MALAYSIA cannot escape a recession this year despite injecting a RM260 billion stimulus package into the national economy, said former finance minister Daim Zainuddin in an interview with The Malaysian Reserve.

He said the government must put in place extraordinary policy measures as these are extraordinary times, and not be stuck in its orthodox and business-as-usual thinking.

“Those in charge must think outside the box.

“We are a trading nation, if major economies are not doing well, we will not do well either.

“The government expects the economy to fall into recession this year, with GDP expected to contract by at least 2%, although my own assessment is that it will be much higher than that.

“Look at Q1, except for a slight expansion in the services (3.1%) and manufacturing (1.5%) sectors, all other sectors had negative growth.

“We must remember the movement control order (MCO) only started in the last two weeks of March, yet most of the economic sectors were not doing well,” Daim said in the interview.

As part of Putrajaya’s efforts to kickstart the economy, the government launched its RM260 billion Prihatin stimulus package, with RM35 billion direct financial injection.

Daim said this package has had some short-term impact on the people, and is expected to blunt the economic recession, and ease the financial pain on households and businesses.

However, he warned that the government’s financial position will be tougher, with revenue depleting because many firms are struggling to stay afloat.

He pointed out that a survey done by the SME Association in March highlighted that nearly 82% of SMEs predicted a loss for the financial year 2020, which means tax collection will be much lower.

He also said the latest figures from the Department of Statistics show that 68% of firms reported zero income during the movement control order (MCO).

“The loss of income by businesses, especially the SMEs will translate to higher unemployment rates. That means there will be less demand.

“So, if exports are not doing well, the consumer pool is shrinking, and firms are not investing, where will growth come from? How then can we collect tax to finance expenditure and development?”

He was also very worried about unemployment, which was already up by 17% in March.

“It will get worse. We will soon have about 51,000 graduates coming out of universities, and they will have a harder time to find jobs.

“This is not good for stability. We will see an increase in poverty rates too,” he said.

Daim said there had been many complaints on the bureaucratic process of obtaining the assistance, adding that the latest report from the Ministry of Finance also showed that not many SMEs were getting the assistance.

Despite 92.1% of the RM6.3 billion allocation of soft loans for SMEs being utilised, it benefited only 14,075 SMEs. That is merely 1.55% of the 907,065 establishments of SMEs in Malaysia, he noted.

Likewise, he said, the beneficiaries of the wage subsidy were also rather small, involving only about three-in-10 of the total number of SMEs in Malaysia.

“The delivery is slow, and the coverage is weak. This needs to be addressed immediately.

“The effectiveness of the stimulus packages will depend on execution and how the financial assistance is being utilised,” said Daim, who was former chairman of the Council of Eminent Persons formed by then-prime minister Dr Mahathir Mohamad after Pakatan Harapan came to power in May 2018.

Below are excerpts of the interview:

Q. Do we have sufficient reserves that could be pumped into the economy immediately or does the government need to raise funds? How should we raise funds? Sell assets, issue bonds, force higher dividends, tax? And how do we balance that with debt?

A. The government has been running 23 consecutive years of financial deficit since the 1997/98 Asian financial crisis, implying that not much of reserves (surpluses or savings) have been accumulated.

There are some trust funds that can be mobilised. Petronas can contribute either through a higher petroleum income tax and dividend payment.

However, the slump in global crude oil prices will affect the federal oil-related revenue, hence exerting financial pressure.

Some of the options open to the government are:

a) Reprioritisation and reordering of expenditure

b) Revenue enhancement through the disposal of assets (but timing is crucial); privatisation, the listing of government-linked companies (GLCs) assets, etc.

c) The government can reconsider the reintroduction of the goods and services tax (GST) at a much lower rate, provided that it is not abused and money is used for the benefit of the rakyat.

I advocated GST a long time ago but the rate introduced was too high, the monies collected were not spent on the rakyat and not refunded to the companies, and cost of living went up. With proper implementation it can be fair, efficient and workable.

d) Borrowings through the issuance of domestic securities as the investors’ appetite for Malaysian bonds is still strong.

There is no foreign exchange risk exposure and the cost of borrowing is cheap given the prevailing low interest rate environment.

External borrowings (debt): under the External Loans Act 1963, foreign currency debt is restricted to RM35 billion (estimated outstanding debt as of March 2020: RM29.4 billion).

e) Review the government’s self-imposed administrative limit of 55% of GDP. The last time the government raised the ratio was in June 2008 (45% of GDP) from April 2003 (40% GDP) and further to 55% of GDP in July 2009.

f) The government can borrow from Bank Negara Malaysia (BNM). There is scope for this under Part X (relations with government), Section 71 of the Central Bank Act.

These are extraordinary times, and require extraordinary policy measures. We cannot be confined to orthodox and business as usual thinking. Those in charge must think outside the box.

Q. The International Monetary Fund (IMF) said there have been close to 100 countries coming to it for financing needs. Should Malaysia seek international help? Is that ever an option?

A. No. Based on our personal past experience and based on what we have witnessed of how countries that have borrowed from the IMF have suffered, the simple answer is: no.

During 1997-98 Asian financial crisis, Malaysia successfully steered the economy out of a deep recession (GDP contracted by 7.4% in 1998) through its own style of unorthodox policy responses, including the unpopular selective capital controls and the fixing of the ringgit peg without seeking financial assistance from the IMF’s conditional lending facilities.

The government still has some financial policy capacity and BNM has policy tools at its disposal to mitigate Covid-19’s inflicted economic impact. – May 22, 2020.