Najib’s roll of the dice – RM60 billion economic stimulus package (4)

The Scope of the Package

The four so-called thrusts identified by Najib are generalities. Deeper analysis of these elements indicates that these are clichés and make for good sound bites.

It is rather salient that the DMP has made no effort to formulate and present an over-arching policy framework. There is a clear and urgent need to layout policy reforms to enhance competitiveness, correct the distortions, strengthen key agencies and identify areas of future potential growth.

There appears to be a mistaken view that Malaysia can find its way out from the hole it is in by spending billions. There does not appear to be a realization that fundamental reforms are needed particularly in the area of the regulatory framework.

There is no acknowledgement of the fact that the growth environment is deeply affected by rigidities of the NEP implemented mindlessly by the “Little Napoleons” of an inefficient and corrupt bureaucracy. Reform is imperative if Malaysia is to regain competitiveness.

In introducing the specifics of the Package, Najib makes no mention of the fact that there is a need to unite and jointly face the challenges; he fails to acknowledge that with almost 60% of the GDP generated in the Pakatan Rakyat governed states, the Federal Government needs to engage in efforts to work with these state Governments if it is to succeed in mounting the challenges confronting the country. Without the necessary collaboration, the efforts to achieve economic recovery will come to naught.

The DPM refers rhetorically to the fact that the the nation has faced crises in the past and expresses the view that we shall overcome the present crisis. This is not disputed but it is important that we collectively acknowledge that the crisis we currently face is a different order and scope.

The 1997 crisis was a financial crisis unlike the current one which is linked to the real sectors and to a global meltdown. Deficit spending, an exchange rate adjustment to stimulate exports and bailing out over-extended corporate entities were appropriate tools in 1997, they are not appropriate in the present context.

The country cannot hope to export itself out of the current situation. It has to focus on sustaining demand and consumption; massive investment programs are not the appropriate means either. The DPM’s gamble is likely to fail and put the nation in greater peril.

The Minister has asserted that the sharp increase in the fiscal deficit is temporary. This claim rings hollow if account is taken of past actions. So too was the assertion at the time of the East Asia crisis but deficit spending has become a way of life as deficits are now a part of the fiscal policy of the BN Government.

Deficits have become an addiction. It is almost as if the Federal Government’s policy stance has been to spend and spend on infrastructure and expand the size and role of the public sector in the national economy.

The pattern of spending on infrastructure has three salient features. In the absence of transparent and competitive bidding procedures, projects are handed out to well- entrenched party warlords thus contributing to the cancer of corruption.

Secondly, the over-emphasis on infrastructure has meant neglect of funding for research, investment in social services, upgrading the quality of education thus lowering the capacity to compete.

A third feature is that ever growing role of the GLCs and state owned enterprises has been that SMEs and other private sector have been marginalized and not contributed to overall growth. There has been a squeezing out of these entities.

Financing of the growing and persistent public sector deficits has meant that the private sector has been denied access to resources. This coupled with the vagaries of the NEP have contributed to the lackluster investment performance of the private sector.

Returning to the assertion that the deficits will be brought into check, I call upon the DPM to indicate how and when he envisages a return to fiscal policies that will lead to budget surpluses.

It is significant that the BN’s fiscal policy in recent years has broadly mirrored the policies of Japan’s Liberal Democratic Party in countering recessions.

Those policies were based on “stimulus” packages that emphasized infrastructure projects handed over to party stalwarts. It is these policies that accounted for the so-called “Lost Decade” experienced by the Japanese economy.

It would appear that the Treasury Mandarins and their political masters have not absorbed the lessons of such failed policies. Malaysia can ill afford similar policies driven by a myopic vision.

The DPM remarked that fiscal stability remains an important element of policy. These soothing remarks do not cut much ice with the rating agencies that have in recent months downgraded Malaysia’s rating levels. The recent risk analysis by the Economist Intelligence Unit should be a source of some concern to policy makers. However, there is little acknowledgement in official pronouncements that any heed is being paid.

