Covid-19 is the new buzzword. Indeed the disease has taken the world by surprise, declared as a pandemic by World Health Organization (WHO) on 11 March 2020. Most countries have responded with some degree of lockdown of the society, forcing many to stay at home, or if lucky can work from home. The restricted movement order (RMO) imposed surely would bring about a supply shock due to labor shortages and disruption to supply chains, followed by a demand shock due to lack of employment, income and restricted mobility. The economy would therefore shrink by a multiplier effect. The lack of cashflow cycle in the economy can potentially collapse many businesses; SMEs and small businesses are particularly vulnerable. A two-month lockdown could destroy about 10% to 15% of GDP, permanently. Recessionary downturns normally arise from the financial markets, i.e. when some market bubble bursts. The year 2020 was indeed expected to be such a year with severe recession globally, judging from the dynamics of the financial markets. But nonetheless, Covid-19 had preempted it by triggering a recession earlier from the real sector, through a calamity of global scale. Hence, it is daunting what the world is faced with is indeed a “double-recession”, coming from both the monetary and real sectors, that is likely to be huge, deep and prolonged. As we address the Covid-19 health crisis, it is important the economy is kept working as much as possible, otherwise the damage would become too large and too deep to reverse later. A large portion of the economy could then be lost permanently.
Basically, the main issue that ensues from such economic downturns is the destruction of LIQUIDITY in the economy. This crisis is going to be of gigantic proportions worldwide and hence it is crucial that governments intervene fast to minimize its effects, by compensating back the liquidity lost, so that the economy can be turned-around, back to normal as possible. There should be enough liquidity so that corporations, SMEs, small businesses and individuals all can transact comfortably in the economy.
The government’s concern now is basically how to finance the large amount of funds needed to address the crisis. Liquidity is normally achieved though creating LOANS in the banking sector, i.e. when businesses start borrowing funds at interest, to finance working capital needs mostly. But this is not the only way liquidity can be replenished in the economy. The government can also print new money (physically or electronically) and spend the money into the economy, what normally referred to as QUANTITATIVE EASING (QE). The US and many countries do this all the time. The Trump administration approved $2.2 trillion stimulus package for the current crisis, which is about 10% of its GDP. Both Loans and QE will bring about some inflation in the economy but that can be justified since this will help turn around the situation. However, the difference is that LOANS will put a burden on the rakyat through higher taxes, GST etc. since the loans will have to be serviced later, while under QE the rakyat need not be taxed. Therefore, using loans to solve the liquidity issue will only enrich the already rich, while the rest of the rakyat will have to bear the burden of reviving the economy, paid through taxes, GST etc. On the other hand, under QE, as mentioned earlier, the rakyat only bears inflation, that is borne by both the rich and poor alike. So, with QE there is no free lunch for anybody while with Loans there is free lunch for the wealthy.
The third method to ensure liquidity is NETTING (Muqassah in Islamic Finance). Netting is a form of mutual credit clearance and provides all the liquidity needed by businesses and households but WITHOUT causing inflation. Its mechanism is similar to multilateral payments arrangements that central banks implement among themselves, but here implemented among all the subjects in the economy. Netting, nevertheless, cannot be implemented fast enough in the current circumstances. Time is of essence, so the best option, in my opinion, is to finance the liquidity needed using QE, i.e. helicopter money, with the view to particularly save the SMEs from closing down, bankruptcies, minimize layoffs and provide some relief to the rakyat severely affected by cash shortages, like the B40 group.
A forth method that can address the problem without creating inflation is if the wealthy in the society, say T20, come forth and contribute their wealth to save the country, that is in “war” indeed. Perhaps the billionaires and millionaires in our midst could come forward during these challenging times? Foreign lenders like IMF and WORLD BANK and JP Morgan surely would love to lend us the money, but we should refrain from taking up the offer since this will only burden the rakyat later. Indeed IMF and World Bank announced that they have trillions of dollars allocated for countries to weather this crisis.
