In their rationale for the downgrade, the World Bank cited the recent spike in Covid-19 infections that has raised concerns about the capacity of the health system, and the effects of the cycle of opening and closing the economy on households and firms.

Yeah Kim Leng, an economics professor at Sunway University, said the revision is “not surprising” given the imposition of a nationwide lockdown, necessitated by the ballooning of daily infections and failure of vaccinations to keep pace.

As the year goes on, he said, “the prolonged pandemic, more gradual recovery and uneven impact on various sectors suggest that more businesses and households will face various forms and severity of distress”.

“These include inadequate income to sustain business operations or household expenditure, inability to service debts, temporary or permanent business closures, bankruptcies, wage cuts and job layoffs,” he said.

All this will likely mean the government will need to continue offering stimulus packages to sustain the livelihoods of many Malaysians facing difficulties.

“The government will need to provide more relief aid and increase social and health spending, again pointing to the need for spending reprioritisation, budget recalibration and higher deficit spending,” he said.

Yeah said the government’s revenue would also likely be lower if growth was low, which could make it necessary for it to look at other forms of cash flow through asset monetisation or partnering with the private sector for financing initiatives.

Center for Market Education CEO Carmelo Ferlito said the World Bank’s downgrade may still be too optimistic, adding that he “cannot see GDP growing by more than 2% this year”.

He said prolonged lockdowns were not sustainable, and that reopening the economy while investing heavily in testing and tracing would be a more effective strategy to balance the need to protect lives but allow the economy to thrive.

“Any other initiative will be just too small a patch on a very big hole. It is not too late to reverse the country’s trajectory, but we need a total reversal in strategy,” he said.

Ferlito said that with the government itself admitting it was running out of fiscal space to make further large expenditures, future investments must be targeted at the healthcare system.

“The only place where it makes sense to invest money is in temporary hospitals, beds, equipment, ICUs and pharmaceutical research. These investments can be the necessary back-up for the mass testing activity and increased infections,” he said.