Category: Economics

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Economics Politics & government

[2940] Immediate fiscal agenda for the new (old) government

The next finance minister is unlikely to be thinking too far ahead since election is just less than 2 years away. It is short time to set any long-term agenda. There will not be enough time for learning and there will not be enough to start implementing. For the most parts, the new finance minister will likely be carrying on with established policy until the general election is called. Even if he or she dares introduce new long-term measures, there is a good chance it would be overturned once a new minister takes the Level 12 office in the Treasury Building in Putrajaya after the election.

Nevertheless, given the situation we as a country are in, the 2-year period is important. I think there are two items of concern during this period that could affect the long-term fiscal policy of the country:

  1. The 2023 fiscal cliff
  2. Fiscal consolidation.

The Perikatan Nasional government that Umno was committed to a quick fiscal consolidation exercise that necessitates a 2023 fiscal cliff and I think there is a question whether the same policy would be taken up.

What is the 2023 fiscal cliff?

To handle the Covid-19 crisis, the government changed certain law that allowed it to practically have a current deficit. Without the changes, the government’s current balance must always be in surplus, or in balance. In other words, total revenue must exceed all operating expenditure. Here is a restatement of: the government can only borrow for investment purposes (or in public sector jargon, development expenditure).

More specifically, the government created a Covid-19 fund that officially neither operating or development expenditure (but in fact, mostly operating expenditure). It was a necessary accounting trick that bends the law. Revenue dropped substantially during 2020 and 2021 relative to previous immediate years, while the need for spending rose dramatically. If the laws were not changed, we would have faced a worse version of this already bad recession. Even so, actual spending done was insufficient (the comic I drew below) due to the then policymakers’ naïve belief in V-shape recovery, and failure to adopt precautionary approach. This was the costly mistake of Budget 2021.

This fund is set to expire on December 31 2022. Upon expiry, the normal way of doing things—current balance cannot in deficit—becomes the rule again. This means any borrowing must be repaid (or from what I am seeing, I suspect it would be absorbed into development fund despite a large chunk of it is not developmental in nature. The 2020-2021 RM21 billion drop in Covid-19 is almost as large as the sudden RM19 billion increase in the corresponding development expenditure).

Based on Ministry of Finance publication, the fund had RM17 billion in it as of end-June 2021. It is likely higher given additional spending announcement made during the quarter. Expiry would mean (assuming it is not reclassified lock, stock and barrel as development expenditure) paying off that RM17 billion to meet the current balance requirement. It could also mean a percentage point worth of government spending unmade if it is paid off. That RM17 billion is roughly equivalent to a percentage point of 2021 deficit ratio.

So, if the fund expires in 2022 and the borrowing gets paid off (instead of reclassified as development expenditure), there will be a fiscal cliff: a stark drop in spending, which would take some steam off GDP growth, and more importantly, recovery.

Remember, economic recovery is not merely about growing again after a recession. Neither is it just about returning to pre-crisis level (which by the way, we are a risk of not doing so in 2021). A comprehensive recovery is one where current level would match the level it would be if no crisis had happened. Our insufficient spending had left the gap big, and catching up with that pre-crisis level and trend is hard.

Inappropriate time for fiscal consolidation

This is on top of fiscal deficit-to-NGDP ratio that the government might target. It is unclear now what the deficit ratio target is. Former Finance Minister Zafrul Abdul Aziz had stated that the figure for 2021 after accounting additional unplanned Covid-19 spending could rise to 6.5%-7.0% of NGDP, from the unrealistic Budget 2021 projection of 5.4%. It is unclear if this accounts for lower-than-expected GDP growth. If it does not, it will go higher.

If the new government (if it could be called new given the composition is… the same) insists on fiscal consolidation still, there will be pressure to let the Covid-19 fund expire while cutting services to keep spending under control.

