In: Economics
Q2
Impact Of Pandemic On Economy And Recovery Policy
Bernama Radio Bernama TV 08/04/2020 05:54 PM
By Dr Norlin Khalid
Apr 8, 2020 - KUALA LUMPUR (Bernama) – The coronavirus or
COVID-19
outbreak, which is said to have originated at a wet market in
Wuhan, China, has spread
all over the world like lightning and was categorised as a pandemic
by the World
Health Organisation (WHO) on March 11. To date, the virus has
infected over a
million people in more than 180 countries and caused over 80,000
deaths. In Malaysia
itself, more than 3,000 people have tested positive for COVID-19
and 63 people have
succumbed to it.
According to a study by JP Morgan and projections by WHO,
Malaysia’s COVID-19
positive cases may peak in mid-April with over 6,000 people
infected. The Malaysian
government has already taken proactive measures to curb its spread
by imposing the
Movement Control Order (MCO) from March 18 to 31. However, the MCO
period
was later extended to April 14. Although the MCO compliance stands
at 95 percent,
case numbers and deaths are continuing to rise.
The COVID-19 pandemic will certainly have an impact on the global
economy,
including Malaysia’s. COVID-19 has shocked the world economic
structure which
is now in a state of uncertainty. Recently, the International
Monetary Fund announced
that the pandemic will cause a global recession this year which
could be worse than
the one triggered by the subprime mortgage crisis of 2008. The
latter was caused by
the contraction of liquidity in the banking system in the United
States after its real
estate bubble burst. The economic crisis ensuing from COVID-19
involves
practically all the countries of the world and recovery is expected
to take a long time.
As long as new positive cases of infection are reported, the
economic ecosystem will
continue to be disrupted. Studies by the Organisation for Economic
Cooperation and
Development and World Bank have projected a 2.4 percent contraction
in GDP
(Gross Domestic Product) growth for the world. Bloomberg reported
zero percent or
negative GDP growth in the worst-case scenario.
COVID-19 will also have a negative impact on the labour market. The
International
Labour Organisation has predicted that 25 million workers
throughout the world may
lose their jobs. Malaysia, which is a small country dependent on
other nations such as
the US and China, is also expected to feel the pinch. According to
a report by the
Malaysian Institute of Economic Research, Malaysia’s GDP growth
will contract by
2.61 percent in 2020. Bank Negara Malaysia (BNM) said in a recent
statement that
Malaysia’s economic growth will be in the -2.0 percent to +0.5
percent range. It also
estimated that 951,000 people will lose their jobs. The Malaysian
Global Innovation
and Creativity Centre predicted that about 40 percent of small- and
medium-sized
enterprises will have to wind up their operations if the COVID-19
chain of infection
persists for three to six months.
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In the face of COVID-19, the government must focus on two
objectives: one, focus
on the necessary protective and safety precautions to break the
chain of infection and
two, reduce the negative economic effects by implementing recovery
policies
involving active fiscal and monetary policy targets. The fiscal
policy targets are
related to government spending and taxation while the monetary
policies are related
to interest rates, liquidity and control of money supply.
In terms of fiscal policy, the government has announced a series of
economic stimulus
packages to help individuals and companies affected by the COVID-19
crisis.
On March 19, the RM20 billion economic stimulus package (PRE 2020)
was
launched to help industries that were directly hit by the first
wave of the COVID-19
outbreak, such as hotels and transport companies. After the
outbreak entered the
second wave and the MCO was imposed, more individuals and
businesses were
impacted. The supply chain is disrupted because almost the entire
sector has stopped
working. Some production firms have also stopped operations and
worse still, laidoff
workers as they are unable to bear the costs. The PRIHATIN package
is aimed at
easing the financial constraints of the people and businesses. On
March 27, the
government announced the second RM250 billion economic stimulus
package
PRIHATIN, which includes the RM20 billion from PRE 2020. Out of
RM230 billion,
RM22 billion would come from a direct fiscal injection; RM100
billion (moratorium
in loan repayments); RM55 billion (guarantees); RM40 billion
(withdrawal from
Employees Provident Fund); and RM13 billion (various sources).
