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Petaling Jaya, Thursday): Bank Negaraís increase of the overnight policy rate (OPR) by 25 basis points to 3.5% is a warning signal to Prime Minister Datuk Seri Abdullah Ahamd Badawi that he should further open up the economy and government procurement to domestic competition if he wants to achieve the 9MPís target of 6% yearly economic growth from 2006-2010. Clearly this interest rate hike is directed to contain inflation which rose to a 7 year high of 4.8% in March 2006, the highest since the 5.3% recorded in January 1999.
By increasing interest rates, Bank Negara sees curbing inflation as more important than generating economic growth. The 4.8% inflation rate had caused real interest rates becoming negative due to higher inflation as this penalised savers and depositors and became a disincentive to savings. Whilst commercial banks are expected to be quick to raise their lending rates, the question is whether they will be equally quick in raising the fixed deposit rates.
As inflation is expected to further increase following the 30 cents fuel hike or as much as 23% on 28/2/2006 and the expected rise in electricity tariffs this year, Bank Negara would be expected to increase interest rates further this year to 4%. Bank Negara raised the OPR on Nov 30 last year to 3% from 2.7%. It was raised again by 25 basis points to 3.25 % in February 2006.
Such a hike in interest rates would definitely affect economic growth and place serious doubts whether the 9MPís objectives of 6% economic growth from 2006-2010 can be achieved. 6% economic growth over the 9MP is crucial to help Malaysia to achieve the 6.5% economic growth from 2010-2020 necessary to be a developed nation.
The International Monetary Fund (IMF) had recently cut its 2006 economic growth forecast for Malaysia to 5.5 percent from 6 percent, citing increasing inflationary pressure. The 5.5% economic growth is in line with estimates by both the by the Malaysian Institute of Economic Research and a Reuters quarterly poll of economists.
For Abdullah as Finance Minister to surprise economists with a 6% economic growth performance he would need to liberalise the economy and open up government procurement to domestic competition. Imposing quota policies would not only result in inefficiencies, increased costs causing higher inflation but also result in cronyism that leads to corruption and abuse of power.
Only by allowing transparent, free and open bidding of government contracts open to all Malaysians regardless of race, then will our economy have a chance of success of achieving 6% economic growth this year. The cost of failing to achieve 6% economic growth this year is high as it would make it even more difficult to achieve developed status by the year 2020. Further such opening up and liberalization of government procurement and local economy will have the added bonus of improving Malaysiaís competitiveness and productivity.