Deeper economic policy response needed to cushion health crisis

KUALA LUMPUR: The World Bank said a deeper economic policy response would be needed should the Covid-19 health crisis intensify and result in a longer duration of economic disruption.

The bank said more targeted fiscal policy interventions were crucial to mitigate the impact of the crisis on vulnerable households and businesses as well as to increase public health capacity.

“This is further complicated by the plunge in commodity prices, which would put additional strain on fiscal space and in turn may increase the burden on monetary policy as a key policy tool,” it said its report, ‘East Asia and Pacific in the Time of Covid-19’ which was released yesterday.

It pointed out that an uncontained or further deterioration of the coronavirus pandemic would result in more severe or prolonged restriction on overall economic activities, posing a further drag on growth into 2021.

“More significant are the expected employment and income losses among the bottom 40 per cent and even the middle 40 per cent.

“Effective economic relief for those affected will depend on both means-tested social assistance such as Bantuan Prihatin Nasional and the ongoing Bantuan Sara Hidup programme and employment-based social insurance such as Employees’ Provident Fund and Employment Insurance System,” it said.

The World Bank’s forecast for Malaysia’s gross domestic product has been significantly lowered from 4.5 per cent to -0.1 against the backdrop of growing uncertainty over the duration and overall impact of Covid-19.

It said the marked reduction incorporates the slower growth momentum from the second half of 2019, but more significantly, reflects the impact of the outbreak under a scenario where the current large-scale disruption of economic activities is extended for most of the year, before a partial recovery towards year-end.

“It is important to note that this estimate has a large degree of uncertainty, conditional on the rapid developments of the outbreak domestically and globally, and the subsequent policy responses,” it added.

Malaysia’s net exports and investments are expected to experience a larger contraction in 2020, while private consumption is expected to grow at a much slower pace of 1.6 per cent this year from 7.6 per cent in 2019.

“Government expenditure is expected to increase on various measures, including the economic stimulus package and other key expenditures and initiatives to mitigate the economic and health impact of the outbreak, but the bulk of stimulus activities are expected to be off-budget in nature.