Since the beginning of the COVID-19 pandemic, the Malaysian government has deployed RM380 billion worth of aid through six economic stimulus packages. The most recent package is the RM40-billion PEMERKASA Plus, which was announced on May 31. These stimulus packages are collectively intended to combat the pandemic, protect the people’s welfare, and maintain business continuity. The government’s economic capacity to fight COVID-19 requires closer monitoring, on both the fiscal and health fronts. At the same time, managing stricter movement and health protocols are also top priorities.
Note that, however, only a fraction of the sizable amount of aid comprises fiscal injections. Direct fiscal measures, including the Bantuan Prihatin Rakyat cash transfers and wage subsidies, account for an estimated RM73 billion of the RM380 billion announced so far. The remaining bulk of the stimulus is made up of quasi-fiscal and non-fiscal measures, which include loan moratoriums, loan guarantees for SMEs, and EPF withdrawals.
To finance these fiscal measures, the government temporarily raised the statutory debt-to-GDP limit from 55% to 60% last August. In addition, the government drew RM5 billion from the RM19.5-billion National Trust Fund (KWAN) this April to assist in funding the nationwide vaccination plan.
While fiscal policy space still exists to support further stimulus packages if the need arises, that space is gradually shrinking. The government’s initial forecast for GDP growth for 2021 was between 6% and 7.5%, with a fiscal deficit target of 6%. However, with many industries closing due to the implementation of the Movement Control Order (MCO) 3.0, the government has acknowledged that its forecast of 2021 GDP growth will have to be revised downward by about 1%.
In Q4 2020, the Ministry of Finance reported that the statutory debt-to-GDP was still 2% away from hitting the 60% limit. While this 2% GDP debt headroom is estimated to be worth between RM28 billion and RM30 billion, a portion of this amount has since been used for the ensuing fiscal injections in the PEMERKASA and PEMERKASA Plus stimulus packages. The high debt burden inherited from 1MDB, SRC International Sdn Bhd as well as private finance initiatives also reduces room for more aggressive fiscal injections.
For now, the rebound in oil prices due to a recovering global economy will help boost the government’s revenue from oil receipts. However, it is still likely that government will have to further raise the statutory debt ceiling to 65%. Any further fiscal injections should be well-targeted to assist those in the B40 and lower M40 category.
Moving forward, the government will have to expand its tax base to assist in closing the fiscal deficit. This includes the possibility of implementing capital gains taxes, as well as one-off windfall taxes for industries which enjoyed supernormal profits during the pandemic.
In addition, there is a need for greater transparency in where the money for these aid packages is coming from, and how the money is being spent. This is all the more relevant because closer scrutiny of fiscal policies is currently affected by the suspension of Parliament. The proposed Fiscal Responsibility Act is a good step forward to institutionalise more sustainable fiscal governance in line with global best practices.
While greater emphasis should be given to controlling the public health threat as it can deeply undermine the country’s socio-economic outlook, the current priority should also be on resolving the national health crisis as soon as possible, as it is still crucial to maintain fiscal responsibility.
The warning signs of limiting budgetary expansion are on the horizon and must not be ignored. Otherwise, the future generation will be forced to shoulder a disproportionate debt burden. This will be a challenging balancing act which requires a great degree of transparency as well as public consultation with various stakeholders in a democratic country like Malaysia.
Tan Sri Ramon Navaratnam is Chairman of the Centre for Public Policy Studies.