The short war in Iraq and quick containment of the Sars outbreak have put Malaysia's economy on track for sharper growth and a smaller budget deficit next year, the finance ministry said in its annual report today.

The report, issued along with the national budget presented by Prime Minister Dr Mahathir Mohamad, forecast real gross domestic product growth in 2004 at 5.5-6.0 percent, compared with 4.5 percent this year and 4.1 percent in 2002.

At the same time, the overall deficit in the 2004 federal budget will be forced down to 3.3 percent of GDP, from the 5.4 percent expected this year, by a cut of 21.3 percent in development expenditure.

Economists have raised concerns over successive high deficits, which were a result of government spending to stimulate the economy after the Asian financial crisis in 1997.

"In consonance with the commitment to balance the budget in the near term, the government's fiscal stance will be the deliberate tightening of public spending to rein in the deficit that had occurred over the last six years," the report said.

Venture in new areas

Mahathir, who is also finance minister, said in a preface to the report that the private sector would have to resume the lead role in the economy and become the engine for growth in 2004.

He urged the private sector to venture into new areas in the services and agriculture sectors, developing homegrown brands, using local inputs and components to compete in the global market.

The report notes that with policies emphasising the promotion of private sector-led growth, private investment is projected to grow by a "considerable" 9.9 percent compared with just 2.0 percent this year.

Monetary policy will remain easy to support growth.

"It will be aimed at ensuring low and stable interest rates, liquidity and easier access to funds to support economic activities, in particular financing to small and medium enterprises and the new growth areas.

Growth in 2004 "is expected to emanate from higher exports on account of continuing improvement in world economic prospects while domestic demand will continue to be driven by pro-growth fiscal and monetary measures".

Rapid expansion

While world growth and trade are expected to improve, the report notes that "business confidence and sentiment will be cautiously optimistic against the backdrop of threats from terrorist attacks."

In its review of this year, the report said the outbreak of the Severe Acute Respiratory Syndrome (Sars) in the region had "some transitory negative effects on tourism-related industries (but) did not significantly impact the overall performance of the economy."

Mahathir said in the preface that policy initiatives, particularly a RM7.3 billion stimulus package in May, "contributed substantially towards the rapid expansion in domestic economic activities."

Mahathir is due to retire next month after 22 years in power, handing over to his deputy Abdullah Ahmad Badawi.

Abdullah must face an election within a year of taking the reins and Mahathir was expected to provide a people-friendly budget to help consumers and sustain economic recovery. - AFP