KUALA LUMPUR: The government has revised downwards its forecast for the economy this year and expects GDP to contract at a slower pace of 3% instead of shrinking by up to 4% under its earlier forecast.

The Economic Report 2010, which was released today, forecasts GDP to recover and grow by between 2% and 3% in 2010, with all the sectors recording positive growth, supported by private investment and consumption.

"With reduced government spending, the fiscal deficit is expected to narrow to 5.6% of GDP [from a deficit of 7.4% this year], the report states. The deficit was 4.8% in 2008.

The report says the deficit would be financed through domestic borrowing. The balance of payments is expected to remain favourable with the current account in surplus for the 13th consecutive year.

These developments,the report says, augur well for the economy and provide a strong foundation for the transition to a high-income economy.

In terms of sectors, the report forecasts the manufacturing sector to contract the most this year, shrinking by 12.1%, agriculture to contract 2.3% this year, and mining and quarrying to decline 2.9%. However, it expects the construction sector to record 3.5% growth and services to grow at a slower pace of 2.1%.

For next year, it expects manufacturing to stage a recovery to record 1.7% growth, agriculture to show a positive growth of 2.5%, and mining and quarrying to expand 1.1%. As for construction and services, the report forecasts growth of 3.2% and 3.6%.

In terms of the Federal Government's finances, revenue is expect to grow 1.4% this year to RM162.1 billion. Operating expenditure is expected to show a 4.3% increase to RM160.2 billion, despite the fiscal injection of RM5 billion under the second stimulus package. Development expenditure (net) is expected to jump 26.6% to RM53 billion.

The largest component of operating expenditure is emoluments, which accounts for 23.7% or RM38 billion. This allocation includes special cash assistance of RM500 given to 860,000 support staff in the civil service to ease their financial burden.

This one-off special payment will cost the government RM430 million.

Another main component in operating expenditure is subsidies -- fuel subsidies, food-security programmes, educational assistance and social-welfare programmes. The allocation for subsidies is projected to fall 30.3% to RM24.5 billion. 

For 2010, revenue is expected to shrink 8.4% to RM148.4 billion due to the contraction in the economy in 2009 and a modest recovery in 2010. The total Federal Government budget will decline 11.3% to RM189.5 billion next year.

As the government seeks to rein in spending and be more efficient, operating expenditure is expected to fall 13.7% to RM138.3 billion while development expenditure (net) is expected to shrink 4.5% to RM50.7 billion.

As for external trade, the report forecasts total exports (free on board) to have shrunk by 20% to RM530.6 billion, from RM663.5 billion in 2009, but to stage a recovery and expand 5.3% next year to RM589 billion.

The government is upbeat about the outlook for manufactured goods, which it expects to expand by 4.5% to RM425.4 billion next year after contracting by 17.8% to RM407 billion this year. The bulk of manufactured goods comprises electronic products.

Palm oil exports, which are projected to shrink 30.1% to RM32.9 billion this year, should pick up pace and expand by 5.9% to RM34.9 billion next year.

Crude-petroleum exports are expected to fall 39.9% this year to RM25.9 billion but also to recover and rise by 14.9% to RM29.7 billion next year. Liquefied natural gas exports, which are expected to shrink 5.7% this year to RM38.4 billion, are expected to jump 69.4% to RM42.7 billion next year.

Total imports (cost, insurance and freight) that are expected to contract 18.6% to RM424.5 billion, is expected to show a 6.7% growth to RM452.8 billion next year.

The report says imports of intermediate goods are expected to contract 21.6% this year to RM297.2 billion and rebound by 6.7% to RM317 billion next year. Most of the intermediate goods are used in the electrical and electronics sectors.

Capital goods are expected to show a 15% decline at RM59.4 billion this year but recover to show 6.7% growth at RM63.4 billion next year. Consumption goods are projected to decline 7.1% this year to RM30.1 billion and expand by 5.6% to RM31.7 billion next year.