Covid 19 : The Way Forward for Malaysia

by Dr.Jeyakumar Devaraj

Human society is going through an extraordinary period. The Covid 19 Pandemic has brought the global economy to its knees. Our normal consumerist way of life has been upended. A severe recession is expected this year and next. Some economists are saying that it could be as bad as the Great Depression of the late 1920s – 1930s. Meanwhile the Covid death rates are mounting rapidly in many parts of the world, and the richest country in the world continues to underestimate and mishandle this health crisis.

Malaysia has fared relatively well up till now – 5389 cases as of 18 April 2020 with 89 deaths – a case fatality rate of 1.65%. We are very fortunate that our government took the epidemic seriously and adopted a policy of total suppression of Covid 191 instead of toying with the idea of permitting a controlled spread of the epidemic through the population in the hope that that would lead to “herd immunity”. The countries that entertained the idea of permitting spread of Covid infections at a slower rate (the Mitigation Approach) have had their hospitals swamped by thousands of desperately ill patients and their ICU thresholds breached. The case fatality rates in Spain, Italy and Britain are in excess of 10%, and many frontline health care workers in these countries have lost their lives because personnel protection equipment wasn’t available in sufficient quantities.

The number of new cases in Malaysia is trending downward over the past week, and there is a possibility that the Movement Restriction Order (MCO) will be relaxed soon. But we really are in uncharted territory. No one is really sure how best to proceed. There is a need for us to discuss calmly and rationally what our main guiding principles should be as we emerge from the MCO and reactivate our economy. This is not the time for politicking or partisanship. There is too much at stake! We need to develop a broad consensus at the societal level on how we should go forward as a nation.

There are some who harbour the belief that things will go back to normal in the next two to three months. That’s just wishful thinking. Malaysia is well integrated to the world economy and disruption of economic activity in the US, Europe and in China will have its negative impact here. We will have to weather an economic recession – there is no avoiding that. The volume of our exports will come down. Our GDP will shrink by several percentage points. The question is – how can we weather these changes with minimum damage to our economy, to our society and to peace and stability in our country? This is what we need to focus our discussions on. The PSM would like to contribute to this important discussion by putting forward six main ideas that we think should define our national strategy.

Containing the Covid Epidemic

We have managed to bend the curve (of new cases of Covid 19) downwards, but the risk of a flare up is ever present. As we have argued in the article This is not the time to lower our guard2, we need to reach out to and win the trust and cooperation of the migrant worker and refugee populations in our country so that they do not become the conduit through which a second wave of the epidemic re-emerges. Senior Minister Ismail Sabri’s authoritarian stance3 is not helping us in the battle to win over the migrant population to our side. Someone needs to advise the Hon. Minister that threatening undocumented workers with detention and deportation is not the best way to persuade them to come forward for testing! We need their cooperation to keep Covid from spreading through our country. The PSM has suggested a Moratorium on immigration offences for the next one year. Only when the undocumented foreign workers realize that they will be not be arrested, detained, flogged and/or deported will they come forward for testing and agree to stay in quarantine centres. Acting harshly against them will just drive them “underground” where they will serve as a reservoir that transmits Covid-19 through our population.

Restarting the nation’s economy is an important objective – we need food as well as other goods and services; we need the foreign exchange to import essential medicines and equipment. The National Security Council has colour-coded the districts in Malaysia as green, yellow, amber or red depending on the number of Covid cases in the previous month. We have to develop a protocol which calibrates the level of economic activity permitted in a district on the basis of its colour code. But for the time being we need to maintain tight restrictions on social, sports and religious events while trying to get the economy back on track. Districts which have active cases will need to have more physical distancing and more restrictions of economic activities. Red coded districts should only permit businesses dealing with food distribution and health care. This protocol has to be constantly reviewed and fine-tuned so that we can open up the economy without allowing a disastrous second wave of the epidemic to take root

Ensuring that basic needs of the entire population are met.

Things will not revert to normal when the MCO is lifted. Many Malaysians are going to lose jobs. The aviation sector, the tourism sector and the hotels are going to be very badly hit and will need to be put on life-support. We will need these sectors again in a year or two once we have finally defeated the Covid menace with an effective and safe vaccine, so we do not want the companies in these sectors to disintegrate completely. But we should not entertain unrealistic expectations that these sectors will be able to “bounce back” in the next few months. Manufacturing firms whose export markets are affected by the pandemic will have to downsize and lay off workers. There will therefore be a significant upsurge in unemployment – perhaps up to 20% of the work-force or 3 million people.

