This article first appeared in The Edge Malaysia Weekly on November 28, 2022 - December 4, 2022

AFTER 24 “not too long” years, Datuk Seri Anwar Ibrahim is prime minister-in-waiting no more. The icon of the Reformasi movement in 1998 was sworn in as Malaysia’s 10th prime minister on Nov 24, 2022, ending the five-day impasse over the outcome of the 15th general election (GE15), which saw no party or coalition winning a simple majority in parliament for the first time.

Anwar’s job may well be the toughest yet: Not only does Pakatan Harapan (PH) not have a simple majority on its own, but the unity government he leads inherits a Putrajaya that has had little choice but to take on more debt, on top of the sizeable pile it already had, to save lives and livelihoods during the Covid-19 pandemic.

Direct government debt was RM1.074 trillion, or 62.8% of GDP, as at end-September 2022 — up 36% from RM793 billion as at end-2019 and 45% above the RM741 billion as at end-2018 — while debt directly guaranteed by the federal government was RM314.6 billion, or 18.2% of GDP.

These do not include the RM14 billion to RM15 billion required to repay the US$3 billion 1MDB Global Bond maturing in just four months in March 2023 — money that the previous administration worked into the development expenditure in the (old) Budget 2023 tabled on Oct 7, as it probably had little choice but to borrow to meet the debt obligation that is close to 1% of GDP.

And not only is Malaysia’s economy set to grow at a lower rate of 4% to 5% next year even as global growth slows, but investments need to be made to upgrade the country’s talent pool and infrastructure to ensure Malaysia’s relevance in the global economy and prepare for its aged population by 2044.

Anwar has said reviving the economy, easing the people’s high cost of living plus weeding out corruption are at the top of his reform agenda.

If Malaysia intends to regain lost ground and remain relevant in a fast-changing global environment, the need for reforms to happen has to be at the back of his mind even as PH works out a compromise with its coalition parties as well as others that have been welcomed into the unity government. To pay for election promises, deliver growth, invest in the country’s strategic capability and ensure fiscal sustainability in the long haul, tough reforms — including unpopular decisions like gradually targeting subsidies and introducing new taxes — need to be made to reduce the government’s “fixed” expenses and find new revenue streams to protect many Malaysians who may be facing old age without adequate retirement savings.

Tricia Yeoh, CEO of the Institute for Democracy and Economic Affairs (IDEAS), says: “The new government has a lot of work to do and must hit the ground running. The first assurance it must provide to people, the market and investors is that this government will be a stable one; to that end, there must be a built-in mechanism to the arrangement among coalition members that support is provided for the full length of the five-year term. This would assure the public that this government is here to stay, and will not result in yet another parliamentary dissolution within a short period of time.

“Political stability is at the top of the mind for most investors, and once this assurance is provided, the government would have a less challenging job to follow. Of course, the five-year stability clause must also be followed through.” Yeoh notes that the government must then embark on a two-step strategy to stabilise and rejuvenate the country’s socioeconomic conditions.

Lee Heng Guie, executive director of the Socio-Economic Research Centre (SERC), also sees no “honeymoon period” for the Anwar administration as global recession risks mount in 2023. Noting that a survey by the Merdeka Centre from Oct 19 to 28 had found inflation (31%) to be the top concern for Malaysian voters, followed by political instability (13%), corruption (12%) and enhancing economic growth (12%), Lee says the new government “must regain credibility and the trust of the people, businesses and investors” by fixing what matters to Malaysians. These include building a sustainable and resilient economy, escaping the middle-income trap, dealing with inflation and rising cost-of-living burden, improving core services (housing, health, education, skill set training), making our community safer and being inclusive of all Malaysians regardless of race, religion and geography.

So far, Anwar is saying the right things.

At his first media conference as prime minister, broadcast live, he said: “I would like to reiterate the importance of respecting the constitutional guarantees of Bahasa Melayu, Islam, privileges of bumiputeras [in the Federal Constitution] and the position of the Malay rulers. Notwithstanding, Malaysia is more than six decades old, every Malaysian — regardless of ethnicity, religious belief, religion, particularly [in] Sabah and Sarawak — should not feel that they are left out in any way. None should be marginalised under my administration. Finally, the focus is on the economy. It is reassuring today to see the surge of the stock market and the strengthening of the ringgit. Let us now focus on the economy and do whatever it takes to revive it so that the welfare of the rakyat, particularly the poor and the marginalised, will be protected.”

