Continue implementing current fiscal stimulus in 2021

By Dr Mohd Afzanizam Abdul Rashid

 IT is the most awaited time of the year again. the Budget 2021 will be tabled on November 6.

Needless to say, the surrounding environment leading to the announcement date has been very intrigued and full of permutation.

While we are not delving into the political side of it, the Budget nonetheless will set the tone on how the Malaysian economy would evolve next year.

As the Covid-19 is not showing any signs of abating and risks of nationwide lockdowns are something that we cannot totally discard, it would be interesting to see what the minister of finance has in store for all of us. 

Much has been said about the state of the economy this year. Economic recession is already here, resulting in jobless rate skyrocketing while some businesses especially those who operate in the realm of tourism related industries and aviation sector are struggling with their cash flows.

Governments across the globe have been acting tirelessly to prescribe fiscal stimulus with central banks doing their level best to bring the cost of borrowings lower in order to stimulate credit markets.

The standard text book demand management policies or the IS-LM curve have been rigorously effected too.

The outcome from such policy responds have been tangible nonetheless. China’s economy accelerated to 4.9% year-on-year during the third quarter, the second consecutive quarters of positive increases after contracting 6.8% during the first three months of this year.

Similarly, Singapore’s GDP also declined at a slower pace to -7.0% in the third quarter from a massive 13.3% plunge in the preceding quarter.

Malaysian economic recovery is also visible. The total industry volume (TIV) for the automotive sector has jumped to 166,796 units during the third quarter from 67,796 units in the preceding quarter, while the Leading Eonomic Index (LEI) has risen by 7.6% year-on-year in August, representing the fourth consecutive months of increases.

So what could be in store in Budget 2021? It is quite straight forward the way we see it.

The country needs to avert job losses and to ensure new job creation for the new entrants to the labour force.

It was reported in the RAM Business Confidence Survey that 68% of the SME favours the Wage Subsidy Program (WSP) which under KITA PRIHATIN would end by December 2020. So do more of this in 2021.

The Geran Khas Prihatin (GKP) amounting to RM3,000 has benefitted small businesses in their working capital and other financial needs, therefore we need to repeat this again next year.

Notably the cost of living in the country continues to rise. Although the country seems to be experiencing a deflation, if you exclude the fuel and other administrative prices, prices are actually rising especially for food. In view of that, the Bantuan Prihatin Nasional (BPN) should say.

In a nutshell, what has been implemented this year should be continued in 2021 as the economic recovery is expected to be very slow.

Some may argue that the government debt would rise and the cost of servicing such debt would also move in the same direction. Exactly true.

The debt service charges have been rising at a rate of 6.7% per annum between the year of 2000 and 2019. The absolute amount stood at RM32.9 bil last year and accounted for 12.5% of total operating expenditure.

However, think about who would be getting the debt service charges of RM32.9 bil. Judging from the holders of Malaysian Government Securities (MGS) which is the main instruments of government debt, 62.9% are from domestic institutions.

This would be the likes of Employees Provident Fund (EPF) which holds 22.8% of total outstanding MGS in the second quarter, followed by banking institution (23.4%), insurance companies (5.7%) while foreign institutions accounted for 37.1% of total outstanding MGS.

Institutions like banks and insurance are required by law to hold certain percentage in this liquid assets for their liquidity management.

Apart from liquidity requirement, MGS is deemed as risk-free assets as the Government will not default on its debt obligation issued in domestic currencies.

There is also a chance that the investors could make capital gains especially during declining interest rate environment as fixed income securities or bond prices are inversely related to the interest rate direction.

So the government can spend. However, it has to be targeted, outcome based and time bound.

Nurturing entrepreneurship is also critical as those who have lost their jobs would be inclined to start their own business as new jobs opportunities are hard to come by.

While providing the necessary training on entrepreneurship and new skill set are important, identifying the key sectors are equally critical.

In this respect, promoting entrepreneurship in the agricultural sector may not be such a bad idea. If one were to look at the self-sufficiency ratio (SSR), we can easily conclude that Malaysia is too dependent on imports for their food requirement. For instance, the SSR for Cabbage, Chili, Coconut, Mango, Mutton, Beef and Fresh Milk stood at 36.2%, 30.8%, 68.2%, 32.1%, 23.7% and 59.3% in 2019 respectively.

From our calculation, the trade deficits in agro food sector stood at RM17.4 bil in 2019. This is extremely higher compared to a deficits of RM1 bil in early 1990’s.

Perhaps, it is high time to revisit the agricultural sector as the source of employment opportunities and hopefully, it can become our niche area especially when the proliferation of high technology can be part of the equation.  

Therefore, expansionary fiscal policy is not a sin especially when it is executed during crisis. As such, we believe that the Budget 2021 would continue to be expansionary as the economic recovery remain highly uncertain in the face of Covid-19 pandemic spread.  – Oct 29, 2020

 

Dr Mohd Afzanizam is the chief  Economist at Bank Islam Malaysia.

 

 

 

 

 

 

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