OCT 28 — What is the most appropriate budget for Malaysia to navigate the economic recession that the Covid pandemic has precipitated? This is the crucial issue we should be discussing so that appropriate solutions can be found. Each country needs to develop a national consensus on how the finite financial capacity of the nation should be deployed to limit the health and economic fallout of the ongoing pandemic. Unfortunately, we in Malaysia have been distracted by political intrigues for far too long.
The PSM would like to share our analysis of the current recession and put forward a set of ideas on how we should tackle the economic fallout of the Covid Pandemic. We need a clear understanding of the situation we are in so that we can plan coherently for the coming year. Our analysis/suggestions:
We cannot “talk up” the economy
There are some government leaders and economic analysts who seem to believe that the primary problem is a lack of business confidence. They think that this lack of confidence is the reason why businesses are not investing. So they try to paint a rosy picture of the economy and spout projections such as “the Malaysian economy will rebound sharply in Q1 2021” and “our GDP will grow by 6% next year”.
PSM’s analysis: the primary problem is a real drop in aggregate demand in the world economy. The lockdowns that many countries have had to keep implementing dampens economic activity, reduces household and business expenditure and undermines market demand for a whole range of goods and services. Ignoring this reality and trying to promote confidence by painting a very optimistic picture is counter- productive. People will start thinking that the government does not know what it is talking about – the credibility of government will go down.
Pumping in more credit into the system is not going to work
Some people believe that the government should reduce the cost of capital – in other words, make it cheaper for businesses to borrow. A corollary of this approach is to argue for the reduction of corporate and individual taxes. The perception is that if business people have more funds, they will invest in the production of more goods and services. This investment will create more jobs and the economy will improve.
PSM’s analysis – the availability of credit is only one of the factors that induce business people to expand production and employ more workers. A far more important factor is effective market demand. If business people cannot sell what they produce, they are going to scale back on production however much credit you make available to them. In fact what the T10 will do is to seek other avenues to invest the credit that is made available to them. This is why the stock markets in so many countries have been having bull runs the past few months despite the fact that the real economies of these nations are severely affected by the pandemic.
PSM’s analysis – the government needs to pump credit into the system to ensure that otherwise viable businesses do not become bankrupt because of cash-flow problems due to poor demand for their products during this pandemic induced recession. Such businesses will need easy credit to settle outstanding obligations – wages, retrenchment benefits, debts to suppliers and to banks, etc. The government also needs to pump credit into the system in the form of cash transfers to families with a household income of less than RM 1000, so that these families can get the basic necessities – food, shelter and health care. But in both these categories, the provision of credit is to protect the group targeted, not to restart the economy.
The Government has to take the lead role in managing the economy and protecting the Rakyat
The conventional economic doctrine in many parts of the world is that markets are self-correcting and that Government intervention should be kept to a minimum to avoid “distorting” the market. This conventional doctrine holds that businesses striving to improve their earnings will create jobs and incomes for the entire population.
PSM’s position: the Covid pandemic has changed everything. The physical distancing measures that we have to tighten each time the number of new cases goes up restrict business activity quite significantly and undermine efforts to re-start the economy. Relying on the private sector to invest, expand production and create more jobs cannot succeed in the current situation. In the “new normal” we are in, the government is the only agency in society that has the capacity to ensure that the damage to the economy and the people is minimized. That responsibility cannot be sub-contracted out to the Private Sector.
This is not going to be a V-shaped Recession
Some people talk like Trump. They believe that a safe and effective vaccine is going to be available before the end of 2020 and imagine that herd immunity is just around the corner. Then we can go back to business as normal without the need to practice physical distancing.
PSM understands: though there are some 60 companies and groups working on developing vaccines, there is still no definite proof that these vaccines will confer immunity to Covid. The vaccine candidates now in Stage 3 trials can induce antibodies against Covid in trial participants, but that does not automatically mean that these antibodies will generate immunity to Covid. The test for active HIV is a blood test that screens for the antibody to the HIV virus. Similarly the current test for Hepatitis C looks for anti hepatitis C antibodies in the patient. In both HIV and Hepatitis C, the presence of these antibodies does not confer immunity. We need to see if the current clinical trials generate evidence that the presence of the Covid vaccine induced antibodies actually confers protection against Covid.
And what is the level of protection? This is critical. In epidemiological terms, we need to bring the rate of transmission (RoT) to below 1.0 if we want to prevent the number of cases from growing exponentially. We now can do that by physical distancing and lockdowns etc. but this is a big dampener to the economy. If we want to bring RoT below 1.0 by creating “herd immunity” then we need to make more than 75% of the population immune through the Covid vaccination program. Only then would Covid, with presumed RoT of 4.0 in the absence of physical distancing measures, not be able to sustain itself in the population. For each Covid infected person will still spread the virus to 4 persons on the average. But 3 of these 4 persons would be immune because they have taken the Covid vaccine. So Covid cannot sustain an epidemic in that population.
