KL mulls tough steps to cut account deficit

KL mulls tough steps to cut account deficit

KUALA LUMPUR (Reuter): Malaysia said yesterday it would impose tough measures to deal with the current account deficit which is seen widening due to the sharp fall of the ringgit. Deputy Prime Minister Anwar Ibrahim said the government would announce the measures in the next few weeks.

"We will see the projections for this year, next year and the following year. We will reduce substantially the current account deficit by very tough measures," Anwar, who is also finance minister, told reporters.

The government has forecast a current account deficit of 14.8 billion ringgit ($5.3 billion) in the current year, against a 13 billion ringgit gap in 1996.

But in a Reuters survey of 10 research houses last week, the current account deficit was projected at an average 15.85 billion ringgit in 1997 and 15.58 billion in 1998.

Economists estimated current account deficit in the first half of this year at around seven billion ringgit.

Malaysian Prime Minister Mahathir Mohamad said last week that the current account deficit, which has been a source of worry for nearly three years, could be higher than forecast due to the ringgit's sharp fall.

The ringgit, like other Southeast Asian currencies, has been battered by speculative attacks over the last two months.

The Malaysian currency has lost more than 13 percent of its value against the U.S. dollar since the beginning of July. It hit a new record low of 2.8300 a dollar on Wednesday.

The ringgit was at 2.8230 a dollar at 0930 GMT.

Anwar said on Wednesday the government would not hesitate to impose very tough measures and would not compromise on reducing imports. But he did not outline any other specifics.

Economists said the government was likely to focus on cutting imports which has been largely blamed for the bigger trade deficit in the first six months of this year.

"The government is trying to avoid additional cost of imports arising from a weaker currency," said Mustafa Mohamad Nor, chief economist at Arab-Malaysian Securities.

Malaysia posted a trade deficit of 2.7 billion ringgit in the first half of 1997 against a deficit of 687.8 million ringgit in the same period last year.

Imports during the period were at 101.1 billion ringgit against 97.2 billion in the previous corresponding period.

Big purchases of ships and planes led to a 2.8 billion ringgit deficit in June, after a surplus of 156.2 million ringgit in May.

"If we can slow down imports of big ticket items, it will have a positive impact on the total import numbers," Mustafa said. He said the government could either postpone imports or "not import at all some unnecessary items."

Malaysia was also likely to raise duties on imported goods, economists said.

"But by raising duties, it may not show an immediate impact. Those who have ongoing projects will still have to buy even at higher costs," Mustafa said.

But economists said higher duties will have a downside.

"There will be pressure on prices," said Kevin Chew, economist at Caspian Securities. "You can't quickly cut imports as projects are ongoing. You need a period of cooling off."

Malaysia cut down growth and cooled the economy through fiscal and monetary policy changes to bring down the current account deficit in 1996 to five percent of gross national product (GNP) from over eight percent of GNP in 1995.