And with the benefit of hindsight from PH’s first chance at running Putrajaya post-GE14 in 2018, his administration made promises pre-election but does not have to rush to deliver an ambitious list of 10 pledges within the first 100 days (for which there was backlash).

Investors and market watchers may have to wait until at least mid-January to see how the Anwar administration will amend Budget 2023, but Anwar delivered his first two election promises that were (almost) entirely within his control even before clocking in at the office he inherits at Putrajaya — declaring that Monday (Nov 28) is to be a public holiday in conjunction with PH’s GE15 win; and he would not take the prime minister’s salary. He took care to say that he had discussed the public holiday with the Chief Secretary of the Government before announcing it.

Anwar has also addressed lingering doubt over political stability upfront: A confidence vote will be tabled when parliament convenes for its first special meeting on Dec 19 — one month after GE15 — to “clear emoluments for public servants”.

“Within a month or so [from there], we will table a new or revised Budget 2023,” he said at the Sungai Long Golf & Country Club in Kajang, Selangor, on Nov 24.

That might be just ahead of Chinese New Year, which falls on Jan 22 next year, at the earliest. The Muslim holy month of Ramadan is expected to begin on March 22.

While Anwar has said a confidence vote will be called by PH when the 15th parliament has its special session on Dec 19, the first test to the unity government may well be the upcoming contest for the Padang Serai parliamentary seat in Kedah, for which voting was deferred, following the demise of the PH candidate during the campaign period.

Winning Padang Serai would provide the PH-led unity government with a chance at having two-thirds majority, even without the one-third, or 73 seats, won by the Tan Sri Muhyiddin Yassin-led Perikatan Nasional (PN). This is mathematically possible if the unity government comprises every seat other than PN’s 73 — including at the upcoming Padang Serai by-election.

So far, only PN has declined Anwar’s invitation to be part of the unity government. Thanking Anwar for his invite, Muhyiddin said in a statement that PN would remain the opposition to bring the voice of the people to parliament as well as ensure corruption-free governance as well as the integrity of the administration.

That is one fewer party to share cabinet posts with and there may well be a chance of another pact with the opposition to ensure political stability, just like the historic “memorandum of understanding on transformation and political stability” signed in September 2021 between Datuk Seri Ismail Sabri Yaakob’s administration and PH leaders.

“To ensure political stability and the well-being of the people, PN is ready to pioneer other forms of cooperation with the government within the scope of the relationship between the government and opposition,” Muhyiddin added in the statement.

A pledge to keep the government intact for five years until GE16 would contribute to stability, observers say, even though Anwar had said on Nov 24 that stability was not an issue, as the unity government would comprise “close to 140” seats — with the trio of PH (82), Barisan Nasional (BN) (30) and Gabungan Parti Sarawak (GPS) (23) already having 135. The tally rises to 141, with Gabungan Rakyat Sabah (GRS) (6) coming on board on Nov 25.

A two-thirds majority — having at least 148 of the 222 seats in parliament — is necessary to amend the Federal Constitution, a prerequisite for a number of promises made in the election manifesto.

It would not be easy. On Nov 19, PH won only one of 14 parliament seats contested in Kedah for GE15 and PN the remaining 13, including Langkawi, which was contested by Tun Dr Mahathir Mohamad, and Jerlun, by his son Datuk Seri Mukhriz Mahathir.

In the coming fortnight, all eyes will be on the cabinet line-up of the country’s first unity government made up of PH with 83 seats, alongside BN (30 seats) and GPS (23 seats). On Nov 25, GRS (six seats) confirmed its participation in the unity government.

Expectations are for the key positions to be filled within a fortnight or as early as next week, given that, in 2018, Mahathir (who was sworn in as the seventh prime minister on May 10 that year) named 13 cabinet members on May 18 from all four PH coalition parties (Bersatu1+3/DAP4/PKR3/Amanah3) while the full cabinet of 28 ministers was sworn in on July 2.

