KUALA LUMPUR, March 26 -- The government’s Stimulus Package 2 (SP2) that will be announced tomorrow should seriously look at adopting money financing for the fiscal deficit strategy, says AmBank Research.
Its chief economist Dr Anthony Dass said given the limited flexibility of the fiscal policy, added with a weak economy and low inflation environment, money financing is a useful tool to support the economy which has been struggling with the coronavirus pandemic and falling oil prices.
He said through money financing, or previously known as money creation, the government can mobilise resources to drive economic growth by financing the budget deficit.
“It will allow the government to spend as much as it wants with the aim of supporting the economy to its full capacity, boost private sector activities, reduce unemployment and finance major programmes like construction/infrastructure, healthcare and green initiatives.
“If the government spending creates a deficit, it is not a serious problem. It is because the government’s deficit is by definition a surplus to the private sector,” he said in a note today.
The government has revised upwards the fiscal deficit to 3.4 per cent of gross domestic product in view of COVID-19, up from the 3.2 per cent of GDP initially set under Budget 2020.
Dass said the domestic economy is expected to contract by 2.8 per cent in the first quarter of this year --the first contraction since third quarter 2009.
The adverse impact is expected to be felt across all economic activities following a ‘partial’ lockdown by the new government in view of the increasing severity of the virus impact, he said.
“According to our assessment, a one per cent increase in money supply will improve economic growth by 0.5 per cent.
“At the same time, it supports the local currency with an appreciation of 0.6 per cent against the dollar,” he explained.
Dass said the SP2 should be more ambitious than the first stimulus package of RM20 billion in terms of reaching a wider range of target groups and covering a broader range of economic activities.
He said it must address six strategic issues: reducing unemployment and increasing job opportunities; easing the economic burden of the people, particularly those in vulnerable sections of society; supporting the private sector; undertaking capacity building for the future; supporting small and medium enterprises (SMEs); and supporting informal business activities and those working in this sector.
He said money created through the money financing mechanism can be channelled, among others, to promote private sector confidence and ensure that this sector does not collapse due to the deepening of the crisis.
This can be carried out in a variety of ways, including direct financial assistance, incentive packages and mega-projects that require private sector participation and SMEs, he said.
Dass said the money can also be utilised to grow the informal sector by providing direct financial assistance and incentive packages as well as compensating individuals whose welfare has been adversely affected due to the current crisis, and focus on those who work in the informal sector, paid daily or on contract.
He said with the money, the government can also reduce unemployment and create job opportunities by providing incentives to companies that employ those who have been laid off as well as provide entrepreneurial skills and financial assistance for those who intend to venture into "micro" businesses or informal business activities.
In addition, Dass said the SP2 should also look at extending all housing loans for government servants by an additional five years and increasing the loan amount for certain categories of government servants to buy a property or car.
The SP2 should also include the extension of business operations of hypermarkets/retail businesses until 11pm on weekdays and 1am on weekends, while hypermarkets in shopping complexes can apply to operate on a 24-hour basis, he added.
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