That means we need to have a safe and effective vaccine made available to almost the entire population of the world so that we can attain the 75% herd immunity we need to return to “business as usual” without the physical distancing measures. There are some idiots who believe that letting the natural infection spread through the population can create the herd immunity we require. Currently (27/10/2020) only 0.086% (28,864 cases out of a population of 33 million) of the Malaysian population is immune to Covid (assuming that the natural infection will lead to immunity – something that is still not established 100%). Even the US with its 231,254 deaths only has an immunity level of about 2.71%. It would be far too painful to attempt to develop “herd immunity” by allowing the natural infection to spread through the population.
More targeted relief for the poorest families
The bottom 20% of society – those earning less than RM 2500 per household per month – are the worst affected by the pandemic. Some B20 families have had to reduce their food intake because their income has dropped. A large proportion of B20 families work in precarious jobs as daily paid contract workers – washing dishes in restaurants, loading and unloading goods in factories and shops, in small farms, etc. Another portion of B20 families rely on micro businesses for their income. If there is a contraction in business activities or some tightening of the Movement Control Order (MCO) the daily paid workers and the micro businesses may not have any income. Neither is these groups protected by any unemployment benefits as are workers in the formal sectors of the economy. In addition, poorer families have much less financial reserves to tide them through difficult periods. Many do not have savings or investments that they can liquidate to provide money for this period.
The Bantuan Prihatin Nasional (BPN) program involving a total allocation of RM 10 billion that the government implemented in April and May 2020, helped a great deal. Similarly BPN 2.0, involving cash transfers of RM 4.8 billion to 10.6 million recipients to be rolled out in October 2020 followed by another payout of RM 2.2 billion in January 2021. BPN 2.0 will bring welcome relief to many families. But this is not sufficient for the 10% of families whose household incomes have dipped to below RM1000 per month. These families require regular monthly cash transfers. But can the nation sustain an outlay of RM 10 billion monthly for the next 2 years? (Our total budget for 2020 was RM 300 billion.)
PSM’s suggestion: families whose current income is less than RM1000 per month should be provided monthly cash transfers of RM 500 to RM 1000 – a guaranteed minimum income – so that their basic needs can be met. We estimate that at present, there will be around 1 million families who would require such assistance – this works out to RM 1 billion per month if RM 1000 is transferred to these 1 million families monthly.
A “Green New Deal” for Malaysia
The PSM has already called for the following
- the building of houses by non-profit entities for rent to young families and to B20 families. We need expand the stock of “social housing” in our country.
- Programs to repair rehabilitate and clean up the low cost flats in our cities. Many of them are in terrible condition now.
- A reforestation program to rehabilitate the forests that have been logged
- Upgrading our solid waste management – separation of domestic waste at source, recycling of as much as is possible and safe disposal of the remainder.
- Cleaning up our rivers.
- Programs to expand generation of renewable energy.
These projects address real needs in our society. Their implementation will generate jobs and incomes for thousands of people and this will have a multiplier effect in the economy. The improvement of housing provision and the greening of our society will inject hope and positivity into our society at this difficult juncture.
But where will the funds for all these programs come from? Government revenue is going to falter in 2021 as corporate taxes will be lower and petroleum prices are depressed.
The Government should use “Debt Monetization” as one of the methods to raise funds for the programs mentioned above.
The Minister of Finance Dato Seri Tengku Zafrul Abdul Aziz, has mentioned that this year’s budget would have a deficit of 6%. That works out to RM 84 billion (based on an estimated GDP of RM 1400 billion). The Malaysian Government usually meets its deficit by selling government securities (MGS) to private sectors investors. Generally the government will have to pay a coupon rate of about 3 to 4 per cent yearly on these MGS. We are already paying RM 35 billion per year as coupon payments on the MGS that have been sold in previous periods.
Unfortunately, even with this additional RM 84 billion the budget might not be sufficient for all the programs suggested above. The government could sell even more MGS to private investors but this will burden future administrations with higher debt servicing costs.
“Debt monetisation” is a strategy that is being used by several governments including Indonesia, India, Japan and New Zealand in which the government sells Government Securities to its own Central Bank but at very low interest rates (perhaps 0.1%). This strategy provides government with the extra funds that it needs in a crisis situation without the disadvantage of committing the country to high interest payments in the future.
Admittedly, there are potential downsides to this strategy. If too large an amount is procured through debt monetization, it can lead to depreciation of the ringgit and to inflation. But an amount equivalent to 4 per cent of the GDP (about RM 56 billion) would not cause these negative effects and the government should consider this as a strategy for these challenging times.
Let’s think out of the box
Several of the ideas put forward by PSM represent a departure from how things are normally done in Malaysia. But there is no denying that we are in a “new normal” and the market is incapable of providing a coordinated response to the current recession. Without adequate government intervention, the economy will go into a downspin and the economic hardships faced by households and businesses will increase dramatically. The Government has a crucial role to play in helping us weather this combined health and economic crisis.
If we handle it right – by prioritizing solidarity and ensuring no one is deprived of the basic needs – we will emerge stronger, more united and more harmonious as a nation. Isn’t that something worth working for? Join us in mainstreaming the proposals that are contained in this write-up. We need to promote a wider discussion of these sort of proposals.
*Jeyakumar Devaraj is chairperson of Parti Sosialis Malaysia
** This is the personal opinion of the writer and does not necessarily represent the views of Malay Mail.