Friday 29 Mar 2024
By
main news image

This article first appeared in Forum, The Edge Malaysia Weekly on June 1, 2020 - June 7, 2020

Policy interventions are attempts to change the dynamics of the economy as a system. The efficacy of any policy can be measured by both the magnitude as well as the direction of change it generates. An effective policy intervention is one that changes things and changes them in the right direction.

The ongoing Covid-19 pandemic calls for various policy responses. The fiscal policy imperative is quite clear. The fact that the government has to spend more even though its revenues are declining while it sits on a pile of debt only points to one direction: The debt level will have to rise, as even sustaining the current levels of spending will require more borrowings in the light of the declining revenues.

There is an urgent need to ensure that those displaced and affected by the pandemic are taken care of in a structured manner beyond the one-off measures already announced by the government. While the three “stimulus” packages are meant to be preventive as well as supportive, there will be a shift towards providing safety net support as unemployment and insolvency rise as the economy contracts. Even if aggregate demand were to return quickly, which is not likely, the contraction in economic activities has been and will be sufficiently deep that the unemployment it creates will be significant. It is this rise in unemployment that should define fiscal priorities.

These interventions will require more expenditures than what is already budgeted for. They also require a total rethinking and therefore a consolidation of the various existing programmes that are already in place. Malaysia does not have a structured and institutionalised unemployment support programme as policy emphasis has always been in capability development and access to subsidised resources instead of direct assistance. The challenge will not just be monetary but also organisational — how to provide the unemployed with safety nets beyond one-off transfers and the usual retraining programmes.

Such a policy focus on unemployment in the next 18 to 24 months will come with trade-offs, some of which will be stark ones. In the medium term, the trade-off will involve development expenditures. Notwithstanding the commitments already made, there should be a re-prioritisation of the ongoing and planned mega infrastructure projects — the various rail projects, in particular. The government funds these projects by debt and existing debt-servicing costs alone are something that the government cannot afford, given the fiscal parameters. It is folly to borrow even more at this time to spend on these physical projects.

What is required is clarity on these fiscal issues — what are the plans and how are they to be financed — as the government is the provider of safety nets of last resort. And parliament is the place to debate this and obtain a national direction, if not a consensus, on addressing the socio-economic repercussions of the pandemic. Investors and lenders look for these things in making their considerations.

On the monetary side, the consensus globally seems to be to loosen things up — lowering interest rates and increasing the supply of money. Bank Negara Malaysia lowered the overnight policy rate (OPR) by 50 basis points in its last Monetary Policy Committee meeting. It had earlier lowered the Statutory Reserve Requirement (SRR) from 3% to 2% and during the last MPC, allowed banks to fulfil the SRR by holding government debt instruments. Combined, these two measures released some RM30 billion of liquidity into the banking system, which could ease demand for more credit. Looked at another way, banks are effectively lending to the government by holding these government debt instruments to fulfil a statutory requirement.

In the bigger scheme of things, however, RM30 billion is not much money. It will not cover the RM35 billion extra spending announced in the three stimulus packages. The original projected Budget 2020 deficit itself is larger at more than RM50 billion; that and both the shortfall in revenues and increased expenditures will require a lot more funds from the capital markets. That does not include debts maturing this year that will need refinancing.

The convergence of fiscal and monetary policy lies in looking for liquidity to fund these expenditures through debt while also refinancing existing debts. The strong demand for emerging economies’ sovereign securities in the period after the 2008 financial crisis has waned as the onset of the pandemic saw an exit of funds from emerging economies back to developed economies. The 2020 Economic Outlook by the Ministry of Finance estimated a current account surplus of RM29 billion or only 1.9% of forecasted 2020 gross national income (GNI). The full-year 2020 GNI figure will be lower than the forecasted number but the number to watch is the current account surplus. As at the first quarter of 2020, before the implementation of the Movement Control Order, the current account surplus had already dipped sharply from the first quarter of 2019. Liquidity will therefore be a key issue that should also amplify the question of priorities.

The consideration on using monetary tools at this juncture is not so much the immediate effects of lowering interest rates or freeing up more liquidity, but anticipating what else is available going forward. If the crisis persists and more correction is needed, will the same policy lever yield the intended outcome or will it lose traction? The thing with policy levers is that there is a certain stringency that must be observed; used too often or too much, the lever loses its traction. What else is there beyond lowering the OPR further?

The labour market, in contrast to the capital markets, is a highly distorted one in Malaysia — the result of a combination of the quality of domestic supply of human capital and three decades of influx of migrant labour.

The quality of supply issue — that the quality of education is not up to scratch to engender national competitiveness — is recognised and has been discussed extensively. The grand plans await the will to implement them. This is not a budgetary issue but also organisational and political ones.

The policy response to the presence of a very large number of illegal immigrants should start with the recognition of why that is the case to begin with. It is obvious that there has been poor enforcement of the law, which, indeed, points to decades-long corruption and institutional failures. It is these workers, illegal and legal, who were exploited and it is the Malaysian economy that has not fully benefited from fully recognising them as a formal part of the labour market.

The solution to their large presence is not to simply say: deport all of them and fill the jobs they are doing with Malaysians. That is a regressive solution apart from being unimplementable. The numbers are huge. A 2019 World Bank study concluded that the total number of foreign workers in Malaysia ranged from 2.96 million to 3.26 million in 2017, with about half of them being irregular or illegal. Official data for 2017 shows that only 1.7 million have legal documentation. The impracticality of “just deport them” is clear especially when we are fighting this global pandemic.

To “replace them with Malaysians” as a policy is equally foolhardy and makes no economic sense. People are not interchangeable like nuts and screws, and if we look with disdain at the machines these nuts and screws are attached to, the solution is to improve the machines so that they require less screws or need better nuts. Or better machines that require more than just nuts and screws. For that to happen, the focus should be on the institutions that shape our human capital.

The economy as a system is ultimately about price discovery and the resulting allocation decision. For that, you need markets and transactions. For now, the markets are there but the restrictions imposed to control the pandemic have reduced transactions drastically. To get the economy going is to increase transactions, all transactions. A monetarist’s view of the situation entails increasing money supply but it also requires velocity of the money supply to increase — the increase in transaction volume. Policy decisions, in the light of the severe constraints on debt and liquidity, must prioritise the increase in transactions. That is the only way to generate economic activities quickly.

There is that inflationary risk further down the road when demand picks up with so much money sloshing about in the economy, but right now, the priority is to reflate the economy and prevent an outright recession.

Normalcy will be gradual. In that journey towards normalcy, which itself is evolving, there needs to be a clear diagnosis of the problem and clear definitions of objectives. In the world of scarcity, the trade-offs will have to be measured by both efficiency and effectiveness. While that should be obvious — the better option is one that costs the least but is equally effective — often times, decisions are taken without clarity about what exactly is the problem to be solved. Misapplied policy tools lose their effectiveness and while still exacting costs, do not change the dynamics for the better.


Dr Nungsari A Radhi is an economist and the views expressed here are not related to any of his organisational affiliations

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.

      Print
      Text Size
      Share