KUALA LUMPUR (Aug 21): The Malaysian economy has maintained its strength, thanks to a confluence of domestic reforms, such as diesel subsidy rationalisation and external boosts, according to the World Bank.

In a post on X on Wednesday, World Bank lead economist for Malaysia Apurva Sanghi said two other fiscal reforms, however, had not received much attention, namely the Fiscal Responsibility Act (FRA) and pension reform.   

He said the FRA was a major missing piece in Malaysia’s macro armour, and it would link revenue and spending to keep the fiscal ship steady.

“It requires tax expenditure statements to cut down on wasteful tax breaks. It sets out four rules on debt and deficits, pushing for more responsible fiscal spending and more,” Apurva said.

However, he proposed that the current debt ceiling set by the FRA might be too high, and could benefit from a review or adjustment to align better with practices in other countries.

Apurva said the current ceiling of 60% of gross domestic product is somewhat lenient compared with the 45% in similar countries.

“The FRA is vague on what triggers ‘escape clauses’ during crises like pandemics or disasters, the allowed deviations, and the return path to normal. Enhancing such clauses would help.

“Instead of relying solely on a fiscal policy council comprising, among others, the prime minister, deputy prime minister and ministers, an independent secretariat like Brazil, Chile or the European Union could better keep an unbiased eye on FRA compliance,” he said.

Apurva also said the proposed pension reform phases out the defined benefit (DB) scheme for new civil servants, replacing it with a defined contribution (DC) scheme. This should make pension spending more sustainable. 

Under the DB scheme, the state covers retirement income, with civil servants getting a slice of their pre-retirement salary at 60%.

“But this won’t be available to new recruits. DC schemes shift the retirement saving responsibility to employees. This makes it easier for the state to handle unfunded liabilities,” he noted. 

Apurva believes that the main risk for Malaysia is transition costs.

“The government still has to pay out under the old scheme, while contributing to the new DC scheme. Plans on how this transition will be managed are unclear at present,” he said. 

Apurva said that many countries, including Hong Kong, China, and India, had already moved to DC schemes from DB schemes, while Singapore had always had a DC scheme covering both the public and private sectors. 

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