This article first appeared in The Edge Malaysia Weekly on August 23, 2021 - August 29, 2021

DATUK Seri Ismail Sabri Yaakob, Malaysia’s ninth prime minister — the country’s third prime minister since the conclusion of the 14th general election in May 2018 — and his choice for finance minister will be expected to roll out more Covid-19 related stimulus and an expansionary Budget 2022 while deftly balancing the country’s trillion-ringgit debt load.

With direct federal government debt alone (excluding other liabilities) reaching RM958.39 billion as at end-June, it is clear that parliament’s approval will need to be sought to raise the statutory debt ceiling from 60% of GDP and increase the ceiling for the special Covid-19 fund to allow more debt to be taken on to fund operating expenses.

Outgoing prime minister Tan Sri Muhyiddin Yassin had on Aug 13 voiced the intent to raise the ceiling for the Covid-19 fund to RM110 billion from RM65 billion — incidentally the RM45 billion increase corresponds with the size of stimulus that opposition lawmakers from the Democratic Action Party (DAP) had presented to the Ministry of Finance on July 17 when discussing the National Recovery Plan (NRP).

What needs further clarity is just how much Putrajaya would stretch existing fiscal and monetary rules as well as tap funds at government-linked institutions to help people and business recover from Covid-19 and shore up economic growth, currently projected at the slowest post-crisis rebound since the recession in 1985.

What we know is that direct federal government debt (excluding liabilities and committed lease payments) had increased by RM78.8 billion in the first half of this year to reach RM958.39 billion as at end-June while debt directly guaranteed by the federal government stood at RM300.4 billion (RM294.7 billion at end-2020).

According to the Ministry of Finance, that RM958.39 billion is 61.2% of GDP while statutory debt of RM890.7 billion (which excludes short-term treasury papers and foreign currency external debt) was 56.8% of GDP, below the 60% statutory limit.

At RM1.56 trillion, the denominator used to calculate these percentages to GDP, however, is bigger than the 2019 nominal GDP of RM1.51 trillion and does not seem to have taken into account the new official GDP growth forecast of 3% to 4% for 2021 (down from 6% to 7.5%), simple workings show.

If one were to use 2020’s nominal GDP of RM1.42 trillion as the denominator, the federal government’s direct debt of RM879.56 billion last year is 62.1% of GDP while the RM958.39 billion as at end-June 2021 would be 67.7% of GDP. A 4% year-on-year growth in the nominal GDP to RM1.47 trillion in 2021 would put the debt-to-GDP ratio at 65% as at end-June, our-back-of-the-envelope calculations show.

According to data released by the Ministry of Finance following the release of the second quarter GDP, RM18.4 billion had been used under the Covid-19 fund in the first half of 2021. That, together with the RM38 billion used in 2020, had brought the total spent under the Covid-19 fund to RM56.4 billion — leaving only RM8.6 billion headroom for the second half of 2021, less than the RM9.1 billion used in 1Q2021 and RM9.3 billion used in 2Q2021.

It is uncertain how much of the RM81.8 billion direct fiscal injection (RM55 billion in 2020) announced under the nine Covid-19-related stimulus and recovery plans have already been accounted for.

Former finance minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz had indicated the need to raise the 2021 fiscal deficit forecast from 6% of GDP, a revision from the 5.4% of GDP or RM84.8 billion that was pencilled in Budget 2021 before the announcement of the Permai, Pemerkasa, Pemerkasa+ and Pemulih stimulus packages totalling RM225 billion between Jan 18 and June 28 this year that requires a RM26.8 billion direct fiscal injection.

A 7% fiscal deficit works out to RM99 billion to RM109 billion, depending on which denominator is used. Every 1% of GDP is roughly RM14 billion to RM15 billion.

Debt service charges were already estimated at RM39 billion, or 16.5% of federal government revenue, under Budget 2021, which had not taken into account the additional stimulus spending.

There is certainly pressure on the federal government to expand its fiscal space, if revenue and expenditure numbers in the first half of 2021 are any indication.

Official numbers for the first half of 2021 show federal government revenue of RM106.4 billion coming in at 45% of the RM236.9 billion estimated in Budget 2021. Similarly, operating expenditure (excluding Covid-19 funds) was RM117.4 billion (50% of RM236.5 billion estimated) while net development expenditure was RM28 billion (41% of RM68.2 billion estimated).

