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A need to restart the economy

A need to restart the economy

03 May 2020

COVID-19: A pathogen that has caused global economic disruptions leading to the world falling into recession mode and millions of jobs hanging by a thread.

Prior to this year, the word did not exist in any dictionary. Today, one can’t go anywhere without hearing about it, as the virus has swept across the planet, taking a heavy toll on most economies including Malaysia.

Borders are closed and travelling overseas is banned as people are confined to their homes in a bid to flatten the curve of COVID-19 spread globally. The drastic drop in travel has slashed the demand for oil.

Combined with the ripple effect of the slump in consumption, this results in less tax revenue which will put a squeeze on the government’s fiscal position.

Oil price volatility

The sharp decline in oil prices was triggered by a lack of demand since the beginning of the year following China’s economic shutdown, the eventual disruption of global demand for the fuel, and the continuous oil price war between Saudi Arabia and Russia.

Due to the decline in demand as well as the historic price crash two weeks ago, which witnessed West Texas Intermediate (WTI) crude futures to turn negative, oil tankers are floating with no direction as storage facilities are full.

South Korea, which has Asia’s fourth largest commercial storage capacity, has run out of room to store more oil.

Malaysia, which is an oil-producing country, had benchmarked its oil price to Brent crude, which slumped to US$15 per barrel over the past week, the lowest level since 2002.

According to the Finance Ministry, Malaysia is relying on oil to provide 20.7 per cent of its total revenue this year.

Based on a research note by Maybank, every decline of US$10 per barrel would reduce fiscal revenue by RM7 billion and raise the budget deficit to gross domestic product (GDP) ratio by 45 basis points.

About two weeks ago, Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz gave assurance that the government had factored in the impact of lower oil prices in its budget deficit forecast of 4.7 per cent for 2020, though yesterday he conceded the deficit may rise slightly to five per cent due to the crude prices.

In the span of four months, oil price had tumbled from US$66 per barrel at end of last year to about US$22 this week while continuously seeing volatile trading.

On the local bourse, the decline in oil price has put a heavy pressure on indices, especially those with direct involvement in the oil and gas industry.

The energy counters declined almost 15 per cent in the last two weeks before slightly rebounding on Wednesday on positivity of global market reopening.

Impact of COVID-19 on tax collection

The country has taken a drastic move to implement a Movement Control Order (MCO) starting March 18 to curb the COVID-19 infection rate in Malaysia, exacting a toll on the country’s economy.

According to Prime Minister Tan Sri Muhyiddin Yassin, the country loses RM2.4 billion every day since the MCO being started, with total loss to the economy surpassing RM60 billion so far.

Taxes could not be collected, businesses face closure and people who lost jobs could not pay their income tax.

As Malaysia uses the sales and service tax model, lack of consumer spending leads to a direct decline in tax collection.

Based on a study conducted by the Department of Statistics Malaysia, spending had drop drastically over the span of the MCO, with upper-class T20’s spending declining by 59 per cent, M40’s slipping by 48 per cent and B40’s by 41 per cent.

According to an analyst, over the 40-day span of MCO, overall tax collection had declined almost 75 per cent, especially when services sector such as hotel and tourism records zero income.

What is worse, even before the MCO started, the industry had experience a sharp downfall due to an exponential decline in Chinese tourists due to COVID-19.

Based on data from Tourism Malaysia, in the first half of 2019, tourism contributed RM42 billion in the country’s revenue in the first half of 2019. It would be nowhere near that in the first half of this year.

Pressure on government’s fiscal position

With limited economic activities and increase in its spending due to the global health crisis, the government is facing a triple whammy in managing the economy.

With lower oil prices, COVID-19 and recession, what is faced today is worse than the 1997 and 2008 global economic crises, as at that point of time, only oil price was under pressure and no health pandemic took place.

Bank Negara Malaysia already foresees a contraction in GDP this year.

Jobs, meanwhile, continue to be hanging by a thread in certain sectors, especially tourism as the sector would not be able to resume its activities for quite some time.

With unemployment expected to rise to four per cent this year, it would be a challenge time for the workforce as well as the government.

As the government has started to allow certain sectors as well as businesses to operate as usual, reviving back millions of jobs, standard operating procedures have been put in place to ensure that the number of COVID-19 cases does not spike.

The move, which is seen as a point to restart the economy after almost one and a half months of shutdown, will put jobs back in the market and money back into people’s pockets, which would increase domestic spending and sustain the local economy.

Worries on COVID-19

The World Health Organisation said the virus is likely to stay for a long time and as of today, the race to find a vaccine continues.

While fears remain as economic activities resume, as responsible citizens we must take all the necessary precautions as have been advised repeatedly.

Avoid crowded places, stay home if there is nothing urgent to do, work from home if possible, wash your hands regularly and get medical assistance if you are sick.

The fight against the virus is not only the responsibility of the government or the health frontliners; we are all in this fight together.

Ignorance at this point could cost you your life as well as endangering others around you.

Source: Bernama

Posted on : 03 May 2020