Phenomenon of Deficit - Asian Financial Crisis

After the Asian Financial Crisis (AFC) occurred in 1997, the Malaysian government had budget reserved back to fiscal deficit for bragging the economy; by keeping a constant yet slender fiscal deficit even the economy recovered after. The government had responded by constricted budgetary operations because they wanted to bring on a reduction in Current Account (CA) deficit to trim down inflationary pressures starting from the Ringgit (MYR) depreciation. The Fiscal Policy (F/P) had turned expansionary in order to support economic activity which incorporated funds establishment to support small and medium-sized enterprises (SMEs), a selective increase in infrastructure spending, taxes reduction, and elevated allotment for social sector development.

The two major reasons for why Malaysia economy had continued to face deficit are the massive burden somewhat placed on the F/P for stimulation purpose attributable to shift in Monetary Policy (M/P) towards maintaining fixed exchange rate. Likewise, Malaysia government’s operating expenditure greater than the revenue received since 2000 due to taxes reduction which implied on those high-salary-civilian only to pay tax but not the low-salary-civilian.

Malaysia government had run the first economic stimulus packages amounted to RM7 billion or 2.5% of GDP which included built more low and medium cost houses, set up investment funds to attract more investors and others. The effectiveness of fiscal policy was supported by other strategies and policies that continue to build on Malaysia’s strong economic fundamentals; both fiscal and monetary policies have been carefully applied to support economic recovery. Thus, financial crisis had directed an enforced on the government to infuse massive amount of money to brag the Malaysia economy.