The second economic stimulus package should focus more on micro measures

THE larger-than-expected 75 basis points cut in the overnight policy rate by Bank Negara Malaysia on Jan 21, plus the International Monetary Fund’s sharp downgrade of its 2009 global economic growth forecast to 0.5% on Jan 28 injected a heavy dose of reality into the present state and outlook of the global and local economies.

These developments also sparked a sense of urgency among policymakers as the Government mulls another economic stimulus package barely three months after the one announced back in November 2008. However, the impact of the earlier package has yet to be felt or seen on the ground.

The Deputy Prime Minister-cum-Finance Minister said 70% of the RM7bil Government spending portion of the November 2008 economic stimulus package has been disbursed to ministries and agencies, which have been instructed to ensure the projects are completed within this year, with the Project Monitoring Unit overseeing the implementation and progress.

The new economic stimulus package should not be about more Government infrastructure spending.

There are enough major projects that have yet to take off in a meaningful and significant way, for example, the Second Penang Bridge, the northern double-tracking railway, the Selangor-Pahang raw water transfer, flood mitigation projects, the high-speed broadband project, as well as the improvement and extension of the Klang Valley’s public transportation and light rail transit.

These large-scale projects must be executed without any further delay as we are now in the final two years of the Ninth Malaysia Plan. Moreover, according to the finance ministry, only 51% of the development spending allocation have been utilised to date!

The second economic stimulus package should focus more on “micro” measures that deliver the impact right away to the most affected sectors and industries, as well as to those who are in need of help and assistance.

In this regard, the new economic stimulus package must contain specific measures to help viable small and medium enterprises (SMEs) survive these challenging times, particularly in terms of gaining access to financing and containing costs.

The possibility of lowering power tariffs and gas prices as well as corporate tax cuts or exemptions could be among the measures.

At the same time, no expense or effort should be spared in aiding retrenched workers in the country, especially the skilled ones, for example “hardship allowances” during retraining and job search.

The Government may also want to consider measures like temporary reductions or even a suspension in employers’ Employees Provident Fund contributions for companies that retain rather than retrench their workers.

Sustaining consumer spending is also important as it accounts for over half of the country’s gross domestic product.

Measures like personal income tax cuts or “holidays” as well as cash or spending vouchers on essential items for the poor and low income groups might come in handy to provide an additional lift, on top of the interest rate cuts and reductions in fuel prices.

Some of the recent measures announced by the authorities suggest that this is the policymakers’ line of thinking, for example, the six-month exemption from the Human Resource Development Fund levy starting Feb 1 to employers in the electronics, electrical and textile industries that will save them RM30mil to RM40mil.

Other examples include the establishment of the RM2bil SME Assistance Guarantee Scheme and the issuance of the RM2bil, three-year Merdeka Savings Bonds with a 5% annual return for Malaysians aged 56 years and above and those who are retired on medical grounds regardless of age.

In addition, there is a need to constantly and actively engage multinational corporations (MNCs) operating in the country, who are in the midst of reviewing their global operations.

This is to ensure that we are not caught by surprise announcements of plant closures or relocations, but are prepared for such eventualities.

And perhaps more importantly, we should try to incentivise the MNCs to retain their operations in Malaysia.

At the same time, the package should not be limited to short-term counter cyclical measures, but must also be about creating and capitalising opportunities to undertake strategic investments and address structural issues that affect the country’s long-term growth potential, development prospects, economic competitiveness and comparative advantages.

For instance, the critical shortage of domestic gas supplies that are hampering implementation of approved manufacturing/industrial projects should be a catalyst for massive upstream and downstream investments in the gas industry, while China’s tainted milk scandal that raised health scares and safety issues should galvanise investment in the local food production industry.

Here, cash-rich Government-linked companies should spearhead such strategic long-term investments, in turn supplanting Government direct spending in boosting domestic demand, so that the “enlarged” public spending can partially take up the slack in private spending.

Liberalisation of the financial and non-financial services sector and the high-speed broadband project should be among the strategic moves and enablers to push the economy into the next developmental stage, just like what the opening up of the manufacturing sector and major infrastructure projects like the North-South Highway did to drive Malaysia’s industrialisation back in the mid- and late-1980s.

In short, with the Government facing constraints and limits to aggressively expand its deficit spending, the second economic stimulus package must therefore be “targeted”, “timely”, “strategic” and “value-for-money”.