PETALING JAYA: Malaysia is still grappling with the complexity of managing the impact of high household debt, particularly on low-income households, even as the economy is facing increasing headwinds, said an economist.
Likewise, businesses are struggling to deal with cost pressures due to elevated inflation levels and the uncertain economic climate, said Socio-Economic Research Centre (SERC) executive director Lee Heng Guie today at the SERC Quarterly Economy Tracker briefing.
It is therefore imperative for the government to find the right balance between interest rates and inflation to ensure economic stability and healthy national fiscal standing, he argued.
“While the interest rate is currently higher than inflation, Malaysia finds itself in a net positive economic environment,” said Lee.
“This means that the economy is growing, and the inflation rate is being surpassed by interest rates,” he explained.
BNM maintained the overnight policy rate (OPR) at 3% following its Monetary Policy Committee (MPC) meeting last month.
The central bank said at the current OPR level, the monetary policy stance is “slightly accommodative and remains supportive of the economy”.
The latest Department of Statistics Malaysia data showed the annual inflation rate in Malaysia slowed for the fourth month to 2.4% in June from 2.8% in May.
Meanwhile, Lee noted that the OPR stood at 1.75% during the pandemic to encourage borrowing and stimulate economic activity.
However, with high household debt levels, there is a delicate balance to be struck.
“A prolonged period of low-interest rates might indeed encourage more borrowing but could exacerbate the already high debt burden in the long run,” he said.
Structural reforms needed
Meanwhile, Lee said the crux of bolstering the economy and fortifying the ringgit hinges on implementing crucial structural reforms, and effectively managing the economy and financial fundamentals.
“For instance, prudent debt control plays a pivotal role in providing fundamental support to the currency,” he said.
“Additionally, fostering an environment that attracts higher foreign direct investment (FDI) and private investment while embracing digitalisation further complements these reform efforts.
“Moreover, the government’s commitment to enacting favourable policies that promote social protection for the lower-income and B40 segments is vital for sustainable economic growth,” he added.
SERC is tasked with carrying out research on economic, business and social issues in support of the formulation of public policies to shape Malaysia’s socio-economic and industrial development agenda.
Source : FreeMalaysiaToday