Spending for growth
PRAGMATIC economics is going to keep Malaysia afloat and growing in an increasingly unfriendly global environment, where the country’s trading partners are, for the time being, not as robust. Depending on domestic consumption to drive the economy, which has been the pattern of late, then means focusing on policies that will fuel it. Given that consumption is dependent on disposable income, the imperative would be to free up money for individuals and households to spend on consumer goods, preferably ones made in Malaysia. The higher the local content of these products, the more it should be consumed because the economic impact will be greater. If, however, purchasing patterns do not adapt and imports are preferred, policies undertaken will fail to stimulate the economy.
To increase consumer spending is one of the main reasons why Bank Negara Malaysia (BNM) trimmed the overnight policy rate (OPR) recently. In reducing it by 25 basis points, the aim is to make loans cheaper, thus, increasing consumption. If banks respond as intended and loans are made cheaper, then consumption should expand. For example, if cheaper loans for Proton cars are easily available, then shifting the cars will be easier. Houses, too, should shift faster if housing loans are more accessible. However, in an effort to keep non-performing loans low, BNM has tightened lending regulations, a prudent move but one, some argue, is stifling lending to consumers. If then the intention of reducing the OPR is to motivate consumers to spend, then these regulations must be eased but not to reckless levels. Additionally, the need to ensure that loans are disbursed for locally produced goods then becomes critical. Local lending institutions must first service consumer spending on domestic products while leaving the financing of imported items to foreign ones. In short, the aim is to increase the multiplier effect of consumer spending on the country’s real economy. And, as the BR1M payments have demonstrated, monies given to low-income groups will be ploughed into the domestic economy. The dilemma for lending institutions, however, is to find ways of lending to groups considered high-risk. Credit cards are out because far too many Malaysians have been bankrupted for want of sound money management skills.
Expansion in consumer spending must then come from the monies saved through cheaper loan repayments. Before this can happen, the base rate (BR) must reflect the adjusted OPR. The bigger banks are better able to respond positively and must do their part. For, after all, loans are, for lending institutions, the means to create money. So, they should consider trimming profits as a national service to tide the country over a difficult period not of its own making. BNM can lead the horse to water, but not make it drink. Accommodation of the trimmed OPR in the BR of lending institutions is a need and not an option. Even the political economist, Adam Smith, will agree that capitalism is not sustainable without some social responsibility.