The Malaysian Insight

MALAYSIA needs to disburse more aid to low-income groups and small businesses to sustain its economic recovery from the Covid-19 pandemic, said the World Bank.

The bank’s officials, discussing how the country can weather the storm, said this is in addition to the RM295 billion that the government has allocated in four stimulus packages this year.

To fund additional packages, Putrajaya must consider amending laws on how it borrows money, as well as collect more dividend payments from government-linked companies.

While the Prihatin and Penjana schemes have blunted the initial economic impact of the virus crisis, said World Bank country manager for Malaysia Firas Raad, more help is needed in the coming months.

This is so B40 households get continued support while the economy gradually recovers, he told a press briefing today after the launch of the World Bank’s Malaysian Economic Monitor.

“While the measures by the government to support small and medium enterprises and households to survive and resume economic activity are good, we feel that additional financial support will likely be needed from the Treasury for the most vulnerable households, such as the B40,” said Firas.

“Even before Covid-19, there was a narrowing of the fiscal space for the government, so it must think of effective ways to expand the fiscal space.”

The national budget deficit is expected to widen to 7% of gross domestic product this year due to the extra expenditure and lower revenue, said the World Bank.

To create more sources of funds, the bank’s lead economist for Malaysia, Richard Record, said Putrajaya can reprioritise spending and increase the collection of dividends from large GLCs such as Petronas.

He also proposed amendments to laws that constrain the government’s ability to borrow, such as the debt-to-GDP limit of 55%.

“A lesser-known law is that Malaysia can only borrow for investments. It cannot borrow for operating expenditure, such as cash transfers to the vulnerable.”

The government should think of amending these laws in the short term, so as to raise funds to provide additional aid, he said.

“When you have a major shock to the economy like this, these sorts of things don’t exist in the history books. Frankly, now is the time to help those who need it most and to preserve the structure of the economy.”

Malaysia can then build up its buffers and reinstate limits when the economy grows again.

Firas said the government must do all it can in the short term to fight the virus and rebuild the economy.

“With something of this magnitude and impact, you have to do all you can to fight the outbreak and rescue the economy. So, do what you can, but don’t completely ignore the fiscal consolidation agenda.

“Our advice to the government is to see what it can do, reprioritise spending, look for new sources of revenue, borrow if you must, and take steps to make these legislative changes.

“You have to do what you must to fight something like this, and to make sure that you recover from it effectively. And then, you can worry about medium-term debt.” – June 25, 2020.