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Generous allocations pave way out of economic slump -- Economist

KUALA LUMPUR: Generous spending under the Prihatin Rakyat Economic Stimulus Package (PRIHATIN) and National Economic Recovery Plan (PENJANA) were deemed as necessary for Malaysia to build its way out of the COVID-19 economic slump.

Dr JS Keshminder,  a senior lecturer in the Department of Economics Financial Studies, Faculty of Business Management, Universiti Teknologi MARA, said governments around the world have committed huge economic stimulus packages to rescue their flagging economies.

For example, he said Singapore has one of the biggest spending packages amounting to US$55 billion.

"To date, the accumulated budget for the Unity, Resilience and Solidary programme is standing close to US$100 billion, which is nearly 20 per cent of Singapore's gross domestic product (GDP).

"In New Zealand, NZ$50 billion was allocated for a tenure of two years to save jobs and to reduce unemployment through heavy borrowing. This fraction accounts for 17 per cent of the country's GDP. It is expected that the government's debt will reach 53 per cent of GDP by 2023," he told Bernama today.

Malaysia has allocated RM260 billion under PRIHATIN and RM35 billion under PENJANA to help businesses tide over their cash-flow problems and ease the burden of the people.

To combat recession, Keshminder said Thailand has approved a stimulus package worth US$60 billion.

"Of all the countries, Japan is said to have the largest stimulus package amounting to US$2.18 trillion or 40 per cent of GDP to rescue its economy," he said.

Keshminder said the figures clearly show that the race for every government now is to save jobs and assist businesses to continue their operations and avoid serious repercussions facing the economy due to COVID-19.

Furthermore, he said the future economy prospect is extremely unpredictable due to the random nature of COVID-19.

Whether more allocations are appropriate, he said it would not be surprised to see the budget ballooning in the future.

Meanwhile, Keshminder said government domestic borrowing is always associated with the 'crowding out effect'.

"Where it reduces the potential capital stock in the economy. For example, if Makcik Kiah lends the government RM1,000 that will reduce her capability to buy stocks or bonds from Pak Abu's company. There is always a concern on the rising interest rate. This is said to distort the marketplace," he said.

However, at the present moment deficits are necessary to boost the aggregate expenditure.

He said to avoid the suppression of consumer and private sector spending, Malaysia has to keep the economy moving.

"Looking into Malaysia's strong financial market and low-interest rate, the economy is ready to absorb any market distortions brought forward by the government's domestic borrowing," he said.

To stimulate expenditure, especially during recession, fiscal measures are necessary, he said, adding that the interplay between both the fiscal and monetary policies also has to come into effect.

"Increased borrowing from the banks is not sufficient to stimulate the demand and create jobs. Therefore, the fiscal measure is necessary to steer the economy in the right direction," he said.

Keshminde said PENJANA was designed as such that it not only solves the short-term economic issues but also spearheads the economy into long-term prosperity, as it encapsulates a structure that has measures to counter economic issues for both short-term and medium-term.

He said the short term measures were to save jobs and help businesses continue their operations, while the medium-term measures were to transform the economy towards a sustainable digitalised economy via training programmes to upgrade the skill sets of the workforce, educate business on artificial intelligence to respond smartly to consumer demand, and produce high value-added products, and proliferate urban farming to allow the economy to be self-sufficient.

"The economy is expected to create more high-skilled jobs and high value-added businesses in the future and this will automatically increase purchasing power in the economy.

"From there, it is evident that the objective of PENJANA is twofold, namely to aid the economy now via budget deficits and prepare the economy in the future to ease the debt," he said.

The economy can expect a combination of budget cuts and higher tax rates in the future, said Keshminder.

"A right mechanism is required to ensure PENJANA works effectively. The plan has to be carefully monitored so that PENJANA achieves the desired short-term and medium-term objectives. With the commitment from the government and dedication from the rakyat, the target should be achieved.

"Even though governments around the world are sharing two similar concerns, saving jobs and ensuring business continuity, they are battling with COVID-19 differently.

"The intensity of COVID-19 is different everywhere. While some countries are enduring natural disasters, some are facing social unrest," said Keshminder.

Achieving the right balance between health and economy for many countries is a challenge, said Keshminder, adding that rightfully, many countries have put forward the health agenda ahead of the economy.

"For me personally at this moment, we can't compare one country to another. Each country has to evaluate its microeconomic and macroeconomic environment before placing any measure at the forefront.

"Furthermore, they have to be mindful that they can't disregard what is happening in other countries, the stimulus package or economic strategy must be able to cushion these external shocks," said Keshminder.

As the random nature of COVID-19 has brought in a lot of complexities, he said the economy is unpredictable and it is difficult to gauge the future.

On the possibility of Malaysia's current debt status ratio to its GDP increases beyond the current 55 per cent ceiling (now it stands at about 51 per cent), Keshminder said if there were plans to increase the ceiling, then the present situation must be thoroughly assessed.

"Probably before any further measures are taken, it is necessary for the government to see how the economy adjusts to the fiscal measures that they have already committed to couple with the monetary measures," he said.

-- BERNAMA