THE economy is stirring; however, recovery remains fragile, and Malaysia is still in recession.

       In the third quarter (Q3) of 2021, the economy contracted by 4.5%, compared with an expansion of 16.1% in the previous quarter.

       This was despite the 37.4-point surge in Malaysia’s Consumer Sentiment Index to 101.7 in the same quarter, the first time that it broke through above the neutral 100-point level since Q3 of 2018.

       Going forward, the recovery momentum should improve as the rate of vaccination rises and the economy reopens further.

       For 2022, the government expects its proposed record high Budget 2022 allocation of RM332.1bil to boost economic growth to 5.5% to 6.5% (2021 estimate: 3% to 4%). This is in line with our forecast of 5.6%.

       To ensure that the recovery is not only secure but also sustainable going forward, Malaysia’s evolving policy mix must support both the demand and supply sides of the economy.

       The reason is simple; the game-changing pandemic crisis, unlike past crises, has triggered not only demand but also supply shocks.

       These have affected both the consumers’ ability to spend and the economy’s capacity to produce.

       Supply side policies are thus important factors in the recovery process.

       Given that they are also enablers, we must take them seriously to avoid the risk of compromising the effectiveness and sustainability of demand side policies.

       Prospects in the supply side of the economy should improve gradually with the decline of the pandemic.

       However, overall confidence will likely remain frail, given the economic damage that has been inflicted.

       In September, the Dewan Rakyat was told that more than 37,000 small and medium enterprises (SMEs) had shut down following the emergence of Covid-19 and subsequent impositions of movement restrictions.

       According to the Q3 of 2021 Vistage-MIER CEO Confidence Index report, CEOs had revised downwards their revenue and profit projections for the rest of 2021. It further indicated that 19% of them, up from 8% in the previous quarter, were considering retrenchments.

       Consequently, fewer CEOs (Q3 of 2021: 25%; vs Q2 of 2021: 43%) were planning to expand capital expenditure.

       With businesses’ confidence and risk appetite still weak, it is especially important not to introduce supply side policies that disincentivise acts of risk taking and entrepreneurship, cause inefficiencies or distortions in the economy, or spook investor sentiment.

       In this regard, the proposed one-off Cukai Makmur has unsurprisingly generated many column inches in the media.

       If passed by Parliament, non-SME companies will be required to pay an additional 9% corporate income tax on chargeable income that is in excess of RM100mil in the tax assessment year of 2022.

       Cukai Makmur, while may be necessary amid this crisis, is controversial. As some have pointed out, it essentially targets large companies, not those generating supernormal profits.

       Not surprisingly, its announcement wiped off a cumulative RM33.8bil from the market capitalisation of Bursa Malaysia stocks on Nov 1.

       The stock market losses following the announcement have more than offset the upside in terms of revenue generation, given that the government expects Cukai Makmur to generate only about RM3bil.

       Hence, we should not underestimate Cukai Makmur’s expected lingering effects, if implemented, on the psyche of investors.

       Inevitably, investors will question, for example, why isn’t the government trimming its own fat in this hour of need?

       And even with Cukai Makmur being a one-off measure, investors will still worry about what unfavourable measure will it be next time, in the next crisis.

       It is notable that even until today, investors still wonder whether capital controls of the Asian Financial Crisis (1997) type could make a comeback.

       Whatever the justifications may be, we should not ignore the fact that supply side policies that cause inefficiencies and distortions in the economy are counterproductive.

       Such policies will certainly hamper efforts, as outlined in the 12th Malaysia Plan, to reset the economy.

       Moving ahead, we need a business-friendly policy environment that supports businesses in their efforts to address the changes they see coming and the challenges that lie ahead.

       This includes supporting efforts to, for instance, automate production tasks, increase operational efficiency, take advantage of digital opportunities to innovate operating models, and address critical skills gaps.

       In the final analysis, we need effective supply side policies to build resilience, speed up productivity growth, and hasten the recovery process.

       A robust and dynamic supply side is an absolute necessity if we want to surpass our economic competitors and maintain our lead post-Covid-19.

       Quah Boon Huat is senior economist at Malaysian Rating Corp Bhd. The views expressed here are the writer’s own.