Given this reality, we need to, as a society ensure that basic goods and services – food and health care in particular – reach all families including those affected by job losses. This has to be a top priority and the population should know that all of us are committed to getting through this challenge together. Only then can we get the broad cooperation that we will need in the coming months to tighten and loosen Covid control measures as the situation warrants. Food riots have occurred in other countries in the past, and they can’t be ruled out anywhere. Food riots occur when people are pushed into a corner and are desperate, and the authorities seem unconcerned about their predicament. Apart from the looting and the unnecessary confrontation between hungry people and the law enforcement authorities, the damage done to social solidarity represents a huge setback to society. It is something that every government should endeavor to avoid.

To ensure that the basic needs of all families are met, not only do we need to ensure that the production of food commodities is sufficient for our entire population but also that all families (including those affected by retrenchment) have the means to buy the basic goods that they need. This means that we have to roll out an unemployment benefit scheme that will ensure that every family has the money to procure food, shelter and health care. The Employment Insurance Scheme that was enacted in 2017 is not comprehensive enough because it only covers the 6 million workers contributing to SOCSO and it is for a six months post retrenchment period only. In any case the EIS cannot be expected to, in the 2 years it’s been in existence, accumulate the funds required to handle unemployment at the scale we are expecting in the next few months. We need a more sturdy scheme that will be able to support those unemployed until the economy recovers sufficiently for them to be re-employed – and that might take a year or more. As a rough estimate, income support of RM 1000 per month for 3 million unemployed individuals would require RM 3 billion per month, initially but hopefully progressively taper down as the economy starts picking up steam. (We shall be discussing sources of funds for this and the other initiatives that we are proposing).

The details of this unemployment scheme have to be worked out in consultation with unions, workers’ groups and academicians. Ideally it should be enough to meet the basic needs of the family but not become a disincentive for people to re-enter the job market as the economy recovers.

Enhancing Food Security

Malaysia is doing quite poorly in terms of food security. Domestic rice production is 1.9 million tonnes per year, or about 70% of our annual consumption. We do not produce any wheat locally and imported 1.7 million metric tonnes of wheat in 2017 (for the production of bread, capati, roti canai, etc). In 2017, Malaysia also imported around 3.7 million tons of grain corn valued about RM 3 billion for the production of feedstock for poultry and other lifestock. Our self sufficiency level is 22% for beef, 14% for mutton, 67% for fish and 100% for poultry, eggs and pork. We imported RM 8.5 billion worth of vegetables and fruit in 2018. Malaysia’s food import bill in 2017 was RM51.3 billion4 or about 28% of total expenditure on food in Malaysia for that year.

The country is quite vulnerable to shortages of basic foods as we are over dependent on food imports, and our supply lines are exposed to price surges of the food items that we source from abroad. It would be foolish on our part to not take immediate steps to address this vulnerability. This is a huge issue that we cannot discuss thoroughly here, but we would suggest that the following ideas be considered

  • large plantation companies should be required to re-allocate 10% of their land for production of grain – rice or corn. (Currently of the 8.3 million hectares of agricultural land in Malaysia, 6 million ha are under oil palm and 1 million ha under rubber. Only 700,000ha are utilised for rice cultivation.) This imbalance in agricultural land use has to be addressed. The PSM is against the idea of cutting down more forests to expand agriculture. We should attempt to re-allocate the land already committed to agriculture.
  • Many vegetable farmers are living precariously on government land. Every year many of them are served eviction notices by the Land Office or by companies that have obtained the land they are on. Eviction of vegetable farmers must be stopped immediately. They should be given leases of 20 or 30 years so that they can invest in the infrastructure that can increase their yield, with the proviso that they cannot use the land leased to them for other, non agricultural purposes.
  • We have several hundred cattle rearers who are currently being pressured by Sime Darby to cease using Sime Darby estates as the grazing areas for their cattle. The government needs to intervene to work out a compromise that allows these cattle farmers to continue their activities. Many cattle farmers at the peripheries of our towns are facing hardships in finding land to graze their cattle. This issue needs to be looked into.
  • Orchard owners complain of gluts during the fruit seasons. FAMA should enter into forward contracts with these fruit farmers and commit to buy a certain volume of fruit from them at specified prices. So at least a portion of the harvest has a buyer, and the farmer is not left with a lot of rotting fruits on his trees. FAMA has to find ways to can or freeze the fruits, or make jam or bottled drinks out of them etc. But not market them as fruit in the local market right away.