What is also salient is the fact that there are sizable expenditures incurred by off-budget agencies together with the large but hidden contingent liabilities of the Government. These are represented by commitments to large payouts to companies owning toll road concessions, the IPPs and cost escalation clauses in the large scale projects.

The truth of the matter is that the time is approaching when domestic financial resources will be inadequate to finance the public sector’s appetite for resources. There will inevitably be need to resort to seeking foreign financing at high interest rates as Malaysia’s ratings deteriorate . At the extreme, there is a danger that Malaysia may have no option but to run the printing presses ala the Latin American economies in the 1980s and 90s.

  1. #1 by HJ Angus on Thursday, 12 March 2009 - 4:44 pm

    What can one expect from the BN?
    They can only formulate policies based on 1 mantra:

  2. #2 by boh-liao on Thursday, 12 March 2009 - 4:46 pm

    NR the all mighty and Umnoputras believe that everything can be controlled and manipulated. They can even command the rising tide to retreat. No worry, semua OK and boleh ‘kau tim’. Be happy.

  3. #3 by Onlooker Politics on Thursday, 12 March 2009 - 6:03 pm

    “At the extreme, there is a danger that Malaysia may have no option but to run the printing presses ala the Latin American economies in the 1980s and 90s.” (Lim Kit Siang)

    If the above prediction falls true, then the end-result will be the running off inflation or hyperinflation when the International Business Communities have lost their confidence in the currency value sustainability of Malaysian Ringgit. The historical records showed that during 1983-1992, one of the Latin American economies, namely Argentina, had reported an inflation rate of 100,000,000,000 % within ten years’ period.

    Below is the excerpt from Wikipedia about the hyperinflation in Argentina:

    “Argentina went through steady inflation from 1975 to 1991. At the beginning of 1975, the highest denomination was 1,000 pesos. In late 1976, the highest denomination was 5,000 pesos. In early 1979, the highest denomination was 10,000 pesos. By the end of 1981, the highest denomination was 1,000,000 pesos. In the 1983 currency reform, 1 Peso argentino was exchanged for 10,000 pesos. In the 1985 currency reform, 1 austral was exchanged for 1,000 pesos argentinos. In the 1992 currency reform, 1 new peso was exchanged for 10,000 australes. The overall impact of hyperinflation: 1 (1992) peso = 100,000,000,000 pre-1983 pesos.”

    Is Najib trying to lead the Malaysian people to the direction of hyperinflation? That will very much be depending on how he is going to raise funds for use in the deficit spending. I certainly hope that he will look into the possibility of resorting to internal borrowing and try to opt out as much as possible from borrowing from abroad. Najib should set a priority for permitting the Federal Government to borrow from Malaysian citizens first and should allow the Malaysian citizens to withdraw money from their EPF savings before its maturity date solely for purpose of buying the interest-bearing Sovereign Bonds of Malaysian Federal Government. As a matter of fact, borrowing from domestic source of debt financing will provide cushion for fast depreciation of the local currency value as compared to borrowing from abroad.

  4. #4 by limkamput on Thursday, 12 March 2009 - 6:08 pm

    Out of RM60.00 billion, RM25 billion were loan guarantees. Although loan guarantees are not direct government expenditure, they represent obligation of the government.

    Hmmm, government guaranteeing loans…. is this not moral hazard is all about. Once the loans are guaranteed by the government, I think both the borrowers and the financial institutions that lend the money would not be very vigilant and diligent. Borrowers may in fact treat the loans as income and the lenders would not be bothered very much with the viability of the loans and the ability of the borrowers to pay back. As the saying goes, the government will tanggong!

    So which loans deserves govt guarantee and which does not? Which loans is viable and which is not? As I see it, ultimately it boils down to who you know again and not so much on viability. Just look at most loans given by Malaysia’s development banks so far. Are they not treated as income by most borrowers? It is a truism that people and institutions will behave differently when they do not have to bear the full consequences of its actions. We shall watch and see how this loan guarantee program will turn out.

