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

The Economic Report 2010, which was released on Friday, forecast 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), according to the report. The deficit was 4.8% in 2008.

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

These developments, it said, 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 sector to contract 2.3% this year, mining and quarrying to decline 2.9% but it expected the construction sector to record 3.5% growth and services at a slower growth pace of 2.1%.

For next year, it expects manufacturing to stage a recovery and record a 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 forecast growth of 3.2% and 3.6%.

In terms of federal government finance, revenue is expect to grow 1.4% this year to RM162.1 billion. Operating expenditure is expected to show a 4.3% increase to RM160.17 billion, despite the fiscal injection of RM5 billion under the second stimulus package while development expenditure (net) is expected to jump 26.6% to RM53.04 billion.

The largest component of operating expenditure is emoluments, which accounts  for23.7% of 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 assistanxces and social welfare programme. The allocation for subsidies is projected to dakk 30.3% to RM24.5 billion. 

For 2010, revenue is expected to shrink 8.4% to RM148.44 billion due to the contraction in the economy in 2009 and modest recovery in 2010. The total federal government budget will decline to 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 RM138.28 billion while development expenditure (net) is expected to shrink 4.5% to RM50.649 billion.

As for external trade, it forecast total exports (free on board) to expand by 20% this year to have shrunk by 20% to RM530.626 billion from RM663.49 billion in 2009 but to stage a recovery and expand 5.3% next year to RM588.98 billion.

The government was upbeat about the outlook for manufactured goods, which it expected to expand by 4.5% to RM425.44 billion next year after contracting by 17.8% to RM406.97 billion this year. A large bulk of the manufactured good comprise of electronic products.

Palm oil exports, which are projected to shrink 30.1% to RM32.91 billion this, should pick up pace and expand by 5.9% to RM34.86 billion next year.

Crude petroleum exports are expected to fall 39.9% this year to RM25,857 but also recover and rise by 14.9% to RM29.71 billion next year. Liquefied natural gas, which is expected to shrink 5.7% this year to RM38.40 billion, is expected to jump 69.4% to RM42.69 billion next year.

Total imports (cost, insurance and freight) which are expected to contract 18.6% to RM424.51 billion, is expected to show a 6.7% growth to RM452.77 billion next year.

The report said imports of intermediate goods are expected to contract 21.6% this year to RM297.15 billion and rebound by 6.7% to RM316.94 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 RM59.43 billion this year but recover to show a 6.7% growth at RM63.38 billion next year. Consumption goods are projected to decline 7.1% this year to RM30.10 billion and expand by 5.6% to RM31.69 billion next year.