Two immediate agenda for the next finance minister

Malaysia is clearly behind the curve by a big margin in terms of economic recovery. Getting recovery on track is the immediate concern. Unfortunately, as much as I hate to say it, the government is likely the main driver of growth in these times.

The government can start playing that role properly by first, extending the expiring date for Covid-19 fund and second, postponing any fiscal consolidation exercise. The second can be done by maintaining deficit ratio high, possibly in the range of 6%-8% in the next several years.

Ideally, this should followed by a long-term agenda of tax reform to increase government revenue, which the Pakatan Harapan government, and the previous Perikatan Nasional government, as I understand it, was willing to go ahead with parts of it.

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Conflict & disaster Economics

[2937] Premature fiscal consolidation influences our vaccination strategy adversely

Our vaccination program is taking the big solution approach. Since the Covid-19 pandemic is a big challenge, it might be natural to come up with a big solution. Mega vaccination centers are a critical part of the program. Big space with hundreds if not thousands of personnel vaccinating hundreds if not thousands more individuals. Big, shinny glittering, big. It is as if Mahathir of the 1990s is back.

It has been a slow painfully slow start with some big mess made along the way, but the program is picking up steam. Vaccination pace is still below what is required but we are getting somewhere: on June 10, approximately 155,000 dosages were administered, and close to 10% of the population has received at least one dose of Covid-19 vaccines.

Behind the headline numbers, stories are appearing that people are not showing up for vaccination despite registration. The authorities at first tied the no-show to vaccine hesitancy. Earlier rationale for separating Astra-Zeneca vaccines from the main public vaccination program was based on the understanding that the public distrusted that particular vaccines. After all, AZ had bad press for some time.

After a while, that rationale is starting to become weak, especially given logistical concerns on the recipients’ side. More and more, it sounds like that particular claim was based on a misreading of incomplete data, and hasty conclusion. The kerfuffle between the Selangor state government and the federal government regarding total dosage the former received, for example, does not inspire confidence in the analytical skills of those in power in Putrajaya. Hesitancy is a big problem, but it is becoming clear that it had been used as a catch-all excuse to brush aside other big problems faced by the vaccination program.

To me, the no-show cases and the government’s preference for the big approach raise a question regarding our vaccination philosophy: are our methods primarily designed to be the easiest for the central authority to deliver the vaccines, or for individuals to get vaccinated?

The first part of the question—is the method easiest for central planners?—has the program administrators firstly in mind. If the administrators are the primary focus of the process, then having big centers is the way. This is because the big approach pools resources and rides on economies of scale. Pooling makes the vaccination program cheaper for the side managing it. Also, easier. The big approach necessarily means having few centers. And having fewer centers means the logistics becomes simpler, given all else the same: manage 3,4 or 5 big centers is significantly less complex than dealing 30, 300, or 3,000 spread across wide geography.

The second part of the question—is the method designed to be the easiest for individuals to get vaccinated?—puts potential recipients as the primary focus. It makes it easier for individuals interested in vaccinating themselves get vaccinated. Instead of having to travel from one part of the city to the another, or worse, having to travel from one part of the state to another (which is common enough), a person would be able to get his or her dose from the neighborhood clinics, hospitals, public halls or anything that could function as a vaccination center. This path is more expensive compared to other approach because it is more complex: it requires hundreds or thousands of small vaccination centers all around the country. It will involve resources being spread as widely as possible. But it is easier for potential vaccine recipients.

So, why did we choose the big approach, i.e. the method easiest for the central planners?

There might be multiple reasons behind that. I suspect one of them is related to cost consideration.

This goes back to the November 2020 when Budget 2021 was tabled in the Parliament. In that Budget, the government of the day in all its wisdom decided to embark on fiscal consolidation immediately. That policy was made based on rosy assumptions: the economy was to experience a V-shape recovery as soon as possible. Things would return to normal soonish.

