Alternative Views: Full reopening comes at crucial juncture for economy

This article first appeared in Forum, The Edge Malaysia Weekly, on May 2, 2022 - May 08, 2022.
Alternative Views: Full reopening comes at crucial juncture for economy
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With 82% of the population fully vaccinated and nearly 50% having received their booster shots, the easing of measures that were imposed to curb the spread of Covid-19 is long overdue.

The final step that will mark the end of Malaysia’s 27-month battle against Covid-19 will be the reopening of clubs and karaoke lounges on May 15. Since March 2020, the nightlife scene, especially in cities such as Kuala Lumpur, George Town and Johor Baru, has not been the same.

Tourists have been conspicuously missing while locals have frequented clubs that serve food with caution for fear of being compounded for not complying with the standard operating procedures (SOPs) that were in place.

Scenes showing scores of young people being herded into police trucks in such places as Bangsar for not observing the Covid SOPs were common. Compounds were still being issued even a month ago.

Come May 15, all nightlife activities will be allowed to operate as usual, paving the way for the services sector of the economy to return to normalcy. The announcement just before the one-week Hari Raya break has set the mood for the country’s most extensively celebrated festival to be different this year.

Since March 2020, clubs and pubs without a food licence, discotheques, dance halls and everything else that is deemed as “negative activities” have shuddered to a halt.

Clubs were converted into restaurants or went out of business. Some karaoke lounges were let out for anyone wanting additional storage space. Concerts were completely barred, causing many equipment service providers to close down and look for other sources of income.

The relaxation in the rules to allow the “negative” segments of the services sector to resume operations as in pre-pandemic times comes together with the opening of the borders to fully vaccinated tourists.

From May 1, travellers are no longer required to do a pre-departure polymerase chain reaction (PCR) test 48 hours before departure and another simple saliva test 24 hours upon arrival. The requirement for a five-day quarantine has been done away with for those who are fully vaccinated.

Essentially, this is a major boost for the tourism industry. It also completes the opening up of the entire value chain of the wholesale, retail, entertainment and hospitality industry, which forms the backbone of the services sector.

The full reopening of the economy comes at a time when the country is reeling from rising inflation, growing unemployment and a weakening ringgit. Bank Negara Malaysia is committed to defending the ringgit but its options are limited.

A rise in interest rates will negatively impact the flagging economy, which has not recovered from the pandemic. Also, it may not have much of an impact on the ringgit’s value because of the overwhelming strength of the US dollar.

The US Dollar Index, a measure of the strength of the greenback against a basket of currencies, is now at 103.5 points. It is up almost 8% so far this year and more than 13% compared with a year ago.

Because of the dollar’s strength, all other currencies — from the Japanese yen to the South Korean won and UK’s pound sterling — have depreciated against the greenback. However, among all the emerging-market currencies, the ringgit is one the worst performers this year because of the limited headroom the central bank has to defend it.

Moreover, Malaysia’s political instability does not help shore up confidence in the ringgit. The federal government continues to splurge to sustain the economy, weakening the country’s overall macroeconomic fundamentals.

Nobody is going to make big investment decisions as the general election is tipped to be held in the next few months. While the balance is in favour of the Barisan Nasional coalition, nobody can say for sure if the outcome will be any different from the current situation. 

The central bank cannot afford to raise interest rates nor does it have the luxury of dipping into the reserves to defend the ringgit. Until we see all engines of the economy firing, there are limited options to defend the ringgit.

And for that to happen, the economy has to reopen completely.

According to Bank Negara’s statistics, the economy is expected to grow between 5.3% and 6.3% this year, which is an improvement compared with 3.1% last year. In 2020 when the pandemic froze the economy, Malaysia’s GDP contracted by 5.6%. All segments of the economy were affected.

Based on preliminary numbers, the services sector grew at 1.9% last year compared to a contraction of 5.8% in 2020. In 2022, the sector is forecast to grow by 6.9%.

The services sector provides employment on a large-scale basis. The other component of the economy that has a similar effect is the manufacturing sector.

In 2020, the income per capita dropped to RM42,598, which was the level of the average Malaysian household income in 2017/18. The last time income per capita declined was in 2009 when the economy contracted by 1.7%.

In that year, the manufacturing sector contracted while the services segment of the economy saw a sharp slowdown.

In the last two years, the unemployment rate rose and the pandemic always lingered in the background, preventing the services sector from returning to normal. In addition, not all engines of the economy were firing.

Festivities such as Hari Raya were a subdued affair.

In fact, since restrictions on Covid-19 were put in place in March 2020, Hari Raya celebrations have been somewhat subdued. In 2020, a tight Movement Control Order was in place, while last year, gatherings were permitted but restricted to 15 persons per house at any one time.

This time around, Hari Raya coincides with the country’s preparations to return to normalcy. It is a celebration that will long be remembered.

M Shanmugam is a contributing editor at The Edge

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