Economic Impact of the COVID-19 Pandemic

The COVID-19 has spread to many parts of the world today. Up to November 9,
2020, there are more than 50 million of COVID-19 confirmed cases and more than 1.2
million of death due to the coronavirus (World Health Organisation, 2020). None of us comes
prepared to fight the virus, this sudden outbreak impacts all of us in many forms. There are
no clinically approved drugs to fight against the virus at the moment, the rapid spread of the
COVID-19 is still affecting the human population all around the world in terms of health,
social, civilisation and economy (Chakraborty, I. & Maity, P., 2020).

Figure 1. Malaysia’s Real GDP Growth from 1st Quarter of 2019 to 1st Quarter of 2020.

Source: Department of Statistics, Malaysia.

More than 200 countries have been severely impacted by the COVID-19 pandemic,
Malaysia is not an exception. The GDP growth dropped drastically from 3.6% (in fourth
quarter of 2019) to 0.7% in the first quarter of 2020. It was due to the slower economic
activities both globally and domestically. Several countries have taken preventive measures
to stop the spread of the virus through lockdown. It affects the international trading as well as
tourism industry. Domestically, Malaysia has announced the movement control order (MCO)
in March to minimise the spread of COVID-19. We observed the success of MCO in
controlling the disease, but the restriction in business activities and travel heavily impact our
economy.

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 Through the loosening from MCO to CMCO, we expect the economic activities will
slowly resume and save the country’s economy. At the same time, economic stimulus is done
by the government to encourage consumption and business activities using fiscal and
monetary policy.

Fiscal Policy Responses to COVID-19

In order to revive the country’s economy, several actions have been taken by the
government. In February 2020, a 2020 Economic Stimulus Package worth RM 20 billion was
announced by the Prime Minister. The main focus of the stimulus package can be further
divided into 3 strategies.

Strategy I: Mitigating impact of COVID-19;

In order to reduce the impact of COVID-19 especially to the businesses in the tourism
sector, deferment of monthly tax instalment payments is allowed. Besides that, discount in
the electricity bills has been provided to these businesses in the tourism sector. In my
personal opinion, it is the right move to do. The border has been shut down temporarily to
contain the disease spread, hotels, airlines, and other tourism-dependent industries has been
affected badly. However, we believe the damage to the related sector is temporary. Once the
vaccine has been invented, we are free to move around the world. Just that at the moment,
government needs to lend their hands to those tourism-dependent companies to sustain the
business at this point. The deferment of tax payment allows these companies to have more
cashflow in hands, which in turn will be spent in circulation.

In the human capital development, the government provided RM50 million to

subsidise short courses to promote upskilling among the citizens. With the sudden outbreak
of COVID-19, many companies are downsizing. The weak aggregate demands in the market
causes slower and weaker business activities. It makes unemployment rate in the countries
remain unchanged or even higher. Short courses related to digital skills can be quite useful at
this moment. Starting this year, many companies have been working towards digitalisation.
Upskilling with digital skills would help the unemployed to find jobs or create their own jobs,
for instance, doing own business in social media platforms.

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 Strategy II: Spurring citizen centric economic growth;

Towards easing the cashflows for household personnel, the minimum Employees
Provident Fund (EPF) contribution by employees was reduced to 7% instead of the previous
11%. The 4% reduction was expected to increase RM10 billion worth of household
consumption. This is a smart move. As we know, the EPF can only be withdrawn under
certain circumstances, such as purchase of first property, education, and to cover medical
expenses. Or else, anyone under age of 55 are not allowed to use the money in EPF.
However, during this crisis, some of the public might not be having sufficient money to live
normally due to wage reduction and get sacked. With less contribution to EPF, people will
have more cash in hands. It shall promote the spending and eventually lead to increase in
consumption and the country GDP growth. Furthermore, Bantuan Sara Hidup (BSH) and e-
money were distributed to the selected group of people (ISIS Malaysia, 2020). I support the
point that the RM50 was given in the form of e-money. This is because the e-money must be
utilised within the timeframe set by the government. It also cannot be transferred into bank
account. Thus, I believe that it would aid to encourage the public to spend and promote
private consumption.

Strategy III: Promoting quality investments

Last, but not least, government tries to promote quality investments. For instance,
government fastens the investment projects involving solar power generations. It can promote
private investment and create more than 25,000 job opportunities to the public. Besides, low
interest cost was provided by BNM to promote SME to involve in digitalisation. Tax
reduction on renovation and refurbishment cost, import duty and sales tax exemption on
importation or local purchase of machinery and equipment used in port operations could
further accelerate Malaysia GDP growth this year (The Star, 2020).