That consolidation plan has gone awry. Recovery, if it could be called as such, is proceeding slower than what the government expected. When the budget was unbelievably passed despite it grave flaws in December 2020, Malaysia was still in recession. In fact as of the first quarter of 2021, the country was still in recession.

Since then, the government has been spending additional resources little by little, but not enough to solve the pandemic problem comprehensively. It has been reactive as the crisis develops, always one or two steps behind, almost ways coming short to the challenge. With available resources limited by the badly designed Budget 2021, those planning for vaccinations had to resort to the big approach: pooling resources, economies of scale, cheaper method. They had to minimize the monetary cost.

That comes at a (different) cost of course: it makes logistically hard to some individuals to get to the vaccination centers. Some is an understatement as we race toward herd immunity. The big approach contributes to the no-show cases: no-show because the big approach needs the people to go to the central planners, instead of the central planners coming to the people. All this raises the risk of Malaysia failing to achieve herd immunity as soon as possible, and letting the economy to muck around longer.

In short, the premature fiscal consolidation planned by this government had influenced our vaccination strategy adversely.

Categories
Conflict & disaster Economics

[2936] Latest government Covid-19 spending plan is ‘dasar cukup makan’

Severely underwhelming.

Those are the words I would use to describe the financial assistance the government launched in conjunction of the latest round of lockdown. The government values the program at RM40 billion, with approximately RM5 billion involving actual government spending. The rest are exemption or postponement-based initiatives, with loan repayment moratorium being the biggest and borne by somebody else.

What we need is not a band-aid program with actual spending being slightly greater than the RM3 billion auditor KMPG has trouble tracing in brewing Serba Dinamik financial scandal. Malaysia needs a new comprehensive program cognizant of the trouble we are facing collectively. I have earlier suggested the government will need to ramp up its spending significantly by raising its deficit ratio from approximately 6% of 2021 GDP currently to 9%-10% or even higher, while making all the consequential legal changes. We need to do whatever it takes to resolve the crisis as soon as possible.

But this government has failed to do that. The latest program proves this government is reactive to events, and always one-step behind. Muhyiddin and his incapable ministers just cannot look beyond the molehill. They keep holding on to plans which foundation has been dismantled by the worsening crisis. Those earlier plans, encapsulated by Budget 2021, were based on rosy assumptions that did not come true. Even with flawed assumptions, they keep going at it. Worse, a huge chunk of spending under the previous plans has yet to be executed.

That mistake of inadequate actual and approved spending in favor of unthinking fiscal consolidation has hobbled Malaysia’s response to the Covid-19 crisis. The government is unnecessarily self-limiting public spending that is needed to raise the health system capacity immediately and hasten the pace of vaccination in the population.

This is a disappointing policy that the Prime Minister should be embarrassed of announcing.

What the latest program really is, is that it is a “at least we tried” policy. Dasar cukup makan.

This spending is not about resolving the crisis. It is the government providing talking points to unthinking political operatives on the ground. It is to show the government is at least is responding to public demand. Moratorium? Yes, half-hearted but at least it is included. Wage subsidy? Yea, it is minimal by at least it is provided. “At least we the government are doing something.”

To come on top of this crisis, at least we did something is not good enough. The leadership of this government is not capable of doing more than “at least we tried.”

“You’re dying, but at least we’re giving you a glass of warm water.”

How comforting.

Hafiz Noor Shams. Some rights reserved

Awani interviewed me on June 2 2021 about my views. Here it is (when I said US and UK with respect to sovereign debt crisis, I meant Europe. I misspoke):

Categories
Conflict & disaster Economics

[2934] Hindsight is 2020, myopia is 2021

We did not know many things about Covid-19 back in 2020. Early on, the authorities and health professionals were urging the public not to panic by highlighting the probabilities of dying from other causes were higher than Covid-19. The intention of avoiding panic was probably good: by end-January 2020, I was looking for face masks to buy but most stores ran out of it. We know better now that the logic was wrong. Covid-19 is serious business.

