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In keeping with global trends and recognising the severity of the Covid-19 situation, Bank Negara Malaysia, or BNM, too has been accommodative in its monetary policy. – File pic
In keeping with global trends and recognising the severity of the Covid-19 situation, Bank Negara Malaysia, or BNM, too has been accommodative in its monetary policy. – File pic

LIKE a wrecking ball, Covid-19 is smashing social life and ravaging economies. Deaths the world over exceed 13,000, with Italy overtaking China in the death toll.

Draconian travel restrictions and harsh lockdowns to contain this existential threat have hit the aviation, tourism and hospitality industries hard, leaving in their wake massive retrenchments. Without state aid, these industries face the bleak prospect of bankruptcy. Across the world, the contraction of consumer confidence and spending further intensify intensifies the economic mayhem, battering production and halving oil prices. All this recently precipitated the United Nations (UN) chief, Antonio-Guterres, to warn that the world is on the brink of a recession.

To counter this imminent malady, fiscal stimulus has been an arrow in the quiver of antidotes of affected countries. The United States (US), for example, has allocated US$1 trillion (RM4.39 trillion) and the UK, 340.2 billion pound sterling to limit the economic fallout from this pandemic.

Countries, too, have bankrolled monetary policy to prop up their floundering economies. Central banks play an important role in managing liquidity in the financial system. Accordingly, as business stalls and firms go hungry for cash, central banks have started to pump liquidity into the banking system.

The US Federal Reserve, Bank of England and the European Central Bank are buying billions of dollars of government and private bonds from banks to inject cash into them. The cash from the asset sale should motivate banks to become more aggressive in their lending.

Central banks have also begun to cut their benchmark interest rate — the rate at which they lend to commercial banks for a short term — to revitalise their sagging economies. The Bank of England, for example, has made two cuts in eight days recently to bring down its benchmark rate to 0.1 per cent — the lowest in its 323-year history. The US has cut its rate to 0 per cent.

In keeping with global trends and recognising the severity of the situation, Bank Negara Malaysia, or BNM, too has been accommodative in its monetary policy. Recently, it brought down the statutory reserve ratio (SRR) — the amount banks are mandated to deposit with BNM as a means to manage liquidity in the financial system — from three per cent to two per cent. The second in four months, the cut frees RM30 billion for banks to expand their lending.

Here are three strategies that BNM can pursue to soothe financial markets and smoothen the sharp gyrations in the securities market. First, BNM should make a further cut to its SSR to boost bank lending. There is still room for that. During the last global crisis in 2009, BNM brought the SSR down to a bare one per cent in 2009.

Second, at 2.5 per cent, there is also leeway for BNM to further cut its benchmark interest rate. Such a rate cut will bring down the interest rate that banks charge for their loans. It will also reduce existing mortgage and other loan repayments. Such reduced rates will further spur consumer and investment spending.

Three, the BNM Ggovernor should go on air as did the Prime Minister and the Director-General of Health. She will be better able to explain in detail and directly the measures BNM is taking to soothe the roiling asset and currency markets. As a sort of forward guidance, the Governor will be able to highlight what is in BNM’s armoury should the economy deteriorate further.

In its March 14th issue, the Economist conservatively predicts that economies such as those of Singapore, Hong Kong and South Korea, could recover by the second half of the year. This is possible given their stringent efforts at flattening the trajectory of the infection rate.

As they struggle at containment, others may have to wait out till year- end for an economic rejuvenation — a recovery doubtless aided by the availability of a suitable vaccine against the virus by then.

Until then, it is vital for fiscal stimulus and monetary policy to ensure that growth is maintained, even at a reduced pace, lest the economy grinds to a halt, or even worse, contracts. Production, especially of essential items, should proceed apace.

Nothing will puncture the people’s confidence and trust in government as much as seeing supermarket shelves bereft of essential supplies.

*The writer is a professor at the Putra Business School

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