JUNE 2 — Bank Negara’s monetary policy reflects a bias towards stability rather than "pure accommodation” of the economic situation — Bank Negara focusses more on the economic fundamentals, i.e. preserving and maintaining these rather than on triggering economic growth.

This is in contrast to central banking in the developed world such as the "Anglo-Saxon” economies where monetary policy is "expected” or "assumed” to do the "heavy-lifting.” Its monetary stance therefore is cautious and ‘wait-and-see.’

As such, Bank Negara has been playing second fiddle, so to speak, to the prominent or pre-eminent role that fiscal policy plays in Malaysia — a hallmark or central feature of the country’s economic development.

The irony is that despite the Malaysian government’s enthrallment with World Bank advice and prescription as epitomised in the fiscal target of 3 per cent and the reduction of the debt-to-GDP ratio which should logically imply and presuppose greater monetary policy space, the fact remains that Bank Negara continues to be behind the curve vis-à-vis the G7 central banks as well as the European Central Bank (ECB) especially in the wake of the Great Financial Crisis (GFC).

The Bank of England’s bank rate is at 0.25 per cent (from 5 per cent at the onset of the GFC in 2008 which represents a reduction of 500 basis points) followed by ECB’s benchmark (otherwise known as the Main Refinancing Operations) rate remaining unchanged at 0 per cent (from 3.75 per cent in 2008 representing approximately a slash of 400 basis points).

The Bank of Japan is perhaps the most extreme example with the policy interest rate below zero per cent since 2016. Contrast this with the (current) normal overnight policy rate (OPR) of Bank Negara at 3 per cent. The ‘range’ within which the OPR has varied has more or less remained "bound” for the past a decade and a half (i.e. a difference of only 200 basis points at most).

However, such a scenario has worked in favour of Malaysia both in the ante and ex-post sense. That is to say, the "arrangement” whereby monetary policy plays a secondary role to fiscal policy has served the economic pattern of growth and development in Malaysia well whether pre- or post-GFC.

One of the economic uncertainties — given the dampening and lacklustre spending levels translated into an increasing slowdown — could well be attributed to the lack of a clear and targeted policy signal from the government regarding which of the two major macro-economic policy tool would be at the forefront.

This would in turn imply a lack of a proper and strategic coordination between monetary and fiscal policy — beyond the normal operational role of liquidity management by Bank Negara in response to and pursuit of debt-issuance (of Malaysian Government Securities) by the Treasury.

Crucially, the level of unemployment would suggest that Malaysia remains on the borderline between full and lack of full employment — at 3.1 per cent of the total workforce. This is a pattern that continues to persist at a constant level.

Youth unemployment is said to be a staggering three times the national rate. It is expected that youth unemployment is set to become a major political issue in the coming general election.

From the macro-economic perspective, the unemployment level/gap is (positively) co-related to the output level/gap. And, therefore, since Malaysia’s potential output level is assumed or projected to be from between 5 per cent to 6 per cent and its actual GDP growth is somewhere between 4.5 per cent to 5.5 per cent leaving a gap of 1.5 per cent to 2 per cent which roughly comes close to or approximates the unemployment level of 3 per cent.

The logic compels us in the direction where the situation illustrates the concrete finding that for Malaysia to achieve its GDP potential, it needs to boost its employment level to reach full employment.

Under the current circumstances where on the one hand, Malaysia has the second highest household debt in Asia (90 per cent of the GDP) and on the other hand, loans are declining with the knock-on effect on the loan to deposit ratios for the commercial banks — signalling de-leveraging and attempts at saving, there is a further gap therefore to be identified, namely a spending gap — left by the private sector.

And in view of uncertain and sluggish exports particularly driven by two major factors (i.e. in reference to the external sector), namely weak commodity prices and lacklustre FDI flows (to be fair this is compensated by increasing Chinese investments in Malaysia), the only other sector left that could fill in the spending gap is none other than the government (by running an appropriate level of fiscal deficit that seeks to ensure that total spending in the economy is sufficient to purchase the full employment level of output at current prices).

It might entail the government running a huge fiscal deficit — that is "targeted, timely and temporary.” This could be done in three main ways:

Raising taxes;

Borrow in the form of debt issuance; and

"Print money” — which nowadays post-gold exchange standard era takes the form of the creation of new reserves or high-powered money/ HPM by electronic means. The most famous/ famous example would be quantitative easing (QE) as introduced in the UK, US and Eurozone following the example of Japan.

The first two policy options would be incompatible or deviate from the World Bank "norm” and the third would represent a taboo (within the groupthink of policy discourse and debate). Therefore the third option represents a gap or lacuna for the government to exploit without having to run afoul of the "norm.”

After all, the advanced economies mentioned above have been engaged in "printing money” without World Bank censure. However, notwithstanding that, the underlying aim and purpose of "printing money” is not serve monetary policy but to "revert” it back to its original intent as regards the spending outcome which is to facilitate fiscal policy.

As the sovereign issuer of the Malaysian ringgit, the government can never run out of money (considered as spending capability or power). It is never revenue-constraint and has ample fiscal space to spend subject to the availability of the productive resources in the economy.

As such, the household budget analogy is inapplicable to the government. Indeed, the growth of the Malaysian economy post-the Asian Financial Crisis (AFC) was precipitated and sustained by large budget deficits contrary to received wisdom of the Washington Consensus. Concerns about inflationary pressure stoking up is allayed by debt issuance soaking excess spending in the economy relative to the output level.

Indeed, in a fiat currency environment, government spending which creates the HPM in the reserves accounts of commercial banks must precede debt issuance of public bonds. The purpose of liquidity management (i.e. of buying and selling bonds in the market) then is to ensure that Bank Negara hits its OPR target on a consistent basis thus maintaining the integrity of monetary policy, and stability and certainty in the financial system.

Excessive reserves (i.e. more than what statutory reserve requirement/ SRR requires in the banking sector) encourages intense inter-bank lending (Klibor) which would natural push the interest rate in a downward direction. The main approach would be for Bank Negara to exchange the reserves with newly issued bonds in coordination with the Treasury.

Therefore, debt issuance is not needed to serve fiscal policy but needed for the smooth and orderly functioning of monetary policy.

It is hoped that the reality of monetary policy operations (in the real world) would be aligned to fiscal policy so as to send the right and clear signal to the Malaysian economy. It would perhaps represent a "first” in the world of macro-economic policy also — where the former finally catches up with the broader operational reality of a fiat/post-gold standard exchange environment.

* Jason Loh Seong Wei is a law lecturer with a private university.

** This is the personal opinion of the writer or publication and does not necessarily represent the views of Malay Mail Online.