16/2020 – A letter to the Finance Minister

Dear Datuk Seri Tengku Zafrul Aziz,

The business community is now confused with the new regulatory conditions imposed on them by your colleagues in the Cabinet in their attempts to control the spread of Covid-19.

Amid the scenes of power play among the politicians, we hope that you stay focused on the job at hand, which is to look after the livelihoods of the businesses that require government support and assistance to survive the next 12 months of a pandemic recession.

As an ex-banker who had managed businesses before, you are the best-placed minister to figure out the macro and micro needs of industries that have been badly affected by this pandemic.

The next 12 months will be the most crucial, as many SMEs fight for survival to stay afloat.

The most affected industries are tourism, retail and food and beverage (F&B). It is absolutely crucial that the government extend as much assistance to these industries as soon as possible. There are direct and indirect assistance that you can implement for the next 12 months.

I hope you will consider the following proposals.

> Indirect assistance – Business recovery was going along well for two to three months and then the new CMCO was implemented and consumer confidence shot to pieces again.

It looks like a stop-and-go kind of economic activity for these industries until a vaccine programme is fully implemented.

When revenue falls, operating expenditure has to be lowered accordingly. Most SMEs have reduced their employee count to the bare minimum and salary reductions have been implemented. Internal wastage has been reduced. Some owners have stopped taking salaries and their savings are being poured in to sustain salary payments for their employees.

> Exemption from EPF payments – I agree with your argument that it is not fair to exempt EPF contributions for workers as some companies are still doing well despite the pandemic.

My counter argument is that you should help out the companies that are not doing well. The tourism and retail/distribution segments of the economy are not doing well. It is a matter of life and death for these businesses. My counter argument comes with these facts.

Restaurants and retail outlets generally have a composition of staff cost at 25%-30% of sales. Rental cost will be 7%-15% of sales. If there is an exemption from EPF contributions, the business reduces 12% from their payroll cost, which will translate into a 3% to 5% reduction in operating expenditure. More importantly, much-needed cash flow requirement is reduced.

From past recession experience, companies not doing well tend to pay salaries (net of EPF, Socso, etc) first, banks and then suppliers. EPF payments are normally delayed. Businesses that collapse end up not paying EPF, Socso, etc.

From your experience as a banker, you know what it is like to take legal action against bankrupt companies. Recovery is like squeezing blood out of a stone.

In addition, the 11% contribution from employees is paid to them. Just imagine a salaried person earning a reduced pay of RM3,000 having an extra RM330 in their bank account. It might not be a big amount to you and I, but it does help them put food on the table, provide pocket money for their school children or pay the instalment for their motorcycle.

Assuming that these sectors (major employers) of the economy affect 25% of employment, then there will be an impact of reduced contribution of RM1bil a month to the EPF’s monthly collection of RM4bil. The EPF will not suffer and with still have sufficient reserves to handle withdrawals.

Just imagine businesses suffering in these sectors reducing their cash-flow requirements by RM522mil a month, and employees having an additional RM478mil a month to pay their debts or spend on essentials. The multiplier effect on consumption will be many times over.

As the world economic recovery is now patchy going from bad to worse, leading economists are now re-forecasting that the actual recovery will start from 2022 rather than next year.

As such, I would recommend that the exemption from paying EPF contributions for these sectors (tourism, retail, distribution, entertainment, etc) be effective for a 12-month period, hopefully till end-2021.

It will be good if you allow suffering businesses from other sectors to apply for this exemption. Let it be accompanied by revenue and cost forecast certified by accounting firms based on certain guidelines set by the MoF. Again, I would like to point out that this exercise does not cost the government a dime.

The next indirect assistance that can be extended by the government concerns rental. Assuming landlords give a 30% discount to their tenants, the total amount of discounts given will be considered as tax credit to be offset against taxable rental income for financial year 2020 (FY20) and FY21.

I am no tax expert but what I know is no rental income for landlords means no tax income for our Inland Revenue Board (IRB). Landlords who are not able to secure new tenants means no rental income to repay bank loans. Again, these claims will be verified by auditors and tax consultants.

Fair enough that our country does not have any reserves at all to help pay rental for businesses like the Singapore government, but we Malaysians are well known for our entrepreneurship and creativity in solving problems.

As property loans are a major component of our banking portfolio, this move will help to reduce systemic risk to our banking system.

> Direct assistance, Prihatin SME – Small and micro SMEs will need direct assistance from the government. I suggest setting up a Prihatin SME fund of RM1bil for direct grants to such businesses on the following conditions.

Small and micro SMEs with an annual turnover of less than RM500,000 should be given a RM5,000 grant. This grant is to be disbursed to companies, partnerships and sole proprietors who have submitted annual filings with the IRB or Registrar of Companies. Again this is to be verified by chartered accountants or audit firms,

The RM1bil fund will help 200,000 small and micro SMEs who are taxpayers to the government. Assuming an average of five employees per company, this sector would employ one million people.

The grant will be considered as other income and taxable if the company makes a profit.

The loan moratorium did help by pushing debt commitments to a later date, but it had no impact on lowering operating expenses. Politically, Prihatin Rakyat was a good move for a new government but it does not solve the unemployment problem and the loss of business revenue for the SMEs.

As a non political Minister with vast business experience, you are in the best position to help the SME community. I truly hope that our Prime Minister will retain you as the Minister of Finance in the next (imminent) cabinet reshuffle.

Comparing the current political struggle for power to Star Wars: Princess Leia (of the SME Resistance) said, “We are in our most desperate hour… Help me Obi Wan Zaf… you are our only hope.”

May the force be with you to do right.

Published: https://www.thestar.com.my/business/business-news/2020/10/24/a-letter-to-the-finance-minister

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