Ex-finance minister urges decisive Putrajaya intervention to stave off economic death spiral

Lim warned that Malaysia is facing a real risk of deflation. — Picture by Saw Siow Feng
Lim warned that Malaysia is facing a real risk of deflation. — Picture by Saw Siow Feng

KUALA LUMPUR, Aug 16 — The federal government must act urgently with another round of stimulus to prevent the already-contracting economy from spiralling into deflation, according to Lim Guan Eng.

He said Putrajaya must at least repeat the RM45 billion infusion from the Prihatin package as the country was now the worst-performing economy in the region following a record 17.1 per cent decline in its second quarter gross domestic product (GDP) result.

Lim urged the government not to be taken by its narrative of gradual economic improvement based on official statistics, arguing that these belied the reality for most Malaysians and businesses.

Among others, he reiterated that the 4.9 per cent unemployment reported in June failed to convey that many professionals have had to take up alternative work following the economic disruptions caused by the various movement control orders.

“To put it simply, they are underemployed. Here, the government must realise that the quality of employment is just as important as the quantity of jobs,” Lim said in a statement today.

“This says nothing of pay cuts many hard-working Malaysians suffered over the past few months. As reported by the Department of Statistics Malaysia in April, 84 per cent of private employees had suffered pay cuts.”

The former finance minister said that combined with the disinflation that was already present before the MCO, Malaysia was facing a real risk of deflation.

Deflation refers to the phenomenon when the price of goods and services begin to fall.

While appearing superficially desirable to consumers, deflation is typically considered a negative in economics as it indicates a systemic imbalance in the economy, which could exacerbate any accompanying recession while simultaneously making debt more expensive.

Unless arrested, the deflation can result in a feedback loop in which lower prices depress income levels, which then cause reduced demand that further reduce prices.

“There is greater urgency for another round of RM45 billion economic stimulus package to prevent deflation, including financial aid to small and medium enterprises and extending the moratorium on bank loans by another six months when it expires on 30 September.

“Failure to do so will cause greater hardship and even bankruptcy as many will struggle to serve their borrowings, either for cars, homes or business purposes,” Lim said.

On Friday, Bank Negara Malaysia reported what was the worst economic contraction in the region, eclipsing the Philippines’ -16.5 per cent and Singapore’s -13.5 per cent second quarter GDP performance.

Economists at Bloomberg noted that Malaysia’s record decline occurred despite the country’s comparative success in containing the Covid-19 pandemic, suggesting that victories in this area alone were not enough to ensure an economic revival.

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