Covid-19: How the gov't should stimulate the economy

This morning I looked in the mirror and realised I needed a haircut – quite badly. And it will be at least another three weeks before I get one. Maybe longer if the movement control order (MCO) is further extended. Now what’s that got to do with anything?

If it has not dawned on you already, that means nobody who cuts hair would have earned a cent since March 18 and won’t until April 14 at least, if the order is not extended again. That’s almost one month – if you have no income and no savings (and millions don’t), what do you do?

Think of all the people who are similarly affected – daily paid workers, vendors of all kinds, salespeople, freelancers, virtually all non-salaried workers in the non-essential sector, the foreign illegal workers who alone might number two million. Soon, or already, they won’t have anything to eat.

They are all affected now – perhaps as many as four million people, or about a quarter of the workforce, and no money has yet reached them.

Some of them, such as illegal workers, are not even covered under the Bantuan Sara Hidup (BSH) programme, which funnels money to those in the bottom 40% (B40) in terms of income. An effort has to be made to get the funds to them. But you have to find them before you can fund them.

Fortunately, there is already a registered group under BSH and these are the people to whom most direct aid must go. That should be the first priority, especially to those poorest in the bottom 20%.

But the question is how much and how to spend.

How much first. One simple way is to estimate what a partial lockdown may cost the economy. The size of the economy in current prices was about RM1.5 trillion in 2019 or RM125 billion on average per month.

Let’s say a partial lockdown crimps production by half. That would mean a month of production halt will cost half that, or RM62.5 billion. If we need, say, two months of partial lockdown (one month is already on its way) to fight Covid-19, the cost to the economy, based on 2019 figures and no growth, would be RM125 billion. That would be the amount of stimulus needed to mitigate the crisis.

With RM20 billion committed, the remainder is RM105 billion. That’s well within the capacity of the government to raise. Central bank Bank Negara Malaysia’s reserves amount to some RM420 billion, and Petroliam Nasional Bhd (Petronas) at last count had well over RM100 billion in cash and equivalents. The Malaysian banking system had funds of RM1.7 trillion, of which some 83% had been given out as loans, implying 17% or some RM290 billion was still available for borrowing.

There are funds available, and while some debt ratios won’t look too healthy if the government borrows some RM125 billion, this is an emergency. Every country is doing it to stem the problem of contracting economies and income caused by Covid-19. So must we.

Next question – and the more difficult one – how do we spend it? First, make an estimate of how much the B40 group of the economy will lose. Because they don’t have reserves, the government simply has to helicopter the money in for them. This probably is the most difficult part because not all of them are covered under existing programmes.

Once the government gets this money to them, it should discontinue as soon as possible the current practice announced earlier this week of allowing them to withdraw RM500 per month from their Employees Provident Fund (EPF) savings for up to 12 months or RM6,000 in total.

In effect, the government is using their savings to get a stimulus effect which it says may be as much as RM40 billion as a result of this. This a grave travesty – you are using the savings of the poor to help resuscitate the economy.

If you had RM50,000 in savings in the EPF, and a lot have less than that, RM6,000 of withdrawal implies that more than 10% of your retirement savings would evaporate.

Borrow RM125 billion instead through the banking system, using Bank Negara reserves or Petronas money or a combination of all three to take the full burden of stimulus, instead of forcing the poor to use their savings.

Subsidising wages

There are some eight million households in Malaysia. The B40, comprising 3.2 million households, earn a median income (sort of a middle income, roughly half earn above that and half below that) of some RM3,000 a month. If we compensate them directly for two months of loss of income, we need to give them RM6,000 per household or RM19.2 billion over the rescue period. This can be split into two payments.

In terms of percentage, that will be only 15% of the total stimulus package, leaving much more – RM105.8 billion to be precise – that can still be used. There is still a lot to do in terms of illegal workers and others, especially the self-employed to take care of.

For businesses, the preferred way of help should be soft loans with interest subsidised by the government, which can tide them over during these tough times. Some of these are already being done through Bank Negara pronouncements.

During the period when production is cut because workers are unable to work as they need to be at their place of work to be productive, the government can help by subsidising wages. But mechanisms have to be devised for doing this so that no abuse takes place.

It is important to stay away from capital intensive projects to create employment – the focus should instead be on tiding over people and businesses until they encounter more normal times again as Covid-19 recedes.

Also, it is not necessary to disburse the stimulus in one go. Money can be raised and disbursed as and when it is needed. If the virus abates, then less is needed. If it gets worse, more may be needed. The idea is to keep the economy going so as to enable the recovery to take place when it comes – the so-called V-shaped recovery when pent-up demand helps to fuel a rapid recovery.

Also, instead of direct cash, other measures available to the government include all kinds of tax breaks and deferments and persuading others to shoulder the economy in difficult times. Thus, landlords should be persuaded to take rental cuts during periods when premises are under-occupied.

There should be willingness by all parties – employers, employees, businesses, self-employed, owners of capital, the government, most importantly, and so on – to shoulder the burden, to lighten it for everyone. Give and take should be the norm, and a genuine desire to jointly come out of it together instead of pursuing narrow self-interests.

If these basic principles are scrupulously adhered to and monies disbursed efficiently, carefully and honestly, then the stimulus package can be successful with the money going to the people and businesses that genuinely need it.

For this stimulus to the economy to work well, the devil is definitely in the details. If we get the details right, then the money should go to the people who need the most help, with minimal wastage and leakage, and people who are likely to spend what they receive so that money becomes recirculated in the economy, producing a multiplier effect which is larger than the amount injected.

The rich and those with reserves don’t need personal help. They may need help to keep their businesses and jobs afloat but don’t extend help to save the shareholders – extend financing to help them tide over the period.

If we take sensible steps to keep the virus at bay, if all of us cooperate to do this, and if we take sensible measures to keep the economy chugging albeit at a lower speed, it becomes easier to accelerate the engine at the appropriate time.

Let’s all work towards that.

---

P GUNASEGARAM is editor of Focus Malaysia. He believes the old adage, attributed to many different people, that all things must pass, includes Covid-19. - Mkini