The Malaysian government’s recent RM250 billion Prihatin Rakyat stimulus package is commendable. It provides moratoriums on loans, credit facilities for businesses, a lot of cash payouts to a wide array of groups, etc. However the direct fiscal injection announced is only RM25 bil. The Bank Negara Malaysia too has come up with a Special Relief Fund to assist SMEs in need. In my opinion, the government needs to inject more stimulus to the level of 10% of GDP, i.e. about RM150 bil, using QE and not borrowed money. These are abnormal times that need abnormal solutions. The government should remember that they has the right to create the currency of the nation, which should be rightfully exercised during times like these. Nonetheless, I regret to hear the second Finance Minister say on TV that the Prihatin package was financed partly through borrowing, even though he did not mention how much and from whom. Malaysia should avoid debt-traps, in the interest of its people.
The Economy Post Covid-19
The world is not going to be the same anymore post Covid-19. This crisis is a game-changer; many parameters will change and adjust in order to fit into the new reality. It’s like life after a major global war. Socio-economic, finance and international relations will alter tremendously. Below are what I foresee some major things to be post Covid-19, with some suggestions given.
1. The Health Sector
a. The Health sector will be given a lot of focus and emphasis by the government and the people. We certainly would not want to go through something like this again. Is the virus that causes Covid-19, i.e. Sar-CoV-2, created in a lab and deliberately spread? We do not have any conclusive evidence for that, but nations must act assuming that is so, so as to be more prepared in the future. If indeed it is a bioweapon, then such a pandemic can reoccur again and again; and countries cannot keep vaccinating their population again and again.
b. Medical related manufacturing and services would rise after this – production of hospital beds, ventilators, masks, test kits, PPE, hospital equipment, medicines etc. will be focused to be locally manufactured. Production of masks is of paramount importance to contain future outbreaks. The government should give all the necessary assistance from industrial policies, finance etc. to help local industries realize this.
c. Traditional and alternative medicines will rise in importance. Indeed there are many claims that Chinese, Indian, Malay and even Arabic traditional medicines as having effectively cured Covid-19. Hence, these medicines should be researched relative to modern medicine and science; and be allowed to be practiced alongside modern medicine, with proper qualifications, criteria and guidelines for their practitioners.
2. Agriculture and Food Security
Food security will be given its due importance and hence agriculture would rise to take its rightful position again in the economy. Admittedly, Malaysia has not given agriculture its due recognition. Just look at our neighbours Thailand and Indonesia, they are net food exporters. Sandwiched between these countries, Malaysia shares basically the same climate with them, yet it imports more than RM50 billion food annually. Malaysia is not even self-sufficient in rice, the staple food of Malaysians. Now due to the pandemic countries like Vietnam are either banning or reducing their rice exports. Moving forward Malaysia has to make sure its agriculture sector comes to be at par with our neighbours’. Any failure to do so, then the Ministry of Agriculture has got no reason to exist. The younger generation should be encouraged to enter, assisted and equipped with modern, fast and efficient farming techniques, like vertical farming.
3. The Rise of Small Traders and Warungs
Post Covid-19 small businesses and entrepreneurship will crop up like mushrooms, simply for survival in difficult times. The government should encourage, facilitate and help finance them instead of curbing or punishing them.
4. The Banking and Finance Sector
The banking and financial sector would go though tremendous change. The current crisis is bound to cause many businesses to go bust and individuals declared bankrupt. Indirectly many banks will fail and are likely to be merged. On the other hand, Banks and financial institutions that are owned by the government would become more important, essential for financing SMEs because SMEs need a risk-sharing model of financing. Banks and financial institutions are privately-owned and profit motivated, hence they do not want to share in the business risks of SMEs. Accordingly Banks cannot be expected to strive for national aspirations which can indeed go counter to their own self interest. For example Banks cannot be expected to champion inclusive finance that targets Shared Prosperity Vision 2030, whereas these concepts will become pertinent post Covid-19.