We made missteps. The Pakatan Harapan government was worried about border closure and its effects on the economy. Nevertheless, travel restrictions were imposed eventually, though not comprehensive.

Then as we were learning about the virus further, party politics got in the way. The unexpected political maneuvering stole from Malaysia several weeks’ worth of lead time to fight the pandemic. At this time, members of Perikatan Nasional and their collaborators appeared unconcerned with the virus and took time to buttress their political position. The new government was lucky because Pakatan Harapan’s last act before their fall was to launch an additional government spending to fight off Covid-19. That bought Muhyiddin Yassin, the Prime Minister nobody elected, a little time as the health crisis worsened quickly.

Eventually, his unelected government got it right: lockdown with financial assistance provided. Lockdown implemention was chaotic, and the accompanied assistance should have been bigger. But the mistakes were forgivable however angering. Year 2020 was a new reality altogether and the hesitance in bringing in the big bazooka was understandable although less than ideal.

Moreover, it was a new government facing a steep learning curve: new ministers on the job had little understanding of fiscal levers, while facing an unprecedented crisis. Like I said, less than ideal but we had to make do.

After several months of mucking around, it seemed Malaysia was succeeding, in large part due to the civil service. The public sector had handled outbreaks before albeit on a smaller scale. That institutional memory served the country well at a time when the executive was scurrying in the dark. Additionally, there were economic response templates from other countries to follow by April-June 2020. Malaysia copied it.

There was damage to many aspects of Malaysian life. Democracy and basic rights were sacrificed. It was a dangerous sacrifice with adverse long term repercussions, but we could argue we skipped the worst. Whether we would pay for our sins is yet to be seen.

In the meantime, we bragged about our success while multiple countries, particularly the US and UK, were bungling their responses.

We bragged so much that overconfidence overcame us. That led us to repeat the same mistake we made in February-March 2020 in the second half of the year. Just like when party politics interfered with crisis management at the start of the pandemic, unreasonable political ambition to take over Sabah state government in the middle of the pandemic brought in the second wave.

This time, the trouble was so not new. There was less excuse to be made. Double-standard regarding quarantine during and after campaigning, and other questionable decisions by the government, made things worse. It was during this period health measures suffered from serious credibility erosion.

But we all need reminding from time to time. Sometimes, we make mistakes because we forget our lessons.

The point is, in retrospect, throughout 2020 we probably would have done things differently. But things should be judged not by how we would have done it differently knowing now things we did not know then. Instead, it is only fair to judge previous decisions based on how they were decided based on the best available information at that time. And we did not have the best information for most of 2020. It was all too new.

We can be angry about 2020. I still am. But that was how the cookie crumbled. Things happened and decisions were made based on the best, or second-best available information.

That excuse can no longer be used for 2021.

If hindsight is 2020, then myopia is 2021. By this year, we know more and we know almost enough information to fight the pandemic effectively. Yet somehow, we refused to use the information.

The disastrous handling of 2021, I think, could be traced back to November 2020, when Budget 2021 was debated in the now suspended Parliament. The budget could have been used to fight the health and economic crises comprehensively.

But we did not use that opportunity.

The government of the day preferred to declare victory prematurely, and engaged in fancy public relations exercise. A sharp V-shape recovery was taken as the base case scenario: base effect was taken in as victory. “This is the biggest budget in history!” declared the government, somehow forgetting the budget of the current year almost always the biggest in history. Rarely does government spending fall. Such was the nature of the government’s meaningless sloganeering to invoke awe in the unenlightened minds.

The budget was big, but it was just not big enough. Budget 2021 rested on rosy assumptions. So rosy that the government intended to resume fiscal consolidation immediately while the economy was still in recession.

So intent the government was on fiscal consolidation that the RM5 billion meant to vaccine-related purchases were not actually included in the Budget. How outrageous could it be?

Constructive criticism came in quickly. The government was told the budget was not big enough. The government was told it should take a more precautionary projection. The government was told to widen the deficit significantly to fight the pandemic off.