Monetary Policy by Bank Negara Malaysia

There are several instruments our central bank can manipulate in order to stimulate
the consumption and business activities, namely reserve requirement, discount operation, and
open market operations.

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 In January 2020, the Monetary Policy Committee (MPC) of Bank Negara Malaysia
reduced the Overnight Policy Rate (OPR) to 2.7%. In March, another 25 basis points was cut,
resulting in the OPR dropped to 2.5%. Another reduction occurred in May 2020, it leave the
OPR of 2%. The OPR of 1.75%, which is the lowest value in over 15 years was announced in
July 2020, it was the fourth time Bank Negara Malaysia reduces OPR in 2020 to improve the
growth and stability of Malaysia’s economy (Central Bank of Malaysia, 2020).

The OPR will affect the interest rate of the bank, in terms of fixed deposit rate and
loan rate to the public. It means that business can borrow money from the bank at a lower
rate. Business owner would have more money to spend in investment and/or business
expansion. Lower interest rate could allow business to invest in more equipment or new
factories to help to increase the productivity of the business. For instance, glove and medical
mask manufacturers should grab the opportunity to increase their production rate in order to
fulfil the current demand. Furthermore, COVID-19 changed the way consumer shops. Some
business highly relies on brick and mortar in-store retailing, could barely survive in this year.
They have to change the business model, for example from offline to online. Lower loan rate
offered by the bank can aid those business to transform the business model through
digitalisation. It could not only help the company to survive, at the same time it also helps to
increase the business cycle rate which would lead to better economy growth.

From the perspective on consumption, lower interest rate in the bank would
discourage the public to put their money as fixed deposit in the bank. The public would have
a feeling of not worth putting the money in the bank due to lower return. As a result, people
will take out the money from the bank and spend in the circulation. Some of them may use
the money in investment. For example, people can buy property with lower housing loan. It
can generate higher demand in the market thus it is helpful in overall Malaysia’s economy
growth.

Besides the reduction of OPR, the government also lowered the Statutory Reserve
Requirements (SRR) ratio by 100 basis points. This action has injected RM 46 billion in to
the circulation and promote the liquidity in the banking system. Our government also took
initiative to improve the economy via open market operations, including the outright
purchase of government securities, FX swaps, reverse repos and the standing facility. A total
of RM58 billion has been released into the bank institution (Central Bank of Malaysia, 2020).
When there is increase in money supply, it would encourage the bank to lend money.

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Business would have more accessible to money to drive the business activities. It would
eventually lead to increase the velocity of money in circulation which promotes stable and
sustainable economy.

Figure 2. Liquidity injected by the Central Bank of Malaysia

Source: Bank Negara Malaysia

Bank Negara Malaysia also pumped in RM5 billion into Special Relief Facility (SRF)
to finance the Small and medium-sized enterprises (SMEs). Due to COVID-19 pandemic and
Movement Control Order, the business activities slowed down. The cashflow of SMEs were
impacted. It may lead to retrenchment, which in turn increases the unemployment rate.
Unemployed citizens would not have enough money to spend, resulting in decrease in
consumption in the market. Besides, SRF would help sustain SMEs business to drive the
whole country’s economy to grow.

In conclusion, Bank Negara Malaysia can use monetary policy to improve the
liquidity in circulation and accelerate the business activities via several actions. BNM will
continue to monitor the market and make necessary movement to aid the country’s economic
growth.

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Reference

Central Bank of Malaysia. (2020). Economic and Financial Developments in the

Malaysian Economy in the First Quarter of 2020. Retrieved November 10, 2020 from
https://www.bnm.gov.my/index.php?ch=en_press&pg=en_press&ac=5053
Chakraborty, I. & Maity, P. (2020). COVID-19 outbreak: Migration, effects on
society, global environment and prevention. Science of the Total Environment, 728: 138882.
doi: 10.1016/j.scitotenv.2020.138882
Institute of Strategic and International Studies (ISIS) Malaysia. (2020). COVID-19 in
Malaysia: Economic Impacts & Fiscal Responses. Retrieved November 10, 2020, from
https://www.isis.org.my/wp-content/uploads/2020/06/POLICY-BRIEF_COVID-19-in-
Malaysia.pdf
The Star. (2020, February 27). Highlights of RM20 bil stimulus package. Retrieved
November 10, 2020 from https://www.thestar.com.my/business/business-
news/2020/02/27/highlights-of-stimulus-package
World Health Organisation. (2020). WHO Coronavirus Disease (COVID-19)
Dashboard. Retrieved November 9, 2020 from https://covid19.who.int/?
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