Recover, revitalise and reform after the storm

By Ndiamé Diop, World Bank Country Director for Brunei, Malaysia, Philippines and Thailand, East Asia and Pacific

No one could have predicted that Covid-19 would raise a perfect storm, hitting the world economy hard in 2020. By our estimates, 90 percent of the world’s economies will expect to see a contraction this year.

This severe downturn means countless people across the world, including in Malaysia, will suffer illnesses, lose jobs and livelihoods. The impact of the pandemic is expected to lead to the first increase in global extreme poverty since 1998, effectively wiping out the progress made since 2017.

Despite myriad challenges, there are encouraging signs that Malaysia is riding it out comparatively better. The country’s economy rests on strong fundamentals. A diversified economic structure, a sound financial system, and effective public health response and proactive macroeconomic policy support have all helped soften the blow.

While we expect the economy to see a sharp contraction this year, with GDP shrinking by 3.1 percent—including a particularly pronounced contraction in the second quarter—and despite the enormous uncertainty over the timing of a return to economic growth, there is light at the end of the tunnel.

The government has deployed a six-stage strategy to build resolve, resilience and to restart the economy. We have entered the fourth “recovery” stage, building the basis for the latter stages of revitalizing and reforming the economy. This means the government is set on not just getting out of this crisis but is trying to get into better shape than it was before, so it is more able to withstand the next one.

Even before the Covid-19 crisis came along, there was a growing sense among many Malaysians that growth had become less inclusive, that the pace of income growth had not kept up with the cost of living and that the economy was not creating enough high-quality jobs.

There is also a growing concern that standards of governance needed to be improved, and that the quality of public services was falling short of the expectations of an increasingly middle-class society.

We tried to get to the bottom of these issues in the latest edition of the Malaysia Economic Monitor, looking not only at how the country can survive the storm of the Covid-19 pandemic, but also take advantage of the opportunities provided by the crisis to emerge stronger. A few things stand out.

Firstly, in the short-term, while significant policy support has been put in place, the government may need to do more to protect those who need it most, especially vulnerable households and businesses.

While some economic activities will rebound after movement restrictions are lifted, it will take time for incomes and jobs to recover, as some parts of the economy (like manufacturing) will see a faster return to growth than others (like tourism). This may mean providing further rounds of financial assistance to the vulnerable, especially the B40 who lack the savings and support networks to withstand a prolonged hit to their earnings.

The crisis has also underscored the need for Malaysia to put in place a stronger social protection system that is more cost-effective and less fragmented to improve individuals’ and households’ welfare, both during the recovery period and in the future.

Such a system would aim to guarantee a minimum level of protection to all those in need, be responsive to changing circumstances, incentivise work, and be fiscally sustainable. The recent announcement to update and raise Malaysia’s poverty line is an important step in this regard and will ideally be matched with a similar upgrade of the non-income dimensions of poverty in the Multidimensional Poverty Index (MPI) in the forthcoming 12th Malaysia Plan.

These measures can help inform government policies and programs to ensure that the most vulnerable of Malaysians are provided with the support that they need.

Stepping up support to vulnerable households indeed means creating additional fiscal space so that the government has more headroom to adequately respond to the crisis. And while some space can be created by reallocating non-core public spending and expanding non-tax revenue (securing additional dividend contributions from government-linked companies to the treasury), what is needed is to temporarily lift the limits on the amount and usage of borrowing imposed by Malaysia’s fiscal rules. This outcome, however, will require legislative action in Parliament.

In the medium-term, steps will need to be taken to prepare the economy for operations under a ‘new normal’. This means restoring Malaysia’s fiscal buffers in readiness for the next crisis. Covid-19 caught Malaysia somewhat off guard with limited budgetary space to respond with direct fiscal injections, so as the economy recovers reforms will need to be taken to boost tax revenues (including finding new sources of revenue that are more progressive).

A key focus also must be on upskilling and retraining the workforce for a new economy, as well as accelerating the digital agenda and bridging the digital divide. And, even before the crisis, there was a growing realisation that Malaysia needs to shift its competitive approach towards attracting higher-quality investments, a challenge which is even more critical to address now.

Looking further ahead, now is the time to adopt bold reforms to help propel Malaysia to the next level of its development journey in the years ahead. Work that the World Bank has carried out suggests that while Malaysia is expected to reach high-income status in the coming years, there are key gaps in the policy framework that are holding the country back from achieving its full potential—and these gaps are even more costly during a crisis.

So now is the time to carefully design and implement policies that would help to boost female labor force participation, improve the quality of human capital, boost competitiveness, create quality jobs, modernise institutions and promote inclusion through a stronger social protection framework that is fitting for Malaysia’s aspirations as a high-income and developed economy.

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