Malaysian budget boost for business

Mr Mahathir prepares for what may be his last budget

Local firms have been given a parting present from Prime Minister Mahathir Mohamad in what will probably be his last budget before he retires at the end of 2003.

Dr Mahathir, who is also finance minister, announced incentives for small- and medium-sized businesses to spur domestic growth.

For decades there had been over-reliance on foreign investment and trade but growth now should be "domestic driven", he said in his budget speech.

Dr Mahathir also offered the government's 850,000 workers a one month bonus or minimum payment of 1,200 ringgit.

The budget is the government's economic blueprint for the two years leading up to the next general elections which must be held before December 2003.

Dr Mahathir has said he will hand over power to his deputy, Abdullah Ahmad Badawi, in October next year, ending a 22-year reign.

Business perk

The corporate tax rate was cut to 20% from 28% for first 100,000 ringgit earned by companies with paid-up capital of up to 2.5m ringgit.

Dr Mahathir said Malaysia's corporate tax rate might appear high at 28% but dividends were not taxed, meaning the effective rate was low than in countries like Taiwan, Japan and Thailand.

Some auto parts makers and high-tech firms will also qualify for a five-year tax holiday.

Foreign corporations did not miss out though, as those who set up operational headquarters in Malaysia were exempted from tax for 10 years.

Economic outlook

The 109.8 billion ringgit (£19bn) budget allows for a deficit of 3.9% of gross domestic product, lower than the 4.7% this year.

Dr Mahathir said the economy was expected to grow at least 4% this year and between 6% and 6.5% in 2003.

The fixed exchange rate of the ringgit, which was set at 3.8 per dollar in 1998 to protect the country from the Asian financial crisis, will remain.

The dollar's recent weakness has made the ringgit more competitive against trade rivals, helping Malaysia post higher export earnings.

Dr Mahathir has overseen the industrialisation of Malaysia, but like many Asian economies, exports have been the economy's driving force.

Export growth of 10.4% in 2003 was predicted after 4.5% growth in 2002.

Inflation would stay within the government's target of less than 2%.