In addition to the cabinet, Mahathir had established a five-member advisory team called the “Council of Eminent Persons”, led by Tun Daim Zainuddin as council chairman, to advise the government on matters pertaining to the economic and financial matters during the transition of power. Members of this “Council of Elders”, as it was also known, were former Bank Negara Malaysia governor Tan Sri Zeti Akhtar Aziz, businessmen Tan Sri Robert Kuok, former Petronas CEO Tan Sri Hassan Merican and prominent economist Prof Jomo Kwame Sundaram.

Muhyiddin, who was sworn in on March 1, 2020, named a full cabinet line-up on March 9. He also tapped prominent private sector figures — Westports Malaysia Bhd chairman Tan Sri Gnanalingam, Sunway Bhd chairman Tan Sri Jeffrey Cheah, MERCY Malaysia founder Tan Sri Dr Jemilah Mahmood, former Axiata Bhd group chairman Tan Sri Jamaluddin Ibrahim and The Edge Media Group chairman Tan Sri Tong Kooi Ong — to join government officials as members of the Economic Action Council (EAC).

Anwar has said his cabinet would be trim and paid smaller salaries.

His choice of candidate for finance minister is among those keenly watched by the market. Tengku Datuk Seri Zafrul Abdul Aziz, who did not manage to win the parliamentary seat for Kuala Selangor after contesting for the first time under the BN flag, resigned to contest in GE15. Senators, whose tenures are not affected by dissolution of parliament, can be appointed for a maximum of two terms in Malaysia. Zafrul — who was appointed finance minister in Muhyiddin’s cabinet in March 2020 after being made a senator and continued in the same position when Ismail Sabri took over as prime minister in August 2021 — had pushed for the Fiscal Sustainability Act, which has yet to be tabled.

IDEAS’ Yeoh, for instance, would like to see parliament table the Fiscal Sustainability Act “at its very first sitting” as a commitment to fiscal discipline, pointing out that there was already a draft to be tabled before parliament was dissolved on Oct 10.

“Second, it must quickly consider the possibility of reintroducing the Goods and Services Tax (GST), as well as possibly introducing other forms of taxation, to widen its revenue base,” she says, adding that the new administration cannot suddenly stop all spending, however, as there are still pockets of vulnerabilities.

“Under the previous PH administration, a policy of austerity was adopted, during which cash subsidies to farmers and fishermen were abolished or reduced — this may not be the best immediate move of a government coming into power, so the government will need to strike a right balance. Given the current socioeconomic conditions of the country following the pandemic, it might be wiser to consider widening the revenue base as opposed to cutting down public expenditures, especially if this has a direct impact on lower-income households.”

As GST “seems an inevitability of the future”, Yeoh recommends that the government “start by planning a comprehensive communication campaign and strategy to ensure the voters do understand the reasons for which GST is required in the long run”.

Datuk Dr Mohamed Ariff Abdul Kareem, emeritus professor at Universiti Malaya, suggests that GST revenue be introduced with lower personal tax rates, “earmarked for financing subsidies” to be more palatable and best introduced when inflation is not an issue.

Experts have said the re-implementation of GST must be accompanied by the ability to deliver targeted aid to mitigate the adverse impact of GST introduction to vulnerable groups as well as the ability to process refunds to businesses in an efficient and timely manner. PH did not speak out against GST in its GE15 manifestos while BN was never against the idea.

Still, SERC’s Lee does not expect GST to happen in 2023, given potential negative spillover from the risk of a global recession, but reckons that the government should consider preparing businesses and consumers for its implementation in 2024. “Perhaps the new government could study both the SST and GST with a view of blending both systems to enhance the revenue base,” he says. “[Whatever format the consumption tax may take,] basic necessities for the lower-income households must be exempted and kept stable.”

The Edge has previously written that the government would need sizeable new revenue streams as well as spending reforms to raise the annual healthcare budget expenditure to 5% of GDP, or RM77 billion, by 2027 from the current RM36 billion — something that both PH and BN promised to do within five years in their respective GE15 election manifestos, and that would require an additional allocation of at least RM8 billion a year over five years to achieve.

The reintroduction of GST alone would not be able to deliver this promise, without spending cuts elsewhere or other revenue sources.

Targeted subsidies would be unpopular but one way to reduce operating expenses.

