Towards economic recovery: the fiscal policy side

Abstract

Since the floating of the Thai baht, in July 1997, triggered a massive outflow of funds from the region, Malaysia, has been grappling with what was initially characterised as a monetary crisis. Attempts to address it through tight monetary and fiscal policies proved unsatisfactory. What began as a crisis in the monetary sector had, within thirteen months, engulfed the real sector as well. In October, 1997, it was projected that the GDP would grow at 7 per cent in 1998. But by March 1998, this projection was revised downwards to between 2-3 per cent. With the first two quarters seeing negative rates of growth, this projection was downgraded further. The recent 1999 Budget proposals predicted a GDP contraction of 4.8 per cent in 1998 - the first contraction in 13 years (NST. October 24,1998). The policy-mix designed to address the crisis has also undergone changes. When the initial tight fiscal-monetary policy-mix proved inadequate to turn the economy around, the government announced an easing of its fiscal stance through increased spending. However, the tight monetary policy was maintained. When even this failed to yield quick results, radical measures were imposed to facilitate a combination of expansionary fiscal and monetary policy.