Notes to PM 24: Proposal to Add Liquidity to the Banking System and Reduce Interest Rates
Here’s another story of how we continue to survive during the Asian Financial Crisis 1997/98. Tan Sri Nor Mohamed Yakcop at that time wrote a proposal to PM on promoting more liquidity to the banking system as well as reducing interest rates in order to place the economy back on its track again. The economic downturn at that time was really a nightmare and one way to promote growth is by making liquidity available to the financial market as well as lowering the interest rates since it will encourage more borrowings and enable firms to survive and finance new projects.
How do we promote liquidity then? the answer is by increasing employees’ take home salary. The question again, how?
At present, the contribution to the EPF is 12% from employers and 11% deduction from employees’ salary. To fight against the economic downturn, we should make funds easily available for the important sectors of the economy to bring about a quick turnaround. therefore, the amount that is deducted from the employees’ salary should be reduced from 11% – 6%, so that their take-home pay will increase by 5%. The employees’ savings in EPF will continue to grow since the employer’s contribution will be maintained at 12% as well as the employees’ contribution at 6% albeit at a lower rate.
The effect of the proposal on various sectors of the economy are as follows:
1) Banking System – The idea will give positive effect to the banking system since it well result in an additional RM3.5 billion of take home pay per year in hands of the employees. This will provide better servicing of loans by the banks and encourage more people to participate actively in the economy as well as enhacing the liquidity conditions in the banking system.
2) Economy – Obviously it will give a positive impact to the economy. The increase in the take home pay by 5% will definitely increase their purchasing power and will have a multiplier effect in the economy, resulting in higher rate of growth of the National’s GDP. Furthermore, the ‘feel good’ factor arising from a higher take home pay will have a positive impact on the economy thorough a more confident spending and payment of bills pattern.
3) Employees – the higher take home pay enable the employees to increase their purchasing power or reduce their loans.
4) Employers – Neutral, since no reduction or increase in the employer’s contribution to the EPF.
5) Govt Revenue – Positive, as the employees’ contribution to the EPF is tax deductible. The 5% which is now not deductible for EPF will be taxable.