KUALA LUMPUR, Aug 12 — Malaysia urgently needs to address the weakness of its social protection coverage for the self-employed as the Covid-19 pandemic has revealed the group’s long-term vulnerabilities during economic shocks, Paris-based Organisation for Economic Cooperation and Development (OECD) said in a report today.

In its 2021 Economic Survey of Malaysia, OECD said vulnerable self-employed workers — comprising women, young people and lower-skilled workers — were particularly exposed as they faced difficulties in preparing for eventual retirement which puts them at risk of old-age poverty.

It said this was partly due to possible biases of existing pension systems against the aforementioned group such as the Employees Provident Fund (EPF) which had a defined contribution scheme.

Their vulnerabilities were further exacerbated by the stringent government restrictions placed on mobility and physical contact affecting sectors requiring in-person services such as retail trade, food and beverage and accommodation who made up the predominant workforce within.

"These self-employed people are concentrated in the wholesale and retail trade sector, and the accommodation and food services, which have been directly hit by the health crisis.

"Even after the pandemic is over, some of these lost jobs may not return for a long time.

"Hence, the enhancement of social protection for the self-employed is crucial to avoid losing gains from the past progress made in integrating women in the economy,” it said.

As a recommendation in the medium-term, OECD said the government could consider making contributions by employers compulsory for dependent self-employed workers (contract workers), while maintaining the matching contribution scheme for other self-employed workers to enhance social protection of the self-employed.

OECD further added that should the ongoing health crisis were brought to controllable levels, most sectors including those with predominant self-employed workforce would be able to restore their normal activities towards end-2021

"Private consumption, buttressed by the continued government relief measures, is projected to restore its robustness gradually along with the recovery of broader economic activities,” it said.

Fiscal policy should remain supportive

The survey also pointed out that Malaysia’s fiscal prudence is underpinned by several legislative schemes where borrowing is confined to investment expenditure and ceilings are imposed separately on federal government domestic debt and its external debt.

It cited the fact that the impact of the pandemic was large enough to widen the fiscal deficit to 6.2 per cent of Gross Domestic Product in 2020, despite government efforts to reallocate spending within the budget.

"Accordingly, Malaysia’s relatively high level of government debt has been further pushed up.

"Particularly, it is crucial to reduce public debt and the contingent liabilities of the government more effectively in the medium term,” it said.

While it lauded the government’s initiative to introduce the Fiscal Responsibility Act towards 2021, the international body proposed for said legislation to be accelerated as part of an integrated fiscal framework with medium-term targets to give the government more flexibility and discipline, and provide more confidence to markets.

OECD also called for close monitoring of the fiscal positions of entities outside the scope of the federal government — government bodies and non-financial public corporations — as their deficits were expected to have widened in 2020.

"Adopting an integrated fiscal framework covering the whole public sector including contingent liabilities would strengthen fiscal monitoring,” said the survey.

Consideration in reintroducing Goods and Services Tax (GST)

Taking into consideration the ratio of federal government revenue to GDP which has declined for years and the need to raise government revenue, OECD said the government could consider reintroducing the GST as part of a medium-term fiscal strategy against the backdrop of the Covid-19 pandemic.

Since social spending is expected to increase rapidly, OECD said the move to expand the revenue base would allow the government to enhance overall social protection, including through social transfers targeted at low-income and vulnerable households.

"In the medium term, in addition to improving spending efficiency, strengthening the revenue base will be essential,” it said, adding that Malaysia’s social protection system mostly relies on the state and is funded mostly by the federal government’s tax revenue.

It also cited the lacklustre share of social spending in Malaysia (roughly three per cent of GDP as compared to OECD’s 15 per cent average) while the dependency rate (an age-population ratio of those typically not in the labor force and those typically in the labor force) was projected to increase from 44.2 per cent in 2020 to 47 per cent in 2045 according to a United Nations report.

"The population ageing would not only increase social protection expenditure, but also reduce tax revenues, as less people will be active in the labour market.

"This also implies that it would be more costly to delay the choice of social protection system (a system relying on tax revenues, social security contributions or a combination of both) to a later period when the population will become older,” it said.

It had earlier highlighted in the survey that enhanced social protection systems would directly improve income prospects of households and thus the sustainability of private consumption.

The complete digital copy of the survey can be obtained from the OECD’s website here.