When signs show that an economy is heading for a sharp slowdown, authorities around the world will respond in two ways to prevent a recession — lower interest rates to encourage private spending and/or injecting a fiscal stimulus by way of higher government spending.

On the back of the global financial turmoil, central banks across the globe have cut rates aggressively, the latest being the Reserve Bank of Australia (RBA) which slashed its benchmark rate by 0.75% to 5.25%, the lowest since March 2005.

Bank Negara Malaysia (BNM), on the other hand, has not responded in a big way. Some may ask why, but there is a reason for it. Up until six months ago, Western economies have been raising interest rates to curb rising inflation fuelled by the sharp rise in the price of crude oil. While that was happening, BNM was in holding mood, even as inflation in Malaysia spiked up, drawing criticisms from some quarters as savers were earning negative interest on their savings.

What this means is because BNM was somewhat “ahead of the curve”, it would rather wait it out a while longer before pushing rates down further. Stability in the currency market and a cooling off in inflation will help.

This leaves fiscal stimulus as the option that needs to be used immediately, which was what Finance Minister and Deputy Prime Minister Datuk Seri Najib Razak announced on Tuesday.

Some may question if RM7 billion is enough, but there is a limit to how much governments can spend their way out of economic trouble and this has to do with their financial capacity.

For instance, the Australian government had taken advantage of the economic boom of the past several years to build up a big budget surplus that is now being put to use. That is why even as it recently announced that it will give A$10.4 billion (RM25.6 billion) to pensioners, homeowners and families despite shrinking revenue, it will still have a budget surplus of A$5.4 billion in fiscal year 2008/2009, compared with an earlier projection of A$21.7 billion.

Malaysia, on the other hand, has run budget deficits since the 1997/98 financial crisis, meaning that even as the economy grew at an average of 5% to 6% since coming out of the crisis, we did not save for a rainy day.

Our budget deficit is 4.8% in 2008 and was to be cut to 3.6% next year.

But because economic conditions have changed, the government now has to spend more while revenue shrinks. Hence the 2009 deficit will remain at 4.8%.

The rule of thumb is a government which has budget deficits of more than 5% over a few years could face a downgrading of their ability to repay loans, meaning they will have difficulty borrowing or have to pay more in interest.

This we must try to avoid, although some believe in times of crisis we should not worry too much about it.

Still, the government needs to tread carefully.

Which is why given the government’s own constraints, apart from allowing Malaysian workers to tap their retirement savings to spend now via an option to cut EPF contribution by three percentage points, Najib has to try and get more value and returns from the money the government spends and assets it owns.

The two most obvious are the decision to unlock the value of assets, in particular land in strategic locations, by offering them to the private sector to develop. Najib said the government can earn several billion ringgit from this.

The second, and more important in the long run, is the commitment Najib gave that a “ large portion” of government procurements will be done by open competitive bidding. Even contracts targeted for bumiputeras will also be given out after competitive bidding among bumiputera companies.

The devil, of course, is in the details.

But we support the decision because it is something this newspaper has pushed for. It opens up opportunities to those who are currently not able to participate in government jobs, it encourages competition among bumiputera companies and this, over time, will build up their capacity to eventually compete without the need for preferential treatment.

Open, competitive bidding will shave at least 20% off what the government now pays for services and products it procures. That can add up to several billion ringgit a year, which comes in handy during a downturn. We hope Najib can make this commitment a reality and do so in a transparent manner. He has to resist the lobbyists and supporters who are lining up for handouts.

Now is not an ideal time for anyone to take over the management of the economy, but we believe Najib can do well by simply doing what is right and sensible.

Najib must seize the moment to liberalise the economy further, cut the fat and wastage, and tear down the remaining barriers to investments. He should unleash the energy of the private sector, not necessarily through the lop-sided privatisation of the 1990s, but in a more equitable manner that gives fair returns to both the government and the private sector.

Source: The Edge Daily

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  1. Salam Aflah,

    Come on friend, why u ask for somebody who never feel difficult in his life before??? He got nothing to do but i'm still confuse why the UMNO's members still given him a priority to be our next PM!!!

    Najib, u must step down before the 'RAKYAT' force u to do it!!!!

    Just give an opinion...,



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