Malaysia unveils mesures to curb account deficit

Malaysia unveils mesures to curb account deficit

KUALA LUMPUR (AFP): Malaysia's Finance Minister Anwar Ibrahim announced yesterday a two percentage point cut in the corporate tax rate and new measures to help narrow the nation's current account deficit.

Delivering his annual budget speech to parliament, Anwar said the Malaysian economy was now "entering a period of transition" following the recent collapse of share prices and the local currency.

"The direction of the economy is currently fraught with uncertainties," he said. "The crisis in the financial markets that is being experienced is a test of economic resilience and effectiveness of policies.

As a result, "the 1998 budget strategy is strengthening economic fundamentals and stabilizing financial markets, maintaining sustainable growth, continuing the process of deregulation and liberalization of the economy and continuing the social agenda for further overall development."

Among the new measures announced were a cut in the corporate tax rate from 30 percent to 28 percent, a reduction in the petroleum tax from 40 percent to 38 percent and various measures to curb the current account deficit.

"The major challenge facing the economy is restoring economic stability and confidence. A major issue in addressing this challenge is the current account deficit," the finance minister said. "Our deficit was significant at 10.5 percent of GNP in 1995 and this was reduced to 5.2 percent last year."

Measures to help boost exports included a corporate tax exemption of 10 percent to 15 percent for exporters and a reduction in duties on crude oil exports from 20 percent to 10 percent.

Anwar also announced higher import duties of 5.0 percent to 50 percent for heavy machinery and 10 percent to 30 percent for certain construction materials along with reduced capital allowances for imported machinery.

Import duties were raised from 25 percent to 30 percent for consumer durables and from 42 percent to 80 percent on imports of knock-down cars while duties of up to 300 percent were imposed for imports of built-up cars.

Anwar, who is also deputy prime minister, said the Malaysian banking system "continues to be sound" despite recent turmoil in financial markets.

Since July, Malaysian financial markets have been rocked by heavy selling, especially among foreign investors concerned about the country's current account deficit and market meltdowns in neighboring countries. The selloff has depressed local share prices and the currency by as much as a third.

"Our economy is at a crossroad. We must tread carefully. We cannot afford mistakes. Our resilience is being tested," the finance minister said.

But "we should not panic. What is required is discipline and resilience. We must be aware that the Malaysian economy is changing and becoming more mature. A mature economy does not need to grow at a high rate.

"Our task is to ensure macroeconomic stability, especially in the balance of payments, the rate of inflation as well as the strength of the government's and private sector's financial position. This is the main objective," he said.

Other budget measures included a one billion ringgit (US$330 million fund) to promote small and medium-sized industries and financial measures including a reclassification of bad loans from six months to three months and a hike in bank provisioning requirements from 1.0 percent to 1.5 percent.

A five percent tax was also imposed on income from life reinsurance.