In any country’s economy there are demand side policies. In general, demand side policies aims to change the aggregate demand (AD) in the economy. AD consists of factors, which are consumer spending + government spending + investments + exports – imports [C+I+G+(X-M)], and anything that affects these factors will affect demand. Demand side policies consists of monetary policies which focuses on changing interest rates and money supply and fiscal policies which focuses on changing taxation and govt. spending)
2.0 Malaysia’s economy (2010 – 2012)
The economic situation is still resilient since the 2008 recession, and has been showing a substantial positive growth until 2012. 2010 showed positive economic growth as there is a strong economic recovery with the implementation of macroeconomic policy initiatives, which encouraged higher consumption activity and the recovery of private investment. Alongside, a stable employment market, moderate inflation and strong business - consumer confidence provides a conductive environment for the economy as it is predicted to expand at a rapid pace of 9.5% in the 1st half of 2010.
In 2011 – 2012, the economy continues to expand despite challenges in the global economy registered a 4.4% growth in the 1st half of 2011. The moderation was due to slow exports following the weaker-than-expected US economy, euro sovereign debt, and Japan tsunami disaster, which causes a global rise in inflation. The moderation was partly attributed by the high-base effect as GDP grew at a rapid 9.5% during the same period of 2010. However, growth momentum of the economy is expected to pick up during the 2nd half with resilient consumption, strong private investment, acceleration of public infrastructure, and sustained strong exports.
3.0 Fiscal Policy
The fiscal policy for 2011/2012 is to support the economic transformation as fiscal recourses are geared towards fulfilling the Ninth Malaysia Plan (9MP), which is to reinvigorate private investment, improve well-being of public, and intensifying human capital development. Due to the commitments made by the government, which was made possible due to the increase in revenue collection, in that year, which lead to the increased subsidy for rising fuel and cooking oil prices. Compared to the fiscal policy in 2010, which was mainly to support the growth momentum of the Malaysian economy and to boost potential output domestically. The fiscal resources were focused to re-energize private investment, spur consumer spending, as well as generate employment; in which 2010 policy shows sign of stimulating growth in the economy.
The government continues to consolidate its fiscal position in the year 2011/2012, while ensuring the growth momentum is sustained. The additional commitments during the year include higher fuel and cooking oil subsidies. This shows a fiscal deficit, which is expected to rein in GDP at 5.4% in 2011. As compared to a fiscal consolidation aimed at reducing government deficits and debt accumulation, which contained a fiscal deficit that contained at a GDP of 5.6% in 2010. Government expenditure is expected at RM229.6 Billion which is an increase of 12.3% over its spending in 2010 which was expected to be RM206.2 Billion.
The fiscal deficit in 2011/2012 is lower compared to a high fiscal deficit in 2009 to focus on stabilizing the economy from the effects of recession and a more stabilized fiscal deficit in 2010 to focus on growth of the economy. It is lower because the government managed to collect a substantial amount of revenue to absorb higher commitments. Although the external environment continues to affect the government’s finances, their objectives to rein the fiscal deficit, stabilize or reduce the debt accumulation while adopting the right policy mix to strengthen private demand are still in effect.
The government budget has also increased from 2010 – 2012 consecutively. In 2010 the budget was at RM189,499 Million, in 2011 it increased to RM211,987 Million and in 2012 it further increased to RM230,833 Million. The main sources for the budget comes from borrowing and government assets, income taxes, and non-tax revenue and other taxes.
The government is clearly running an expansionary fiscal policy by have a budget deficit working towards closing the recessionary gap. Government spending measures are used in 2010 – 2012 to recover, stabilize, grow, and expand the domestic economy; it shows signs of stability although affected by the global economy.
The expansionary fiscal policy, which involves Government spending contributed to intensifying training and skills program, and strengthening higher education as well as expanding the access to quality education, which has managed to lower unemployment rate and increase employment rate since 2009 as shown in the data taken from Ministry of Finance economic report. Employment has increased 594.6 million in size since 2009, and unemployment rate has decreased 0.4% since 2009.
Adding to that, the expansionary fiscal policy has also increase demand the years, as final consumption expenditure increased yearly as shown in the data below. Public expenditure has increased RM3632 Million since 2009, and Private expenditure has increased RM37634 Million since 2009.
4.0 Monetary Policy
The economy continues to grow in 2011/2012, the monetary policy is aimed towards the further normalization of rates to support the growth of the economy, while managing the risk of inflation and avoiding financial imbalances. Compared to the monetary policy in 2010, which was more focus on the normalization of monetary conditions due to the recovering economy. With the policy focusing on strengthen growth and ensuring the availability on financing the private sector.
The monetary aggregates continued to grow during the first seven months of 2011 as M1 increased 14.5% comparing to 2010, which has only 11.7%. Expansionary monetary policy was used intend to provide more money supply in order to support the growth of the economy.
As headline inflation recorded the fifth consecutive quarterly increase, the discount rate was adjusted upward by 25 basis points (bps) to 3.00% in May 2011 in order to safeguard price stability. In contrast with 2010, the discount rate was just 2.75%. It is clearly shown that the discount rate is increased from 2010 to 2011 as the upward adjustment is to ensure the growth and inflation is appropriate and consistent to prevent build-up of financial imbalance. Due to the adjustment of discount rate, the average base-lending rate (BLR) of commercial banks increased 27 bps to 6.54% in 2011 from 6.27% in 2010. It made the commercial harder to borrow reserves from the Fed although it seems to have a limited impact. Based on the graph below, it is clearly shows that the interest rate is keep increasing throughout the year as the flow of money in the nation must be controlled so that people will not be over spending and lead to inflation.
Meanwhile, the Reserve Requirement Rate (RRR) was raised from 1.00% (2010) to 4.00% (2011) in the ratio of three times. This purpose is to manage the increased level of liquidity to prevent any financial imbalances, arising from the strong short-term capital inflows. Post-global financial crisis, the emerging economies, large short-term capital inflows in Malaysia exerted significant upward pressure on exchange rates and asset prices. Hence, in this context the RRR is increased in order to reduce the money flow in the country to cool down the overheating economy.