In April, the government had already tapped RM5 billion from the National Trust Fund (KWAN) to pay for Covid-19 vaccines and vaccine-related expenses. That RM5 billion was from the RM9.1 billion generated from investments over the years and not the RM10.4 billion capital contributed by Petroliam Nasional Bhd (Petronas) into the country’s natural resource fund set up in 1988.

Besides asking Petronas for a special dividend, The Edge had previously written that the federal government could create more fiscal room by tapping “savings” at government-linked institutions created to support the country’s fiscal sustainability (‘Ways to expand fiscal space besides lifting the statutory debt ceiling’, Issue 1382, Aug 9). An example is Kumpulan Wang Persaraan (Diperbadankan) (KWAP), which reportedly has RM150 billion in assets under management, to help pay a bigger part of the government’s public pension obligations for this year and next year to free up fiscal space for other necessary spending.

Some observers also reckon that the federal government could also turn to the central bank for further assistance, including monetising some of its debt to expand fiscal space — talk that emerged last year when Bank Indonesia was tapped to directly buy government debt and help pay interest expenses for bonds issued by the Indonesian government. Bank Negara Malaysia governor Datuk Nor Shamsiah Yunus told The Edge last November that Malaysia sees no pressing need to employ unconventional monetary policy to support the government’s fiscal spending to battle the pandemic. It is understood that the bank’s stance has not changed.

It is worth noting, however, that there are already provisions in the Central Bank Act that allows it to legally help fund the budget deficit. Section 71 of the Central Bank Act states that Bank Negara “may extend temporary financing to the government on terms prevailing in the market in respect of temporary deficiencies of budget revenue” provided that the overdraft, so to speak, is repaid within three months of the end of the financial year and does not exceed 12.5% of the federal government’s expected revenue that year. Some amendments may be required should further flexibilities be required to bolster fiscal flexibility without compromising on the central bank’s independence. “There needs to be transparency and proper checks and balance [to allay concerns on abuses],” an observer notes.

Due to tight fiscal space in the face of both a health and economic crisis, it is clear that something has got to give to save both lives and livelihoods in the short term.

To be sure, debt will need to be repaid eventually, and savings that are used would need to be replenished if a country wants to have a strong buffer to cushion the impact of future crises.

While KWAP funds are not contributed by civil servants and are essentially government money, the annual public pension obligation that has been growing at an average of 7.4% a year in the past decade, to reach RM27.6 billion in 2021, means that KWAP would not be in danger of being emptied by withdrawals to cover annual public pension obligations only if the fund grows above RM500 billion and can generate at least 5% returns every year. This means that the funds “withdrawn” from KWAP, totalling at least RM14.5 billion since 2018 (including RM5 billion estimated for 2021) to help pay civil servants’ retirement charges, would need to be more than replenished once conditions permit for it to achieve its goal of sustainably taking over the public pension obligation. The need to be allowed to grow big enough also applies to KWAN as well as institutions like Khazanah Nasional Bhd, which is also tapped for dividends to help bolster federal government revenue, if they are ever to become sustainable and significant contributors to the federal budget annually, just as how about a fifth of Singapore’s annual budget comes from net investment returns contributions (NIRC).

While the fact that more businesses in states that are still under Phase 1 of the NRP have been allowed to reopen on Aug 20, and more than half of Malaysia’s adult population (37% of the total registered population) have received two doses of vaccines as of Aug 19, is encouraging, the battle is far from over.

To inspire confidence that recovery from Covid-19 is at hand, the new government would need to provide clarity on policy direction, including affirming dates for the tabling of the 12th Malaysia Plan (previously set for Sept 20) and Budget 2022 (previously set for Oct 29). A pre-budget statement, previously expected by end-August, would also set the tone for Budget 2022, which is still expected to focus on recovery, resilience and reform. It will also need to address questions over the timing for the reimplementation of the Goods and Services Tax (GST) as well as plans to replace blanket subsidies with targeted aid to enhance the government’s capacity to cast a wider social safety net and better fund the rise in healthcare spending as society ages.