ANY plan to mitigate the economic impact of the Covid-19 crisis should focus on stimulating domestic demand, and not so much on business sectors, said experts.

Universiti Tunku Abdul Rahman Associate Professor in economics Wong Chin Yoong said if domestic demand does not increase, stimulus packages may even have an adverse impact on the economy.

He told The Malaysian Insight that businesses depend on market demand, and only with sufficient demand can a positive economic environment exist.

“If there’s no demand, some businesses may not even take the incentives, so it backfires.”

Further aid to the economy should focus on getting the market moving again by putting cash into people’s hands so that consumers can spend it, improving the circulation of money, he said.

However, said Wong, if package announcements are by International Trade and Industry Minister Mohamed Azmin Ali, it is likely that the aid is geared towards businesses instead of consumers.

“If it’s the International Trade and Industry Ministry that is announcing it, then it is likely that the aid will be for industries instead of consumers. The circulation of money in the economy is more likely to be handled by the Finance Ministry.”

Azmin last week said the government will unveil a six-month economic recovery plan at the end of the month, and touched on the hardest-hit sectors, including electrical and electronics.

Wong said the focus should instead be on improving consumer sentiment, which is currently low, as most people are saving money for fear of uncertainties in the future, such as job losses, pay cuts and emergencies. 

“Those whose incomes have not been affected or are still employed are unlikely to spend. So, the priority now is to circulate money.”

On ways to do this, he said Putrajaya could consider emulating the previous administration’s efforts to promote e-wallet use by transferring funds to the people, who then have to spend the money within a stipulated period.

This would ensure the movement of funds, and not the accumulation of money, he said.

Plan ahead for broader tax base

The recovery plan will follow three stimulus packages totalling RM260 billion that targeted low- and middle-income groups by giving them cash aid, and small and medium enterprises by giving wage subsidies, micro loans and grants.

However, Institute for Democracy and Economic Affairs senior economist Muhammad Adli Amirullah said the government needs to start planning for a broader tax base to strengthen its financial position.

However, it should not consider any new consumption tax at the moment, as this is unlikely to have an effect on government revenue.

“My point is, there needs to be a plan to reintroduce a consumption tax. It doesn’t have to be immediate, or next year, or even the year after, but the government needs to keep it in mind.”

He said Putrajaya is relying on government-linked companies and their investments to make money, but this is heavily dependent on external factors and unsustainable in the long term.

As a result, he said, the government lacks the tools to properly control its finances, whereas a consumption tax will provide better stability in future crises.

Plans to stimulate the economy must also have health and safety considerations in mind to ensure that the recovery is not paid for with people’s lives.

“We need to have the mindset that Covid-19 is here to stay, so issues of health and safety should be considered in tandem with the recovery of the economy in this stimulus package,” said Adli.

If the cost of economic recovery is more people dying from the coronavirus, he said, it would be meaningless.

Wong said it may be more effective to unveil the recovery plan after businesses have adapted to the conditional movement-control order (CMCO) and Covid-19.

He added that Bank Negara Malaysia announced positive growth for the national economy in the first quarter, performing better than Europe, the US, China and Singapore.

Compared with the US, which recorded its first virus deaths in February and started locking down in mid-March, the Malaysian economy is more resilient, he said.

“One of the reasons for this is the speed at which our business community moved operations online after the MCO started on March 18.”

He said many GLCs and large companies have avoided complete shutdowns during the MCO period, while SMEs have seen a resurgence since last month.

He added that demand in the retail sector is currently low, which is expected, and it is unlikely that consumer sentiment will bounce back immediately after movement restrictions are lifted. – May 17, 2020.