Re-opening the Economy in a New Normal

By Smita Kuriakose, Senior Economist, World Bank

After 47 days of the Movement Control Order (MCO), most businesses have been allowed to resume operations on May 4.

As Malaysia’s economy wakes up from the necessary shutdown, which has been effective in arresting the spread of the Covid-19 pandemic, the days ahead will look very different. The economy reopens to a new normal.

We enter with a grim picture at the beginning, facing an expected economic loss of RM 63 billion from the MCO, as announced by the Prime Minister.

Many people would have lost their jobs. Many firms, both large corporates and small medium enterprises (SMEs), would not have escaped unscathed with many of them facing insolvency. The negative effects on credit markets, supply chains, and worker productivity will only dissipate gradually.

The policy objective now is to ensure firms return to their pre-crisis production and employment levels as rapidly and safely as possible, setting the foundations for longer-term productivity-driven growth, resilience, and competitiveness.

A detailed plan for the post-MCO phase would require close coordination between the private sector and the government. The unprecedented scale of the pandemic means that the return to work will need to be gradual and phased, and heightened caution is necessary to prevent further waves of infection.

It is also important to ensure that the burden of Covid-19 prevention is not placed solely on SMEs who are already struggling to stay in business.

The government, in recent days, has been working to provide information with Standard Operating Procedures for employees to follow social distancing norms to ensure safe work conditions.

This support is especially important for SMEs as such companies are likely to have lower capacity than larger ones to scale up the kind of management response necessary and to put in place adequate mitigation measures.

For many industries, getting employees back to offices may remain the preferred manner of work. Until effective treatment or a vaccine becomes widely available, targeted scaling up of testing to identify positive infections may help alleviate some of the uncertainty and lack of confidence from workers and customers as businesses seek to reopen.

Support to SMEs could also include co-financing for professional cleaning of premises in line with confirmed Covid-19 cases and access to business continuity insurance.

While clear before, the current crisis has further increased the benefits SMEs could derive from using new technologies, for instance through remote work and online business platforms.

Going forward, measures should be identified to further increase the rate of digitisation amongst SMEs in Malaysia. Subsidised or free broadband access and direct technical support could be provided to SMEs to accelerate the transition to digital platforms, including business to consumer (B2C) and business to business (B2B). In this context, renewed efforts to support workers’ reskilling and upskilling will be particularly important.

Once businesses can safely operate, efforts should focus on boosting demand and reactivating supply chains. Adopting broad-based fiscal stimulus consistent with available fiscal space can help lift aggregate demand.

In this regard, measures announced to accelerate and increase allocations for large public investment projects and programs (e.g. the East Coast Rail Link, Mass Rapid Transit 2, The National Fiberisation and Connectivity Plan), should have a positive impact on demand during construction and could benefit growth in the longer run.

Without support, SMEs tend to be disadvantaged from accessing public procurement contracts. In Malaysia, this may limit their capacity to benefit from the investment projects mentioned above. To that end, e-procurement could also be encouraged to further level the playing field for SMEs competing for tenders with larger companies.

With regards to foreign direct investment, immediate efforts should focus on the retention of existing foreign investors, and the preservation of supply chains connecting foreign and domestic (often SME) suppliers.

With supply chains and client relations disrupted by the crisis, government agencies can help SMEs reintegrate into supply chains and find new domestic and export markets to help reduce the time to recovery.

In Malaysia, special attention should be placed to ensure firms in the electrical and electronics industry, retail, and tourism sectors that are exposed to demand and supply shocks are supported. This is key to preventing an exodus of investments and subsequent job losses.

It is important for the government to communicate how the current financial support measures for firms will evolve as the post-MCO reopening phase continues. It is critical to avoid removing support measures too soon, and some key measures may have to continue to operate even as firms restart their operations. Close dialogue with representatives of different segments of the private sector, especially SMEs, can help inform the government in their decisions.

The measures adopted and the way they are implemented should continue to reduce physical transactions or unnecessary face-to-face interaction. Measures should also be scalable and timebound, allowing the government to increase the scope of assistance provided, reduce it as the crisis subsides, and increase it again if the virus surges.

Even in the hopeful event that the virus does not persist, the damage to the economy has been significant. Recovery is unlikely to be uniform, with different parts of the global economy moving at different speeds which in turn will determine the recovery of specific sectors that are integral to global value chains.

However, hope remains. The current crisis provides not only a sense of urgency but also an opportunity to reduce Malaysia’s vulnerability to external shocks and to accelerate its transformation toward a high-income economy built on a stronger, more resilient and competitive private sector.

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