Multiplier effect of RM2.6 billion in economic stimulus

Borneo Post

2 days ago

Do our part, spend the RM100 wisely, and help to stimulate the economy. Rotarians purchasing essential items to be donated to a rural school hostel.
In a move aimed at stimulating domestic consumption and offering some financial relief to the rakyat, Prime Minister Datuk Seri Anwar Ibrahim recently unveiled a nationwide initiative: every Malaysian aged 18 and above will receive RM100. While the announcement inevitably carries political undertones, that is a discussion for another day. To benefit from the initiative, recipients must spend the RM100 between 31 August and 31 December 2025, using their MyKad to make transactions.
After the Prime Minister's announcement, some quarters reacted with skepticism, scoffing, 'Just RM100? That's hardly enough to make a real difference.'
While RM100 per person may appear modest, the collective impact of this move is anything but small. With an estimated 26 million Malaysians eligible for this benefit, the total government spending for this initiative could amount to RM2.6 billion. But the story does not end there. When we take into account the concept of the economic multiplier effect, the overall impact on the Malaysian economy could be far greater.
To understand this impact better, let us first explore the concept of the economic multiplier effect in layman's terms. Simply put, when money is injected into an economy, it does not just benefit the first person who receives it. That person, in turn, spends part of it, which becomes income for someone else.
That second person then spends part of the income, passing it on to a third, and so the cycle continues.
Each round of spending becomes slightly smaller than the last, but altogether, they add up to a much larger total economic impact than the original amount spent.
This chain reaction is measured by what economists call the multiplier, which depends largely on a factor known as the Marginal Propensity to Consume (MPC). The MPC is a number between 0 and 1 that reflects the amount of every additional Ringgit of income a person is likely to spend rather than save. For example, if a person has an MPC of 0.80, it means the person is likely to spend 80 sen out of every additional Ringgit earned. The remaining 20 sen is either saved or used to pay off debts. The higher the MPC, the more powerful the multiplier effect will be.
In the Malaysian context, research indicates that the MPC varies significantly across income groups. Low-income households generally exhibit a high MPC, sometimes reaching 0.81, as they must spend most of their earnings on essential items such as food, rent, transportation and utilities. In contrast, high-income households tend to exhibit a higher capacity to save. When crafting policies to stimulate economic activity, governments often target groups with higher MPCs, as their spending is more likely to generate a stronger and more immediate multiplier effect by circulating rapidly and repeatedly within the economy.
The multiplier effect formula calculates the total increase in economic activity resulting from an initial injection of spending. The formula is 1 / 1 – MPC, where MPC is the Marginal Propensity to Consume.
If we assume an MPC of 0.81, which is a reasonable estimate for the lower and middle-income groups in Malaysia, the multiplier becomes:
1 / 1 – 0.81 = 1 / 0.19 = 5.26
This calculation means that for every RM1 the government injects into the economy, the total economic activity generated could be as much as RM5.26. Applying this to the RM2.6 billion initiative, the total impact on the Malaysian economy could reach approximately RM13.7 billion.
This kind of impact is especially significant during periods of economic uncertainty, rising living costs or when domestic demand requires a boost. For many small businesses and vendors, even a modest increase in consumer spending can make the difference between staying afloat and shutting down. By requiring the RM100 to be spent, rather than saved, and within a defined timeframe, the government is promoting a rapid cycle of consumption. This measure carries the potential to revitalise key sectors such as retail, food and beverage, transportation and services, industries largely driven by micro, small and medium enterprises (MSMEs).
Another strategic feature of this policy is the use of MyKad as the mechanism for spending. This creates an efficient, transparent and traceable way of ensuring the funds are used as intended. It also allows policymakers to collect useful data on consumption patterns, which can be used to guide future economic planning. The requirement that the RM100 be spent within a four-month period ensures that the money enters the economy quickly, amplifying its short-term impact.
Beyond the numbers, there are social and psychological benefits to this initiative. At a time when many Malaysians are grappling with economic pressure, the gesture of direct financial support can help restore confidence and morale. It signals that the government is attentive to the needs of the rakyat and willing to take action to support them. This reassurance, in turn, can increase consumer confidence, which is an important driver of economic activity. When people feel more secure about their financial future, they are more likely to spend, which further fuels the multiplier effect.
However, the effectiveness of this RM2.6 billion stimulus also depends on several key factors. Firstly, it is important that the money is spent primarily on goods and services produced within Malaysia. If a significant portion is spent on imported products, the multiplier effect will 'leak' out of the economy, benefitting foreign producers instead. Secondly, the initiative should ideally be complemented by other policies that support local businesses, such as training, grants, subsidies or tax reliefs to enable them to meet the increased demand. Thirdly, attention must be paid to inflationary pressures. A sudden surge in demand, if not matched by supply, could lead to price increases that erode the purchasing power of consumers.
An equally important component in the success of this initiative lies in the role of the rakyat. The effectiveness of the multiplier effect relies on their willingness to actively participate in the programme. The rakyat should be mindful to spend the RM100 in ways that support local businesses and essential services, rather than on imported or non-productive items. By choosing to buy from neighbourhood shops, local markets and Malaysian-owned enterprises, consumers can help ensure that the money remains within the domestic economy for as long as possible. Moreover, responsible and purposeful spending on food, school supplies, daily essentials or healthcare can contribute to both personal well-being and the broader national interest. The collective participation of millions of Malaysians in this initiative can significantly magnify its economic impact. Thus, the rakyat are not just recipients of financial aid, but active agents in revitalising the economy.
The multiplier effect remains a powerful concept in economic planning. It tells us that the real value of government spending is not just in the initial amount disbursed, but in the way that money travels through the economy, creating layers of benefit as it goes. In this case, RM2.6 billion is not just a financial injection; it is a catalyst for RM13.7 billion worth of economic activity, livelihoods sustained and hopes renewed.
While RM100 per person may seem insignificant on the surface, the strategic design and targetted timing of this initiative give it the potential to significantly uplift the Malaysian economy. By tapping into the high MPC of the population, especially among the lower-income groups, the government is leveraging a tried-and-tested economic principle to maximise impact. If well-executed, this policy will not only stimulate spending but also support local businesses, safeguard jobs and strengthen consumer confidence. It serves as a timely reminder that in economics, small actions when multiplied wisely, can lead to powerful results.
Let us support this government initiative with a broader perspective. RM100 may seem little in terms of personal financial impact to high income earners, but its true value lies in the collective economic ripple it can create. When viewed on a national scale, this contribution carries the potential to stimulate substantial economic activity and generate meaningful income across various sectors. By participating in this effort, we are not merely spending, we are playing an active role in revitalising our economy and supporting fellow Malaysians whose livelihoods depend on it
Footnote
Dr Richard A. Gontusan is a Human Resource Skills Training and Investment Consultant. He earned a Master of Arts Degree in Economics from the Southern Illinois University at Carbondale, USA, and has lectured in Economics at the tertiary level. His views expressed in the article are not necessarily the views of The Borneo Post.