PRIHATIN’s main
objective is to protect the welfare of the people, support
businesses and strengthen the
economy. However, the stimulus packages will cause the nation’s
fiscal position to
worsen. To add to that, the global economic crisis has caused oil
prices to tumble
down to US$25-US$30 a barrel. In comparison, oil prices were around
US$60 a barrel
when Budget 2019 was tabled. When government revenue from oil
drops, it will cause
an increase in deficits.
In terms of monetary policy, BNM has cut the Overnight Policy Rate
or OPR by 25
basis points to 2.5 percent and reduced the statutory reserve
requirement ratio or SRR
by 100 basis points to two percent. These cuts will reduce loan
costs, improve
liquidity and stimulate economic activities. Apart from that, the
restructuring and
rescheduling of the six-month moratorium will ensure that the
capital and financial
market returns to stability. It will also help individuals and
businesses facing financial
problems and liquidity constraints.
It is difficult to predict when the economy will fully recover as
long as COVID-19
positive cases continue to rise and no vaccines are discovered to
treat the disease.
Nevertheless, the government’s fiscal and monetary policies
complement one another
and will help to revive the economy by increasing aggregate demand
such as public
and private consumption and investment. This will help to stimulate
economic growth
through the multiplier effect and reduce the hike in the
unemployment rate.
https://www.bernama.com/en/features/news.php?id=1829686
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(a) Examine the impact of COVID 19 pandemic on the Malaysian
economy from
the aspects of unemployment and the wages of labor.
(b) To reduce the negative economic effects of COVID-19 pandemic,
the
government is implementing recovery policies involving active
fiscal and
monetary policy targets. The fiscal policy targets are related to
government
spending and taxation while the monetary policies are related to
interest rates,
liquidity and control of money supply. Analyze the implementation
of expansionary fiscal policy and monetary policy
to stimulate aggregate demand (AD) in the economy during economic
recession.
(a) Based on the global economic meltdown or downturn at the onset of the COVID-19 outbreak and the predictions of the International Labor Organizations(ILO) and the Malaysian Global Innovation and Creativity Centre, the domestic labor market in Malaysia would expectedly feel the adverse impact of shutdowns/winding up of and deplorable economic or commercial performance of many the domestic firms, companies, or business organizations. Due to the expected economic downturn in the domestic economy and its inclement impact on the performances of domestic businesses, the overall labor demand by the firms or companies would decrease in the domestic labor market in Malaysia as they would be looking to reduce the overall capacity of the existing productive resources or factors/inputs of production as part of the cost-cutting endeavor to maintain formidable or desirable profitability. This would consequently cause or increase unemployment and a decrease in the labor wage in the labor market at least in the short-run, holding everything else as constant, mainly the labor supply in the market. Therefore, in congruence with the predictions of global economic predicament due to the universal engulfment of the COVID-19 pandemic, the Malaysian economy and the labor market are also expected to feel the adverse economic effects of COVID-19 pandemic.
(b) In general, as a recovery measure to effectively come out of any economic recession, the government can both evidently and theoretically implement expansionary fiscal and/or monetary policies. Expansionary fiscal policies essentially include an increase in the overall or aggregate government spending or expenditure in the economy to stimulate further promote infrastructural development and mobility or growth of various public sector facilities and endowments, and reduction in tax or tax cut which would increase the disposable income of the individuals or households in the economy thereby increasing the consumer demand for goods and services leading to an increase in the aggregate consumption expenditure on goods and services in the economy. Therefore, expansionary fiscal policy/s by the government can primarily increase either aggregate government spending or expenditure or/and aggregate consumption expenditure thereby enhancing the aggregate demand(AD) in the goods market or the economy. Now, an expansionary monetary policy commonly includes an increase in the money supply or reduction in the interest rate by the central banking authority. Higher money supply by the central bank implies higher availability of liquid money in the economy thereby inducing higher aggregate consumption expenditure by individuals or households on goods and services. Now a reduction in the interest rate would encourage the individuals or households and the private firms/companies to undertake more loans to finance or liquidate large-scale consumption expenditures and business investment projects. This would entail an increase in both aggregate consumption expenditure on good and services and aggregate investment expenditure in the economy thereby leading to an increase in AD in the goods market. A positive and stimulating impact of an expansionary fiscal and/or monetary policy on the AD in the goods market would consequently lead to an increase in the real GDP or output and cause inflationary effects in the economy in the short-run.