Kuala Lumpur, 14 August 2018 –  Malaysia could face its first recession since 2009 by the end of this year or the next, stated Bank Islam Malaysia chief economist, Dr Mohd Afzanizam Abdul Rashid. He advises the government to loosen up on monetary policy and expand fiscal policies to fuel economic growth. Among his suggestions were reducing the Employees Provident Fund members’ contribution to promote consumer spending and tax cuts to ensure growth of the country’s GDP. The timing of the next recession is uncertain but the fact that it will happen at some point is almost certain.

Responding to the statement, IDEAS Senior Fellow Dr Carmelo Ferlito said, “Dr Mohd Afzanizam Abdul Rashid’s prediction of a recession is consistent with the possibility of a property market-driven crisis, as argued in my paper “Affordable Housing and Cyclical Fluctuations: The Malaysian Property Market” published last month (that can be found here). However, his suggestions of easing the monetary policy and introducing fiscal stimuli, to support consumption, may not be the right way.”

Dr Carmelo explains that it is necessary to understand the reason why a recession happens at the first place, before proposing adequate policy measures. He argues, “The business cycle is the natural dynamic of capitalistic development. Most of the booms are generated or enhanced by credit support. If the government further injects liquidity in the economy, it will only delay the necessary readjustment process of the business cycle.”

“The best way to support sustainable growth and to face the recession is to recognize the crucial role of long term investment projects and the need for them to be financed with sound money rather than easy credit. The logical conclusion is to support the creation of saving, rather than artificial credit and consumption, to generate real funds available for long term investment projects.”

“Besides the support for long-term investments, another counter cyclical move may be to gradually reconsider indirect taxation, such as GST or SST. Therefore, rather than a simple tax cut, I suggest more comprehensive tax reform which favours indirect tax collection to prepare the economy for the upcoming recession.” Dr Carmelo concluded.