The outbreak of COVID-19 in addition to movement control measures will have a devastating impact on the Malaysian economy. A large, decisive, two-stage economic policy response can help to safeguard Malaysian livelihoods.
The new SARS-CoV-2 virus, which causes the disease COVID-19, first arrived on Malaysian shores on 25 January 2020. A month later in February, case numbers inched up to 22 positive cases. By mid-March, case numbers had ballooned 20-fold to 428 cases. In response, Malaysian authorities issued a two-week Movement Control Order (MCO) on 18 March 2020. Businesses and services deemed to be non-essential were shut down. Interstate travel was curtailed. Public sporting, religious events and gatherings were cancelled. At the time of writing on 30 March 2020, a total of 2,626 positive cases have been identified. Of those, 479 have recovered, while 37 have passed away.
By now, it is clear that this pandemic will have detrimental effects on both the Malaysian economy and the economic welfare of the rakyat.
Even long before the movement control measures in Malaysia, the outbreak of the new coronavirus in China had created wide-ranging supply and demand shocks that have reverberated across the globe. In Malaysia, the effects of these shocks may be dire. The Malaysian economy is amongst the most highly exposed economies in the region to both Chinese demand and supply. China is Malaysia’s number one trading partner, a large source of foreign investments, and top tourist source outside of ASEAN.
Besides, MCO measures will have devastating economic costs too. On a macro level, the closure of businesses and services, along with travel and movement restrictions will have a large impact on the Malaysian economy. By many estimates, Malaysia is projected to record its lowest GDP growth rate since the Global Financial Crisis in 2009. However, its effects on individual livelihoods and businesses may be even more pernicious. Vulnerable households affected by the temporary closures will be at high risk of facing immediate cash flow constraints as their earnings dwindle.
Critically, this liquidity squeeze will be disproportionately felt by small-and-medium enterprises (SMEs), vulnerable groups such as lower-income individuals, as well as part-time and unemployed workers. This can have knock-on effects on the entire economy, leaving businesses insolvent, individuals bankrupt and the financial system saddled with non-performing loans.
As such, Malaysia’s economic policy response to the coronavirus pandemic should comprise two separate stages. Stage one measures should be implemented immediately during the MCO to safeguard the income and liquidity of affected businesses and individuals. Stage two measures should comprise a hefty fiscal stimulus component and be implemented as soon as the outbreak shows signs of subsiding and movement controls are lifted.
Stage one measures should primarily involve supporting the welfare of the rakyat through income and liquidity support. As much as possible, the goal of stage one measures should be to allow affected workers and businesses to remain solvent until after the pandemic subsides.
For businesses, the primary aim of stage one measures should be to reduce the number of business deaths from the outbreak. On this, affected businesses will need concessionary working capital loans to help them remain solvent during periods of reduced demand. Distressed larger firms may require access to emergency credit lines. At the same time, making a portion of these loans conditional on some employee retention target – along with generous wage assistance policies for firms – will help to preserve employer-worker relationships during the MCO.
For individuals, stage one measures should primarily aim to cushion the impact of the outbreak on the livelihoods of the rakyat, focusing particularly on vulnerable groups most susceptible to income shocks, such as the lower-income, the unemployed and part-time/gig economy workers.
On this, temporarily increasing benefit size and extending the benefit duration of the Employment Insurance System (EIS) would enable unemployed workers to weather adverse labour market conditions, giving them more headroom to seek employment once conditions begin to normalise. Similarly, during this emergency extension, funding for the EIS should also be temporarily shifted to the federal government instead of being funded by payroll contributions. Lastly, broadening existing coverage of the EIS – by relaxing eligibility requirements – would also be hugely beneficial in protecting the welfare of workers.
Outside of the labour force, direct cash flow support via Bantuan Sara Hidup (BSH) should be increased to reach low-income households who may not be formally employed or are unable to work. Here, a one-off increase in the BSH transfer amount for the poorest households would enable lower-income communities to purchase much-needed necessities during the MCO.
Subsequently, after the infection curve has peaked and movement controls have been lifted, stage two measures need to kick in immediately. Economic policy should now shift gears from focusing on “life support” in stage one to stimulating the economy in stage two. At this stage, past experience suggests that having both shorter-term policies to lift demand, in tandem with longer-term policies to boost productivity and human capital accumulation, will yield the greatest results.
For the shorter-term, a simple one-time cash injection to every Malaysian, structured as an immediate lump-sum tax rebate, would put money in the hands of the rakyat almost immediately, rapidly kickstarting aggregate demand. Recent research has suggested that such lump-sum cash injections work much quicker in getting money into the real economy compared to other fiscal policy tools like corporate tax cuts.
For the longer-term, periods of crises present good opportunities to invest in overall productivity as well as deepening social safety nets. Increasing infrastructure spending, especially in lagging regions, can have long-term effects on productivity and economic growth. Similarly, continuing to deepen social safety nets and strengthen automatic stabilisers, like the EIS, will incentivise human capital accumulation and ensure the Malaysian economy and workers are better prepared for future crises.
Certainly, none of this will be easy. For starters, it will be costly. Government budget deficit targets will need to be overshot. Difficult decisions will need to be made later on taxation and expenditures – though with progressive taxation reforms these costs can be borne primarily by the wealthy. Additionally, intense amounts of political determination will be required – especially because certain laws may need to be amended, especially ones concerning unemployment insurance and government borrowing.
Yet the economic, social and political cost of inaction – or even insufficient action – is something far greater and far more frightening. This is no time to pull punches. After all, extraordinary times require extraordinary measures, and while the outbreak may eventually be conquered through vigorous public health efforts, without a sufficiently large and immediate fiscal response, the economic scars it leaves behind will be felt for decades to come.
A full version of this article can be found here.