The National Security Council should set up a Task Force to consult farmers groups, academics and other stakeholders so that a comprehensive plan to rapidly enhance food security for the nation can be agreed upon and speedily implemented.

Preserving the Nation’s Productive Capacity

Many of the firms in the manufacturing sector are going to continue facing cash-flow problems in the next few months. Production might be affected by the need to observe physical distancing within the factory and perhaps by repeated district level MCOs. On the demand side, their traditional markets might be under-performing for the time being, so their sales may be impaired. However, wages, loans and rentals have to be paid irrespective of whether the firm is able to achieve sales targets. Even downsizing has high initial costs in the form of retrenchment benefits.

There is definitely a risk that quite a number of firms will go bust because of these cash flow problems. This would be a loss to the nation. If these firms are given the support to survive these difficult times most of them will be able to function profitably when their markets recover. The nation needs these firms as they produce goods for the rakyat, provide employment as well as much needed foreign exchange. Just as we all lose if a segment of our population goes hungry because of this economic slowdown, we also all lose if we allow our manufacturing firms to implode because of cash flow problems.

The government has already come out with a series of programmes to help these firms – the moratorium on debt, the deferment of EPF and tax payments, the provision of easy credit and wage support for the workers in the SMEs. The adequacy of the assistance has to be assessed from time to time, and perhaps further measures have to be implemented if many firms are still burdened by cash-flow problems. It should be noted that the steps taken to ensure every family has the money to buy basic necessities will help our business sector by partially resuscitating consumer demand and providing a market for the goods and services that our SMEs provide.

Another strategy that might be useful at this stage is that the government takes over factories that intend to wing up operations and repurpose them to provide essential goods. For example, Imperial garment, a textiles firm in Ipoh has given notice that it’s going to wind up. If the government could take over this factory and use it to produce personnel protection equipment (PPE) for Malaysia as well as for other countries in the ASEAN region, that would be most helpful and it would help us build goodwill with our neighbours.

Considering Heterodox Economic Policies

All of the above measures require government expenditure. The RM 297 billion budget approved in December 2019 envisioned a deficit of RM 52 billion or 3.2% of GDP. It should be clear from the preceding discussion that the federal Government will have to run up a much larger budget deficit to stabilize the situation and steer the country through the storm. We therefore need to address the issue of government finances. And we will have to “think outside the box” while doing so. The following represents PSM’s take of the issue. But the issues are complex and inter-related so we too are still learning and are prepared to engage in a debate on these proposals.

a/ A much larger Budget Deficit

In December 2020 Parliament approved a Federal Budget amounting to RM 297 billion. This budget envisioned an income of RM 245 billion which was just enough to cover operating expenditure, estimated then as amounting to RM 244 billion. This is in keeping with the Government Funding Act 19836 that specifies that operating expenditure should not exceed Federal Government Revenue. Deficit spending should only be for development expenditure. This Act also specifies that Federal Debt cannot exceed 55% of GDP. Our current Federal Debt of RM 750 billion is dangerously close to this 55% limit.

Well, we will need to set aside these regulations for this period as the stimulus packages announced thus far have already committed an additional RM 30 billion of expenditure from the Operational Budget. In addition we will need to implement an unemployment fund which will require about RM 20 billion over the next 8 months. We will also need funds to help our business sector deal with their cash flow problems and survive this downturn. At the same time, government revenue is unlikely to meet the estimates made in the 2020 budget as corporate taxes (which are based on profits) are going to drop quite markedly, and the world price of petroleum is really depressed. These 2 items are usually the biggest contributors to Federal Government revenue. The 2020 Budget envisioned a budget deficit of RM 52 billion – or 3.2% of the GDP. The deficit that we are looking at is going to be 3 to 4 times higher!

b/ QE for the rakyat

QE or Quantitative Easing7 was widely utilized to extricate the world economy from the Financial Crisis of 2008. QE involves the large scale purchase of bonds by Central Banks. Bonds and Government Securities, which pay a specified rate of interest annually, are usually held by investment funds, pension funds and rich individuals. The theory behind QE is that when central banks buy these bonds, a larger portion of the wealth of investors and the super-rich is in the form of money (in their bank accounts). The expectation is that this greater availability of funds would encourage businessmen to invest in new business activities and thus create employment.
Some heterodox economists suggest that instead of buying bonds from the private sector, the Central Bank should buy bonds (government securities) directly from the government and at a low interest rate – ie QE for the rakyat. This would give our government the funds to finance the various programs required to tide us through this down-turn. Currently, Malaysia’s debt servicing figure (the interest we pay yearly on the RM750 billion Government Securities we have put on the market) is about RM 33 billion. This works out to an interest rate of about 4.4% and is a big drain on our operational budget. (As a comparison, the Federal Health Budget in the 2020 Budget was RM 30 billion.) The heterodox economists recommend that financing a part of the budget deficit by selling bonds to its Central bank at a low (say 0.5%) rate of interest would provide the government the funds it needs for its stimulus packages without increasing the costs of debt servicing too much.

