Economic policies may backfire post-Covid

The expansive fiscal policies implemented to address the damages created by stay-at-home orders may result in temporary effects


THE economic policies that have been implemented in the country so far may become the root cause of an economic crisis once the Covid-19 pandemic emergency is over and the economy is on the path to recovery, according to economists.

Malaysia’s GDP declined by 5.6% in 2020 amid the harsh economic restrictions imposed in the attempt to curb the spread of Covid-19, while stay-at-home orders increased unemployment up to 5.3%, and forced the government to intervene with different stimulus packages, supported by expansive policies by Bank Negara Malaysia (BNM).

The Centre for Market Education’s (CME) Dr Carmelo Ferlito, Fariq Sazuki and Abel Benjamin Lim said the effects of the policies on inflation and unemployment will become more evident when the deflationary pressures currently in play will no longer be in place.

Ferlito said a commitment to a no-lockdown policy would help the system naturally free up resources to be invested consistently with the real structure of preferences, while the government focuses on targeted healthcare investments.

“Targeted fiscal interventions, directed to strengthen the healthcare system, are the only fiscal tool that in this moment may not produce unintended bad consequences in the future in terms of slower growth, inflation and additional unemployment,” CME said in the newly published policy paper, Inflation, Unemployment and Covid-19 Policies: Where is the Malaysian Economy Heading?

Ferlito added that the expansive fiscal policies implemented to address the damages created by stay-at-home orders may result in temporary effects, but will shift the debt burden to future generations and create more unemployment when the stimuli are over.

“CME foresees unemployment to be between 5% and 5.5% at the end of 2021, depending on when lockdowns will be lifted and a serious discussion on domestic and international borders will be opened. The figure could stabilise between 4% and 4.5% if the current trend in business openings won’t be stopped by further closures,” he said.

He opined a tax reform, which is based on simplification on one hand and on the introduction of a multi-layered GST (consumption tax) on the other, would favour rebuilding the savings which are necessary not only for the longterm financial stability of households, but also as the sound resources for private investments.

Meanwhile, AmInvestment Bank Bhd chief economist Dr Anthony Dass said to boost the economy and trade, the country will need to have more extensive efforts to fight the Delta variant.

“If the Delta variant continues to spread fast in Asia while vaccination rollouts fall behind, it can lead to a string of longer-term economic impacts. Hence, our exports are expected to face headwinds, including supply-chain uncertainties, in the coming months. The Delta variant is likely to further slow the rebound, as firms and employees are held back from returning to offices. It will consequently extend the slide in growth,” he said.

According to Dass, foreign demand has also propelled export economies like South Korea, China and Malaysia, but it has now shown signs of slowing down.

Additionally, Moody’s Analytics said the Malaysian economy is slowing down, with no clear path to recovery as the acceleration of global trade has been hindered by the new Delta variant.

Its Asia Pacific (APAC) economist chief Steve G Cochrane said Malaysia has been one of the most volatile economies in the region, as a quarter-on-quarter decline was recorded in the second quarter (2Q) of this year.

“The new caseloads relative to population size are high and rising in Malaysia, while the impact on the APAC economy will be deep for the current 3Q and could extend into a weak 4Q if the recent wave is not soon contained,” he said in a report.

Cochrane said fortunately for Malaysia, the rate of vaccination is accelerating quickly as it shifts its supply from Sinovac to Pfizer vaccines.

“But vaccination rates on their own don’t provide a complete picture of the remaining risk from Covid-19 as the vaccination rate does not always correlate well to the incidence of the virus or the death rate. There could be many reasons for this, including the efficacy of the vaccine in use, the geographic distribution of the vaccine, or the age cohorts of the population that have, or have not, been vaccinated,” he said.

Cochrane further said exports will continue to be a lifeline to the local economy, as domestic consumption and production remain hobbled.

“Exports from Malaysia may face continued production shortages of autos and electronic products due to labour shortages caused by the spread of coronavirus and the Movement Control Orders that have followed. The support from their high-value export industries will be offset in the near term by a slow turnaround in their travel-dependent industries,” he noted.