Greater spending power with cut in EPF contribution


  • Business
  • Friday, 23 May 2003

BY KATHY FONG

CONSUMERS who were thinking of tightening their purse strings are unlikely to do so now that extra money is being put in their pockets following the announcement of the government's economic package. 

Economists said measures such as lowering employees' contribution to the EPF and cutting the base lending rate (BLR) would help sustain domestic consumer spending, which had shown nascent signs of slowing down. 

“The objective of the measures in the economic package is not so much to boost consumer spending. 

“These measures are to prevent consumer spending from falling further, given the external uncertainties and that certain sectors in the domestic economy are badly hit by the Severe Acute Respiratory Syndrome (SARS) outbreak,'' said an economist with a local stockbroking house. 

The lower EPF contribution and cut in BLR will more effectively encourage consumer spending, as many Malaysians are already saddled with housing or car loans. 

In addition, civil servants are likely to spend their half-month bonus because of better job security in the public sector compared with the private sector. 

Analysts and economists concurred that the steps taken by the government were timely to prevent the momentum in consumer spending from losing steam. 

“The measures will prevent a vicious cycle of weakening consumer spending from starting. The authorities cannot afford to wait until things deteriorate further, like in the case of Japan,'' said a fund manager, who manages more than RM500mil.  

However, he finds that the quantum of cut in EPF contribution too little. A deeper cut in EPF contribution would not only stimulate consumer spending but also help the development of the unit trust industry or even the bond market, he said. 

Employers' contribution should also be reduced so that the cost of conducting business in Malaysia would also decline, he added. 

The 2% reduction in employees' contribution to 9% from 11% for a year starting next month is estimated to release RM1.3bil-RM2bil into the hands of EPF members. 

Analysis by TA Securities shows that RM1.3bil will be pumped into the economy, assuming a 1.5 times multiplier effect and 40% savings rate. 

The stockbroking firm said a “fairly significant” amount of cash would flow into the retail, food and beverage, and tobacco sectors. 

Tracking the impact of the previous cut in EPF contribution two years ago, economists concurred that lowering the EPF contribution had been an effective way of encouraging spending.  

The government had in 2001 reduced employees' contribution by 2% for a year in a move to make the private sector the main growth engine for the local economy. 

According to the Malaysian Retailers Association, if workers spent all their extra take-home pay arising from the cut in EPF contribution, it would mean a 3.4% rise in sales for the retail sector. 

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