a chance to prove that they are liberals not because they look up to the West, but because they believe in principle that transcends geography and culture. And more importantly, the West does not control the local liberals. With the West in trouble and even local liberals starting to condemn the illiberalness of the West, the accusation that local liberals are Western puppets are becoming less and less relevant.

In other words, illiberal troubles besetting the West liberate liberals elsewhere.

This is the first significant protest the current government faces. And this is yet another opportunity for this government to demonstrate that it is different from the previous corrupt racist, fascist regime.

That can be shown by accommodating the protest as much as possible with a view of not being explicitly hostile to it either through speech or action, but by guaranteeing the safety of the protest participants and others while they exercise their rights to freedom of assembly and speech.

I participated in all of the Bersih protests and each time, there was always a dread feeling inside of me expecting the worst to happen. Such feeling was warranted.

Previously, government-controlled media always delivered threatening messages to the masses ahead of any large protest. May 13 without fail was the boogeyman.

My first taste of tear gas happened while I was standing amid a large crowd near the Maybank tower.

I have been chased by the police before. At one time, an officer pulled a gun near Jalan Raja Laut after chaos erupted. There was a time when I walked by a security personnel during a protest, and he verbally abused me.

And the laying out of barbwire and other actions like the conspicuous rolling out of anti-riot assets with security personnel all equipped with armor always threatened the atmosphere of the protest.

Furthermore, it was common knowledge that the party in power then sent provocateurs to create chaos, and create a reason for the security personnel to come in and break the protest.

All this should be avoided by this government. The police should hold back and not purposefully threaten the crowd. No provocateur should be sent by anybody associated with the ruling parties and the government.

It is by backing off from these provocative tactics that we can show to the world that the government is self-assured and strong.

The function of a government within the context of its citizens exercising their rights is to protect those rights and the people who are practicing it peacefully.

We can disagree with the agenda of the protest participants, however racists they are, but we should also respect their right to assemble peacefully.

We can be different and we must be different. We can show to them that there is another way. We do not need to beat our chest to show our confidence and strength.

That is the best way to blunt their message: that we are different and better.

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