Malaysia feeds fiscal elephant in the room: its civil service

Tue Oct 15, 2013 6:02pm EDT
 
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By Siva Sithraputhran and Niluksi Koswanage

PUTRAJAYA, Malaysia (Reuters) - From unwinding subsidies for food and fuel to imposing a new sales tax, Malaysia's Prime Minister Najib Razak has plenty to do to rescue the country from a possible credit rating downgrade when he presents his government's annual budget this month.

One thing Najib won't dare risk is upsetting the country's majority ethnic Malays by downsizing a bloated civil service, despite its heavy impact on a fiscal deficit that is the biggest in emerging Asia after India.

Though the next election is only due by 2018, the ruling National Front coalition is already looking nervously to the future after a contentious victory last May, and Najib cannot take for granted that his own party, the United Malays National Organisation (UMNO), won't jettison him before his term is up.

"If the National Front institutes policies that make the Malays or the government servants unhappy, a 2-3 percent swing next time to the opposition will spell defeat," said Ibrahim Suffian, director at the respected pollster Merdeka Centre.

Dominated by Malays, the civil service, with its jobs for life and access to cheap loans, serves as part of a decades-old affirmative action policy. At 60 billion ringgit ($18.78 billion) its wage bill is the single largest budget item, accounting for a third of total spending.

The fiscal burden, along with a shrinking current account surplus, renders Malaysia vulnerable to foreign capital outflows at a time when investors are eyeing emerging markets with growing caution due to expectations that the U.S. Federal Reserve call time on years of easy money in the coming months.

But, mindful of preserving stability, policymakers often make ethnic considerations a priority in this nation of 29 million people, made up mostly of Malays, Chinese and Indians.

It was the Malay vote that helped the National Front, which comprises parties from each ethnic group, scrape back into power, despite losing the popular vote for the first time in 56 years since independence from British colonial rule.   Continued...

 
Malaysian Prime Minister Najib Razak speaks during a meeting with U.S. Secretary of State John Kerry (not pictured) before Kerry speaks at the Global Entrepreneurship Summit, at the Kuala Lumpur Convention Centre in Kuala Lumpur October 11, 2013. REUTERS/Jacquelyn Martin/Pool