Since, the Covid-19 is a pandemic, most countries in the world will simultaneously face liquidity problems, hence it is best countries increase the use of counter-trades among themselves, including bilateral and multilateral trade arrangements, to settle international trade balances
5. Digital Money and Netting System
For better management of many socio-economic aspects of the economy, digital money would prove far better than physical ringgit and sen. Hence it is high time Malaysia moves towards a 100% digital money environment. Nonetheless, the digital money, the creation and management of it, MUST be controlled by the government and should never be surrendered to some foreign entities like IMF or World Bank. 100% digital money would increase tax revenues substantially since things like tax evasion, bribery, corruption, misappropriation of funds etc. would become extremely difficult.
The government should also implement a netting system throughout the country, both for B2B and B2C. A netting system provides instant cheap working capital financing for SMEs, provides all the liquidity needed by the SME ecosystem, non-inflationary, counter cyclical and provides employment stability and sustainabilty.
6. A More Extreme Scenario
As this crisis is a “double-recession” arising from both the monetary and real sectors, it is likely to be the mother of all crises of our lifetime. We cannot rule out a total collapse of both the monetary and real sectors. Banks will seek recapitalisation, but businesses will not be able assume more and more debt.
The right thing to do in this scenario is to revamp the entire monetary sector. All debts of all businesses, particularly the SMEs, and individuals need to be written off. All Banks be nationalized and run along a public banking model. New injection of liquidity must be done using equity modes and a lot of handouts be given to all individuals in order to “reset” the economy. Redistribution of wealth may also be necessary.
That will also be an opportune time to reinstate real measures of value that would bring about a just, stable and sustainable monetary and real sectors, i.e. to introduce back money backed by gold and silver (or any other monetary asset like oil). This is like going back to the original ringgit, which was a 20gm silver coin. This topic needs great deliberation because not many people, even economists, who understand the merits of gold backed money.
However, implementation in this scenario needs careful planning. There will be attempts by foreign predators to control our money, but Malaysia must never surrender her sovereignty.
7. Family Wakaf and Endowments
As mentioned earlier, in crises like this the T20 should come forward to provide the necessary funding needed by the country to revive back the economy, rather than insisting on lending the money at interest (through purchase of government bonds etc). Accordingly, Family Wakaf and Endowments should be allowed, encouraged, and laws be amended to facilitate it, so as to enable those with great wealth to easily contribute for the benefit to the society at large.
8. Avoid Mass Vaccination
It is in the interest of Foreign lenders to push for mass vaccination using borrowed funds, that can cost a fortune, but in my opinion, countries should go for natural preventive measures including traditional medicines in order to save costs, and avoid further indebting the country. Countries must avoid such debt-trap in order to protect their sovereignty.
9. Increase in Social Capital
Just like after war or traumatic experiences, people would become more caring, respectful and show compassion for others irrespective of race or religion.
People would also become more religious. They would now frequent their visits to mosques, churches, temples etc. after missing congregational religious services for weeks. More people will return back to God. Indeed, the Covid-19 has increased people’s respect for Muslim women’s dressing, in particular the “purdah” or niqab, that cover the face.
10. Fate of Partisan Politics
Covid19 is likely to bring people of all races and religions to come together for the common good. Malaysians are indeed fed-up with the partisan politics played out by Malaysian politicians. In my opinon, Covid-19 is about to change the Malaysian political landscape significantly. People want more Transparency instituted. Soon the rakyat will only allow those highly qualified and morallly upright individuals to represent them and become leaders in society.
Hopefully post Covid-19 pandemic humanity at large would find much opportunities and a greater fulfilling life with cooperation, love and compassion.
Prof. Dato’ Dr. Ahamed Kameel Mydin Meera
Adjunct Professor, International Islamic University Malaysia
Chairman, Movement for Monetary Justice (MMJ)