c/ The use of a Consumption Tax to combat Inflation

Putting money into the hands of the rakyat (some call it “helicopter money”) through stimulus packages creates consumer demand that will spur businesses to produce the goods and services that the people need. People get the basic goods that they need and businesses get a market to sell to and as SMEs expand they will employ more people. The supply chains for these businesses also benefit from the increase in demand, and the economy can start spiraling upwards. It can be a virtuous cycle where it’s a win-win-win situation for all. The government too “wins” as when businesses make profits, government tax income will grow. Also as businesses grow and employ more people, the number on unemployment benefit also reduce.

But it is not always that simple. The problem arises when there aren’t enough goods and services for recipients of “helicopter money” to purchase. This might arise if there are bottle necks in the supply chain that limit the production of the goods and services that people want. Then we would have unmet consumer demand and this will lead to inflation. Inflation reduces the buying power of the poorest groups and a concerned government might try to correct this by increasing their subsidy payments. But that can lead to hyperinflation.

Some heterodox economists suggest that a consumer tax like the much maligned GST could be used in this situation to reduce the amount of money in the hands of consumers so that inflation does not get out of control. To counter the fact that a consumption tax is regressive (in that it burdens the poorest most) these economists suggest that a RM 300 monthly rebate to all B40 families, would make a GST set at 10%, value neutral for families earning RM3000 per month. Families spending more than RM 3000 would pay a net tax while families spending less than that would actually be getting more in terms of GST rebates than the GST they pay.

Well, something worth thinking about. This problem of inflation can arise whatever the source of the funds for the stimulus package. It’s not a phenomenon associated specifically with QE for the rakyat.

d/ A Ban on short-selling currency

The currencies of developing countries generally come under pressure in times of economic crises. This can be best understood if we ask ourselves why non-Malaysians would want to exchange their currency for the Malaysian ringgit. It would be because they want to buy a product that Malaysia is producing, or because they want to invest in the Malaysian economy or in the KLSE, or they want to purchase Malaysian Government Securities. At a time like this, there will be a drop in our exports as consumer demand the world over has taken a hit from this pandemic. There is also a tendency for foreign investors to divest their holdings in our stock market8. The investors then sell a portion of their shares and convert that money into USD or other foreign currencies as they look to park their funds in another country. These actions will tend to create a glut of ringgit in the international financial markets and result in downward pressure on the ringgit. If we decided to practice QE, that too would decrease the volume of ringgit that foreigners would otherwise buy to purchase Malaysian Government Securities.

What some unscrupulous currency traders might do in a situation when there is a relative excess of the ringgit in international markets, resulting in a downward pressure on the ringgit, is to “short sell” the ringgit. Short selling means that the trader sells something he does not have in the expectation that when the time comes for him to make delivery, the ringgit would have depreciated to below the value it was at when he “sold” it – so he can buy it at the lower price then make the delivery and collect the difference9. The volume of his short-selling if big enough will result in a run on the ringgit as other traders will also start selling the ringgit they hold as they fear the value of the ringgit is going to go down.

This despicable practice should be outlawed. Causing the depreciation of a country’s currency creates serious problems for the people. Malaysia imports about 28% of the food we consume. If our currency drops in value, the prices of foodstuff will go up. We also need to import medicines, equipment for our hospitals, machines for our factories, fertilizers for our crops, animal feed, etc. A devaluation of our currency by 20% will make the life of our people more difficult, and as always the people who will suffer the most will be the poorest amongst us.
Malaysia should work with other countries in ASEAN and the G77 group of countries to formally propose that short selling of any currency above a certain volume is a form of genocide and should be outlawed.

