Covid-19 exit plan – tipping into a recession

THE prime minister’s announcement of Malaysia’s Covid-19 exit strategy is at least the first time the government has given us a clear plan for the future since the beginning of the pandemic as opposed to a “wait and see” approach. Nonetheless it will have a chilling effect on everyone to see how long the plan will take to come to fruition and how much it will cost to see it through.

Now that we have a clearer view of the government plans we should try to calculate the economic cost. We had previously estimated that the total cost of the various lockdowns including the full lockdown from June 1-14 will be around RM107 billion. Based on the new exit-strategy we estimate this costs will be RM170 billion or 12.7% of GDP including earlier lockdown costs.

To put this into context, according to estimated treatment costs reported by the Galen Centre, it would have cost around RM8 billion to treat the 668,000 people who have tested positive for Covid-19 so far. So even if we were to have a similar number of cases from now until December, which would be three times the rate of infection in the last 18 months, it would cost 20 times more to try to prevent the disease than to try to cure it.

The financial costs are of course only part of the issue. The SME Association of Malaysia said there were 100,000 small-business closures last year with 50,000 more to come even before this announcement. A survey by the Entrepreneur Development and Cooperatives Ministry (Medac) published on 4 June said that more than 90% of micro, small and medium enterprises risked closure, with 54% saying they could only survive three to six months and 72% expecting to suffer losses. This is now all but certain.

Excellent new data from the Statistics Department on underemployment show there are 2.1 million people underemployed with 310,000 on short-time and 2.1 million taking jobs below their skill levels on lower pay. With 771,000 fully unemployed there are 3.1 million or 19.4% of the workforce struggling to make ends meet.

The RM170 billion loss of output is enough, mathematically at least, to guarantee a recession in the coming months and is based on the static linear cost estimates provided by the government for earlier lockdowns. 

It does not include the effect of grinding down underlying growth and destroying capacity that we can see from the closure of companies and which was predicted by Bank Negara in their Annual Report earlier this year which cut 1.3% from underlying potential growth.

Based on the four-stage plan set out by the government we believe that the most likely outcome for the economy is now a recession with a probability of 55% or a weak recovery, with a probability of 45%. 

There is no chance of a consistent and robust recovery that predicted 6%-7.5% growth for 2021 and this has already been conceded by Minister in the Prime Minister’s Office Mustapa Mohamed and also by Finance Minister Tengku Zafrul Abdul Aziz. 

Weak recovery is only possible if there is a significant policy response. We had already said that the mix of fiscal and monetary policy will play a key role in determining whether the economy has a weak recovery or mild recession and the government and Bank Negara need to set-out a fully specified recovery plan of at least RM100 billion of direct injection into the economy.

We are of the view that such a plan should be balanced between RM60 billion of direct cash transfers to B40 and M40 households or RM1,500 per month until December. The balance of RM40 billion in the form of structured support for businesses, especially small businesses would offer the hope that they could survive and even grow.

Put this way the key cost-benefit issue in the government plan of “lock down and vaccinate” is to risk the loss of RM170 billion in economic costs and incur possibly RM100 billion in extra borrowing in order to try to control the virus or to spend a fraction, perhaps as little as RM8 billion to treat those who contract the virus. 

As we have mentioned in previous articles a multiple treatment approach with prophylactic or preventative treatments and therapeutic agents and an extension of the, “test, trace, isolate and treat,” regime advocated by the World Health Organization, both to be run in parallel with the vaccine programme and the current treatment regime would decouple the management of the virus from the management of the economy at much lower cost when balancing lives and livelihoods. 

The other key risk factor is the assumption that this will be the terminal strategy that will end the Covid crisis by December. As the United Kingdom experience shows, even with very high vaccination rates, the risk of new-variant waves is a real and present danger. 

The strategy of depleting the economy of RM170 million and increasing debt by RM100 billion would leave no reserves to fight future virus outbreaks when they occur, which they are almost certain to do. This terminal exit strategy could therefore be the last roll of the dice. – June 16, 2021.

* Dr Paolo Casadio is an economist at HELP University and Professor Geoffrey Williams an economist at Malaysia University of Science and Technology. 

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.

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