Economists: Move to utilise domestic borrowings lauded, calling it “exemplary”


ECONOMISTS have lauded the government’s stance of utilising domestic borrowings to fund its stimulus packages – the Prihatin Rakyat Economic Stimulus Package (PRIHATIN) and the Short Term Economic Recovery Plan (PENJANA), calling the move exemplary.

The two financial aid packages announced recently is the largest ever in the nation’s history, PRIHATIN (RM260 billion) and PENJANA (RM35 billion) compared to the RM67 billion stimulus to shield the economy from negative impacts during the global financial crisis a decade ago.

Despite the huge spending this time around, economists opined the move as justified as the magnitude of the COVID-19 is economic impact expected to be much worse than the world had experienced during the global financial crisis in 2009.

“In fact, this global crisis is affecting almost all the countries, from advanced to least developed countries hence the impact could be amplified,” said MIDF Research economist, Mazlina Abdul Rahman to Bernama in an interview.

To date, the total fiscal injection to the stimulus packages stood at RM45 billion.

“Increasing expenditure on top of declining revenue pushed the government’s fiscal position to a tougher state for this year. Lower global oil prices and gross domestic product (GDP) contraction anticipated for this year suggest that government revenue will be reduced. Loss of income by businesses on top of tax exemptions announced in the stimulus packages including PENJANA will reflect in lower tax collection,” she noted.

However, Mazlina said this is a global trend as most of the countries throughout the world are pumping in money in efforts to reduce the adverse effect of the pandemic on their economy.

She said the amount of stimulus announced for neighbouring countries such as Singapore, Thailand and Indonesia are almost similar to Malaysia’s level, for instance, the $SGD92.9 billion total support offered by the Singaporean government will push their fiscal deficit to 15.4 per cent of GDP.

Mazlina said although domestic borrowings hold the most share of total Malaysian government debt, the move also depends on several anomalies.

“In 2019, approximately 74 per cent of public debt was borrowed from domestic sources while the balance from foreign.

“The decision to raise debt through domestic or foreign sources will depend on interest rates. Generally, if local rates are lower than foreign’s, internal debt will increase and if they are higher, external debt will increase.

“Nevertheless, funding the stimulus package through domestic sources seems to be a wise decision as it is less vulnerable to changes in foreign interest rates especially in the current pandemic situation, whereas, in Malaysia, Bank Negara Malaysia has control over it,” she said.

Universiti Malaysia Sarawak’s (UNIMAS) senior professor of the economic and business faculty, Prof Datuk Dr Shazali Abu Mansor, said internal borrowings doesn’t affect the economy adversely, as Malaysia is not subject to overseas ruling.

“For instance (if we were to borrow from) the International Monetary Fund, it is very strict while internal borrowings have more leniency as the money is still within the country,” he told Bernama.

He said the two stimulus packages that were announced recently are needed to prevent other socio-economic problems from occurring such as rising retrenchment and crime rates that would lead to public disorder in the country.

Exposure to currency depreciation risk according to Mazlina, is also lesser as the debt will be denominated in ringgit.

“In 2019, ringgit denominated debt accounted for 96.4 per cent of total government debt while the balance denominated in foreign currency,” she said.

Meanwhile, it is apparent that the utilisation of both monetary and fiscal policies are needed in the event of economic downturn or recession.

“While the tools used under these policies are different, the aims are similar. Combination of these two will expedite the economic recovery,” said Mazlina and added during the global financial crisis in 2009, the budget deficit to gross domestic product (GDP) amounted to 6.7 per cent due to fiscal injections.

At the same time, overnight policy rate (OPR) was also reduced to 2.0 per cent, the lowest thus far.

“I believe, the combination of these two helped Malaysia to quickly recover from the crisis,” said the economist, adding that cutting interest rates will reduce the burden on homeowners and businesses, allowing the economy to recover.

However, during a recession, Mazlina said this might be insufficient as there will usually be a liquidity trap due to the low interest rates combined with consumers who prefer to save rather than invest.

She said this is where the government need to play its role by paying for new investment schemes and creating jobs directly.

On the goal to narrow the fiscal deficit back down to less than 4.0 per cent of GDP over the next three years, Mazlina said it is achievable as most of the incentives announced in stimulus packages are one-off.

“With the stimulus, the economy is expected to improve, revenue will go up and then the deficit will go down,” she said.

As of 2019, Mazlina said the federal government debt to GDP ratio stood at 52.5 per cent.

“Subject to 55 per cent government debt to GDP ratio rule and contraction in GDP anticipated for this year, available fiscal capacity is limited. With the total fiscal injection of RM45 billion, we view the government debt to expand beyond the 55 per cent rule in 2020.

“Hence, we believe it is necessary for the government to increase the ceiling rule from 55 per cent to probably 60 per cent in order to provide more fiscal space for future spending which is, of course, subject to Parliament approval,” said Mazlina.