KUALA LUMPUR (April 22): The World Bank has suggested that the Malaysian government establish an independent fiscal council to monitor compliance with the Public Finance and Fiscal Responsibility Act (PFFRA) and support fiscal policy planning.

Dr Apurva Sanghi, the World Bank’s lead economist for Malaysia, noted that while the PFFRA currently mandates a Fiscal Policy Committee (FPC) to advise the Cabinet on fiscal policy matters, the FPC’s composition of Cabinet members may limit its independence.

“The PFFRA mandates a fiscal policy committee, which is good, but it is not independent. This may limit the independence of the committee,” he said during a media briefing on the World Bank’s April 2024 Malaysia Economic Monitor report entitled 'Bending Bamboo Shoots: Strengthening Foundational Skills'.

The FPC’s current composition, according to the PFFRA, includes the prime minister, the deputy prime minister, the finance minister, the economy minister, the chief secretary to the government, the secretary general (sec-gen) of the Treasury, the sec-gen of the Ministry of Economy, the governor of Bank Negara Malaysia, and two additional members to be appointed by the committee with “standing and experience in fiscal or public finance”.

Under the enactment of the PFFRA, the formulation of fiscal policy should adhere to the principles of accountability, responsibility, transparency, and intergenerational equity, Apurva noted.

He suggests that the government, at the very least, establish an independent, permanent technical secretary to the fiscal committee that monitors compliance of the PFFRA and prepares independent macro projections.

Furthermore, Apurva highlighted that the PFFRA can be further strengthened by better streamlining of fiscal policies, supported with the introduction of a more effective escape clause — to be exercised in extraordinary situations similar to the Covid-19 pandemic.

“Rules on development expenditure and [financial] guarantees are to be complied with annually, while rules on the fiscal balance and debt are to be complied with in the medium term — which is three to five years,” he said.

Given the variables’ interaction with one another, Apurva suggests that "harmonising the compliance period of all these rules would be more effective on an annual basis".

On the introduction of the escape clause, Apurva emphasised its importance in providing leeway to diverge from thresholds set in the act in situations of unexpected crises, albeit in a guided and established manner.

"The PFFRA could include escape clauses to be triggered by shocks and automatic correction mechanisms in case of deviations or non-compliance with the fiscal rule targets," he said.

“We don't know what might happen in the future, but we introduce this clause that provides flexibility to deviate from the fiscal rules under extenuating circumstances,” Apurva added.

He pointed out that one of the issues with the PFFRA’s current escape clause, or “temporary deviation” under Section 26 of the Act, is its ambiguity over what could trigger it, the permitted size of deviation, and the trajectory to resume the rules once the crisis is over.