Economists laud move to use domestic borrowings

KUALA LUMPUR: Economists have lauded the government’s move to use domestic borrowings to fund the Prihatin Rakyat Economic Stimulus Package (Prihatin) and the Short Term Economic Recovery Plan (Penjana) stimulus packages.

The two financial aid packages are the largest ever in the nation’s history, Prihatin at Rm260bil and Penjana, Rm35bil, compared to the Rm67bil stimulus during the global financial crisis (GFC) a decade ago.

Despite the huge spending this time around, economists opined the move as justified as the magnitude of the Covid-19 economic impact is expected to be much worse than the world had experienced during the 2009 GFC.

MIDF Research economist Mazlina Abdul Rahman said because advanced and least developed countries were affected, the economic impact would be “amplified”.

To date, the total fiscal injection to the stimulus packages stood at Rm45bil. She said rising expenditure and declining revenue has created a challenging situation to the government’s fiscal position. Lower global oil prices and an anticipated contraction in gross domestic product (GDP) for this year suggest that government revenue will be reduced.

“Loss of income by businesses, in addition to tax exemptions announced in the stimulus packages, including Penjana, will reflect in lower tax collection,” she said.

However, Mazlina said this is a global trend as economies around the world are pumping in money to cushion Covid-19’s adverse effects.

She said the amount of stimulus announced for neighbouring countries such as Singapore, Thailand and Indonesia are almost similar to Malaysia’s level. The S$92.9bil total support by the Singaporean government will push their fiscal deficit to 15.4% of GDP.

Mazlina said although domestic borrowings hold the most share of total Malaysian government debt, the move also depends on several anomalies.

“In 2019, about 74% of public debt was borrowed from domestic sources, with the balance from foreign.

“The decision to raise debt through domestic or foreign sources will depend on interest rates. Generally, if local rates are lower than foreign’s, internal debt will increase and if they are higher, external debt will increase.

“Nevertheless, funding the stimulus package through domestic sources seems to be a wise decision as it is less vulnerable to changes in foreign interest rates especially in the current pandemic situation, whereas, in Malaysia, Bank Negara Malaysia has control over it,” she said.

The debt will be denominated in ringgit, reducing currency depreciation risk, she said.

“In 2019, ringgit denominated debt accounted for 96.4% of total government debt while the balance was denominated in foreign currency,” she said.

Universiti Malaysia Sarawak’s senior professor of the economic and business faculty, Prof Datuk Dr Shazali Abu Mansor, said internal borrowings doesn’t affect the economy adversely, as Malaysia is not subject to overseas ruling.

“For instance (if we were to borrow from) the International Monetary Fund, it is very strict while internal borrowings have more leniency as the money is still within the country,” he told Bernama.

Meanwhile, it is apparent that both monetary and fiscal policies are needed in the event of recession.

“While the tools used under these policies are different, the aims are similar. Combination of these two will expedite the economic recovery,” said Mazlina and added during the global financial crisis in 2009, the budget deficit to gross domestic product (GDP) amounted to 6.7% due to fiscal injections.

At the same time, overnight policy rate (OPR) was also reduced to 2%, the lowest thus far.

Cutting interest rates will reduce the burden on homeowners and businesses, allowing the economy to recover. — Bernama