“Subsidy adjustments might still be possible, in view of the decent economic performance, which allows for some room of policy support recalibration and fiscal consolidation,” RHB Research economist Chin Yee Sian wrote in a Nov 25 note, maintaining headline Consumer Price Index (CPI) projection of 3.4% for 2022 and 3% for 2023 after October CPI came in at 4% to bring the reading for the first 10 months of the year to 3.3%. “We keep our eye on any potential changes in fiscal and monetary policies as well as their profound impact on the inflationary trajectory.”

Edmund Terence Gomez, former professor of political economy and dean of the Faculty of Economics and Administration in Universiti Malaya, says the new administration “must act immediately to improve the public delivery system”, and institute policy-cum-institutional reforms to deal with structural issues holding back the development of talents and the economy.

“Policy reforms have to go hand in hand with institutional reforms. This is to ensure checks and balances in the political system. Such institutional reforms to curb corruption were mentioned in the manifestos of all major coalitions. This is crucial, given the still very close nexus between government and business. These reforms include separating the Attorney-General from the Executive arm of government, while the [Malaysian Anti-Corruption Commission] has to be an independent body. The Whistle-Blowers Act must be amended. All three issues are to be found in the PH and BN manifestos,” says Gomez, who also called for better targeting of aid based on needs rather than along ethnic lines.

“PH has long spoken about a focus on a needs-based approach but this policy direction change did not occur after 2018 [and] the outcomes of such a stance have long been clear: a narrowing base of productive enterprises; a massive brain drain; poor volume of domestic investments in R&D; and huge dependence on foreign investments for growth. In terms of equity ownership, by the government’s own tabulation, the volume owned by all ethnic groups is falling rapidly, as revealed in the 12th Malaysia Plan.”

He is looking out for a “thorough review of the GLC [government-linked company] ecosystem and the introduction of reforms to ensure an arms-length relationship between the government and the economic institutions under its control”.

“What is closely related to GLC reforms is the issue of political financing, arising also from the mix between politics and business in this country since the early 1980s. The time has come for the introduction of a Political Financing Act. This act was supposed to have been introduced this month, before parliament was dissolved,” Gomez adds.

Whatever the composition of the cabinet, IDEAS’ Yeoh says transparency and policy-based decision-making are even more important in the current political economic climate.

“Greater scrutiny must be given to the operations of government, and this is where strengthening parliament by setting up more permanent Parliamentary Select Committees (PSCs) — with a greater representation of backbenchers and members of the opposition, with regular interaction with the public and civil society — would enable these processes of scrutiny from the outside. More transparency, check and balance, and accountability from multiple stakeholders on multiple platforms would allow the public to know whether decisions are being made the right way for the country and people’s benefit,” Yeoh says.

Given the challenges ahead, there is no room for corruption, even if “things actually work”, says Yeoh.

“That phrase may be acceptable when there is a lavish gravy train for all. When the economy is not as flush as it used to be, this is where a system of continued patronage would in fact no longer be sustainable. We have to understand that patronage has a direct impact on the costs of any and all forms of transactions: business transactions, consumers’ purchase of property or even the everyday F&B.

“The margins that are paid by regular people on a daily basis are higher precisely because of the culture of political patronage that we have allowed to perpetuate for too long. Patronage also means some segments of society benefit unfairly more than others. So, even if it is perceived as ‘delivering’, it is only ‘partially delivering’ for certain select segments of society. So, if we truly want an equitable and fair outcome, the system needs to be oriented along programmatic and policy lines, not patronage,” stresses Yeoh, who also advocates the need for research and data-based policymaking.

Even as reforms are made and money is invested to build up the people’s and the economy’s strategic capabilities, Yeoh says, the government must consider new ways of rejuvenating the economy and reinviting investors that have left the country for brighter shores. “Creating a healthy ecosystem for enterprises to flourish, which includes less cumbersome regulatory barriers and more straightforward employment laws and policies (especially for foreign labour or expats), will be important to attract the right talent to the country.”

If the government is indeed stable, reforms can happen if there is political will. “Any stable government would not feel any pressure to be populist during the early period [of the five-year term],” Jomo says.

Time will tell whether the Anwar-led administration will be the one to lead Malaysia out of the middle-income trap with necessary reforms. What is certain is that time is running out as the world races ahead — populist measures may win votes in the short term, but the many red flags seen during the pandemic prove that long-overdue reforms must be made for the country and people’s long-term well-being. With the nation having long suffered the impact of kleptocracy, the new government must act fast to right the known wrongs.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.