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Impact Of Pandemic On Economy And Recovery Policy

Bernama Radio Bernama TV 08/04/2020 05:54 PM

By Dr Norlin Khalid

Apr 8, 2020 - KUALA LUMPUR (Bernama) - The coronavirus or COVID-19

outbreak, which is said to have originated at a wet market in Wuhan, China, has spread

all over the world like lightning and was categorised as a pandemic by the World

Health Organisation (WHO) on March 11. To date, the virus has infected over a

million people in more than 180 countries and caused over 80,000 deaths. In Malaysia

itself, more than 3,000 people have tested positive for COVID-19 and 63 people have

succumbed to it.

According to a study by JP Morgan and projections by WHO, Malaysia's COVID-19

positive cases may peak in mid-April with over 6,000 people infected. The Malaysian

government has already taken proactive measures to curb its spread by imposing the

Movement Control Order (MCO) from March 18 to 31. However, the MCO period

was later extended to April 14. Although the MCO compliance stands at 95 percent,

case numbers and deaths are continuing to rise.

The COVID-19 pandemic will certainly have an impact on the global economy,

including Malaysia's. COVID-19 has shocked the world economic structure which

is now in a state of uncertainty. Recently, the International Monetary Fund announced

that the pandemic will cause a global recession this year which could be worse than

the one triggered by the subprime mortgage crisis of 2008. The latter was caused by

the contraction of liquidity in the banking system in the United States after its real

estate bubble burst. The economic crisis ensuing from COVID-19 involves

practically all the countries of the world and recovery is expected to take a long time.

As long as new positive cases of infection are reported, the economic ecosystem will

continue to be disrupted. Studies by the Organisation for Economic Cooperation and

Development and World Bank have projected a 2.4 percent contraction in GDP

(Gross Domestic Product) growth for the world. Bloomberg reported zero percent or

negative GDP growth in the worst-case scenario.

COVID-19 will also have a negative impact on the labour market. The International

Labour Organisation has predicted that 25 million workers throughout the world may

lose their jobs. Malaysia, which is a small country dependent on other nations such as

the US and China, is also expected to feel the pinch. According to a report by the

Malaysian Institute of Economic Research, Malaysia's GDP growth will contract by

2.61 percent in 2020. Bank Negara Malaysia (BNM) said in a recent statement that

Malaysia's economic growth will be in the -2.0 percent to +0.5 percent range. It also

estimated that 951,000 people will lose their jobs. The Malaysian Global Innovation

and Creativity Centre predicted that about 40 percent of small- and medium-sized

enterprises will have to wind up their operations if the COVID-19 chain of infection

persists for three to six months.

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In the face of COVID-19, the government must focus on two objectives: one, focus

on the necessary protective and safety precautions to break the chain of infection and

two, reduce the negative economic effects by implementing recovery policies

involving active fiscal and monetary policy targets. The fiscal policy targets are

related to government spending and taxation while the monetary policies are related

to interest rates, liquidity and control of money supply.

In terms of fiscal policy, the government has announced a series of economic stimulus

packages to help individuals and companies affected by the COVID-19 crisis.

On March 19, the RM20 billion economic stimulus package (PRE 2020) was

launched to help industries that were directly hit by the first wave of the COVID-19

outbreak, such as hotels and transport companies. After the outbreak entered the

second wave and the MCO was imposed, more individuals and businesses were

impacted. The supply chain is disrupted because almost the entire sector has stopped

working. Some production firms have also stopped operations and worse still, laidoff

workers as they are unable to bear the costs. The PRIHATIN package is aimed at

easing the financial constraints of the people and businesses. On March 27, the

government announced the second RM250 billion economic stimulus package

PRIHATIN, which includes the RM20 billion from PRE 2020. Out of RM230 billion,

RM22 billion would come from a direct fiscal injection; RM100 billion (moratorium

in loan repayments); RM55 billion (guarantees); RM40 billion (withdrawal from

Employees Provident Fund); and RM13 billion (various sources). PRIHATIN's main

objective is to protect the welfare of the people, support businesses and strengthen the

economy. However, the stimulus packages will cause the nation's fiscal position to

worsen. To add to that, the global economic crisis has caused oil prices to tumble

down to US$25-US$30 a barrel. In comparison, oil prices were around US$60 a barrel

when Budget 2019 was tabled. When government revenue from oil drops, it will cause

an increase in deficits.

In terms of monetary policy, BNM has cut the Overnight Policy Rate or OPR by 25

basis points to 2.5 percent and reduced the statutory reserve requirement ratio or SRR

by 100 basis points to two percent. These cuts will reduce loan costs, improve

liquidity and stimulate economic activities. Apart from that, the restructuring and

rescheduling of the six-month moratorium will ensure that the capital and financial

market returns to stability. It will also help individuals and businesses facing financial

problems and liquidity constraints.

It is difficult to predict when the economy will fully recover as long as COVID-19

positive cases continue to rise and no vaccines are discovered to treat the disease.

Nevertheless, the government's fiscal and monetary policies complement one another

and will help to revive the economy by increasing aggregate demand such as public

and private consumption and investment. This will help to stimulate economic growth

through the multiplier effect and reduce the hike in the unemployment rate.

https://www.bernama.com/en/featuresews.php?id=1829686

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(a) Examine the impact of COVID 19 pandemic on the Malaysian economy from

the aspects of unemployment and the wages of labor.(8 marks)

(b) To reduce the negative economic effects of COVID-19 pandemic, the

government is implementing recovery policies involving active fiscal and

monetary policy targets. The fiscal policy targets are related to government

spending and taxation while the monetary policies are related to interest rates,

liquidity and control of money supply. Analyze the implementation of expansionary fiscal policy and monetary policy

to stimulate aggregate demand (AD) in the economy during economic recession.

1. Consider a perfectly competitive economy with two goods (I and y) and a single consumer. The consumer is endowed with s {> 0} units of thee which are supplied inelasticale to the labor market. Both goods (:1: and y} are produced by perfectly competitive rms using one unit of labor to produce one unit of good 3': or good 3;. The consumer chooses consumption of goods e and y to maximize his utility: U = olnm+lny, where lI] cm > {1:3 > U . 0 (16:1 5. ,33 0, by x(a, t) = 0 for t