Greening society and improving living conditions

With a forecasted unemployment rate of 20%, we will have a surplus of manpower and talents for the next one year. If we could get organized, we could use this precious resource to repair the damage done to our environment. We could make it a condition of our unemployment benefit scheme that the recipients will have to contribute 10 days per month for public projects. We would then have to collectively decide what these public projects should be, and use work teams comprising of the people on unemployment benefits to carry out these projects. The following could be among the projects considered –

a/ Reforesting our logged forests
b/ Building sanitary landfills in all our districts
c/ Repairing facilities in our low cost housing areas – drains, playgrounds
d/ Rehabilitating our rivers
e/ Constructing 200 low cost terrace houses in each parliamentary constituency.
f/ Adult education classes focusing on language literacy, simple vocational skills, accounting, etc

The government will have to provide the materials and machinery for these project as well as the leadership in ensuring that these activities are run in a democratic manner and there is quality control of the various projects embarked upon. Innovative methods for sharing ideas and coordinating between teams working in different districts will need to be worked out. If implemented well, these public projects will improve the quality of life for our citizens. The demand for materials will also spur aggregate demand and play a role in reactivating the national economy.

Concluding remarks

The suggestions described briefly above are not a complete blueprint. We are putting them forward as a set of proposals that might be useful in handling the challenging situation that we and the rest of the world are in. We need to discuss these and other options so that we make the correct decisions. The differences in the levels of pain and deaths suffered by different societies in handling the Covid Pandemic underlines the fact that correct policy decisions are crucial in navigating this storm. It underlines also the important role of government in coordinating the nation’s response and in gaining the trust and cooperation of the people of the country.

From the conventional point of view, this year will be a complete disaster! Our exports will slump, unemployment will reach record levels and our GDP will shrink. But if we can identify what’s truly important and focus on keeping people safe from Covid, ensure that everyone gets the food and essential services, take steps to ensure the productive capacity of our society is not eroded, and in the meantime use the availability of manpower to clean up our environment through public projects, we will emerge rejuvenated and stronger as a nation. We in the PSM think that it is do-able, and the key to success is acting democratically on the basis of social solidarity.

Dr.Jeyakumar Devaraj
_Chairperson Parti Sosialis Malaysia
22.4.2020

Notes.

  1. There may be other factors at play here. The statistics seem to indicate that the countries that routinely gave BCG to all their new born babies have a lower case fatality rate for Covid 19. It might be that BCG somehow primes the immune system to react more efficiently to the Covid infection. There is so much we do not know about this virus!
  2. Malaysiakini. 18/4/2020
  3. “Those without documents will be arrested and send to Immigration Depots for further action’” Ismail Sabri. https://www.nst.com.my/news/nation/2020/04585968/mco-not-over-yet
  4. In 2018, expenditure on food per capita for Malaysia was 1,410.7 US dollars. (Themalaysianreserve.com)
    (USD 1410.7 x 4 x 32 million = RM 180 569.6 million = RM 180.6 billion)
    Food Imports in 2018
    Cereals RM7.1 billion
    Coffee, cocoa, tea and spices RM7 billion
    Feedstock RM5.9 billion.
    Vegetables RM4.6 billion
    Fish and crustaceans RM4.1 billion
    Fruits RM3.9 billion
    Meat RM3.9 billion
    Sugar RM3.8 billion
    Dairy products RM3.8 billion. (The Malaysian Reserve 19/11/19)
  5. Heterodox economics is the analysis and study of economic principles considered outside of mainstream or orthodox schools of economic thought. … These schools of thought often combine the macroeconomic outlook found in Keynesian economics with approaches critical of neoclassical economics. (Investopedia)
  6. The Loan (Local) Act 1959 and the Government Funding Act (1983) collectively specify that the government’s operating expenditure must be financed by its yearly revenue and that federal government debt should not exceed 55% of GDP.
  7. Quantitative easing (QE) is a form of unconventional monetary policy in which a central bank purchases longer-term securities from the open market in order to increase the money supply and encourage lending and investment. (Investopedia)
  8. Foreign selling of local equity on Bursa Malaysia accelerated to RM638.6 million last week, compared to RM326.0 million disposed of in the preceding week MIDF Research’s Adam M Rahim said. (The EDGE markets 20.4.2020)
  9. In 1987, Andy Krieger, a 32-year-old currency trader at Bankers Trust, took up a short position against the kiwi worth hundreds of millions of dollars. In fact, his sell orders were said to exceed the entire money supply of New Zealand. The selling pressure combined with the lack of currency in circulation caused the kiwi to drop sharply. It yo-yoed between a 3 and 5% loss while Krieger made millions for his employers. Krieger later left Bankers Trust to go work for George Soros

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