    The world has seen unprecedented bubble over the last 10 years. During this period, many “nothing doers” have gained enormously and became filthy rich. So now is pay back time. What saddens me most is those that did not gain when the bubble was built up are now asked to share the burden and help to preserve the ill-gotten gains of those who benefited earlier. Real baloney. If the global financial economic system can become stupid, governments everywhere can also.

  5. #5 by limkamput on Thursday, 12 March 2009 - 6:24 pm

    Fiscal deficit per se that is not a concern. It is how the deficit is financed. Resorting to printing press is course one of the extreme form of financing deficit. But financing through massive borrowing from commercial banks and other financial institutions is also highly inflationary. We must be aware that money, commonly defined as M1, is not just currency notes and coins. Demand deposits are also money. Commercial banks can routinely create money through current accounts. It is time to look at how the government finance its deficit – whether from the inflationary sources or non inflationary sources,

  6. #6 by undergrad2 on Thursday, 12 March 2009 - 9:58 pm

    It is called credit creation by banks. That’s banking 101.

  7. #7 by limkamput on Thursday, 12 March 2009 - 10:23 pm

    It is called credit creation by banks. That’s banking 101. undergrad2

    What i said is more than that. Of course if your have only done 101, that is your level of understanding. Tony Phua will know what i am implying here, not you.

  8. #8 by undergrad2 on Friday, 13 March 2009 - 10:55 am

    limkamput Says:

    Yesterday at 18: 24.42
    But financing through massive borrowing from commercial banks and other financial institutions is also highly inflationary.”


    In times of recession, deficit financing is the only way out. This is no time to be thinking of balancing the budget.

  9. #9 by undergrad2 on Friday, 13 March 2009 - 10:57 am

    “So which loans deserves govt guarantee and which does not?” limkaput

    You don’t even know the difference between a guarantee and an indemnity.

  10. #10 by undergrad2 on Friday, 13 March 2009 - 11:02 am

    “If the global financial economic system can become stupid, governments everywhere can also.” limkaput

    … and so can a certain government retiree from Kg. Attap with a long service medal after years of kowtowing to his BN masters.

  11. #11 by limkamput on Friday, 13 March 2009 - 12:26 pm

    In times of recession, deficit financing is the only way out. This is no time to be thinking of balancing the budget. Undergrad2 aka 101

    Yes sure, this is a parrot talking following may be a chief parrot somewhere. This is what a 101 will be talking. Please 101, don’t talk beyond your level. It is embarrassing.

  12. #12 by limkamput on Friday, 13 March 2009 - 12:29 pm

    You don’t even know the difference between a guarantee and an indemnity, undergrad2 aka 101

    See, i am 100% sure you do not know how how government guarantees work. Who is talking about indemnity here? Please, stay where you are – which is 101, ok?

  13. #13 by limkamput on Friday, 13 March 2009 - 12:34 pm

    Give you a simple test, 101: Give me examples of inflationary sources and non inflationary sources of deficit financing. Explain also why you say they are inflationary and noninflationary. This is not an open book exam like you find in one of those cheap US universities you attended, ok. So answer me truthfully and don’t cheat, god will know.

  14. #14 by undergrad2 on Friday, 13 March 2009 - 11:49 pm

    Yes, sir. I will try.

    When you walk the streets of Kg. Attap at night and charge your clients RM10 for a short time and hide it under your mattress, that is not inflationary. Deflationary is when you client after seeing you in you cannot get it up.

  15. #15 by undergrad2 on Friday, 13 March 2009 - 11:53 pm

    ooops.. should read “when your client, after seeing you, cannot get it up and I’m not referring to the economy”


  16. #16 by limkamput on Saturday, 14 March 2009 - 12:28 am

    that is right. vulgarity is the only thing you have gone above 101.

  17. #17 by undergrad2 on Saturday, 14 March 2009 - 3:54 am

    Vulgarity is a state of mind – yours.

  18. #18 by limkamput on Saturday, 14 March 2009 - 4:14 pm

    Cliché argument, back to 101 again….sigh

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