Critics were proven right. Budget 2021’s rosy assumptions were dismantled just 4-5 months after it was passed. In November 2020, the government aimed to cut the 2021 deficit ratio to 5.4%. By March 2021, the figure was raised up to 6.0%. It is likely higher now given how things are going. Not only was fiscal consolidation was the wrong policy to pursue at that time, but now since it could not be achieved, the government’s credibility has taken a hit.

The budget should have been rejected: the failure of Budget 2021 is both the fault of the Perikatan Nasional government—including Umno for those still in denial—and Pakatan Harapan. The non-rejection in the House was mind-boggling: we live in a tragic comedy.

Now, as Covid-19 is making its ugliest spread yet, with death toll mounting, health workers exhausted, the Ministry of Finance approved another RM200 million for the public health sector.

What is RM200 million when a vaccine dashboard alone worth RM70 million? What is RM200 million when the total Health Ministry Budget is RM32,000 million a year, and that the public health sector is running out of capacity?

To solve this crisis, we require a much bigger deficit spending: boost the deficit to 9%-10% or even more. Do whatever is necessary to finance the fight. Do it properly instead of through half-baked measures. There is no time for dry powder.

The cost of failing to address this crisis is greater than the cost of higher deficit ratio.

Categories
Economics WDYT

[2932] Guess the 1Q21 Malaysian GDP growth

The 2021 first quarter GDP for Malaysia will be out next week. As usual, before we go into the details, let us play some games.

How fast do you think did the Malaysian economy expand in 1Q21 from a year ago?

  • Faster than 10.0% (0%, 0 Votes)
  • 7.6%-10.0% (0%, 0 Votes)
  • 5.1%-7.5% (0%, 0 Votes)
  • 2.6%-5.0% (36%, 5 Votes)
  • 0.1%-2.5% (50%, 7 Votes)
  • 0% or slower (14%, 2 Votes)

Total Voters: 14

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January, February and March industrial figures grew 1.2%, 1.5% and 9.3% year-on-year respectively. That is a 3.9% industrial expansion for the whole quarter. With industrial production representing  approximately a third of the 2020 economy, this is a good sign.

This is especially so when services (60% of the 2020 economy) contracted slightly in the first quarter, falling 0.3% from a year ago.[1] This is likely caused by the second lockdown imposed by the government in January and February 2021. But I do not think that small contraction should not bring down the overall growth (and I do not think agricultural output will be too bad that it would bring the whole GDP growth down).

But we are in danger of getting distracted by growth number. We have been distracted earlier and the belief in V-shape recovery is a proof of that. Now, we are paying the price in the form of bad government response, and bad planning.

Instead of whether the first quarter (or the second quarter for that matter) would grow, there are two benchmarks we should focus on as far as the top line recovery is concerned:

  1. When will the GDP level (not growth) return to pre-pandemic level? This level should be the fourth quarter of 2019, and the answer will determine whether we have somewhat recovered.
  2. When will the GDP level (not growth) match the level it would have been if the 2020 recession did not happen? The answer to this question will tell us the long-term damage the economy has suffered.

Additionally, the real bad news is that, recovery has been uneven and its pace is flagging. March 2021 unemployment rate is stuck at 4.7%, after spiking to 5.3% back in May last year. The reason for the stubbornly high unemployment rate is that people are returning to the labor market, except that the economy is not creating jobs fast enough. Definitely, some jobs have been eliminated permanently.

Bottom line is, even if there is growth in the first quarter, I would not label it recovery just yet. In this situation, I rather not pay Genting Casino a visit. I prefer to err on the side of caution.

Hafiz Noor Shams. Some rights reserved

[1] — I made a noobish careless mistake here. I mistook quarter-on-quarter number for year-on-year. The year-on-year was much worse, and if I had realized it, I would have expected a contraction for the first quarter. Apologies.