Thursday 28 Mar 2024
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This article first appeared in Forum, The Edge Malaysia Weekly on February 13, 2023 - February 19, 2023

The recent announcement that Malaysia’s national debt broke RM1.5 trillion, of which RM300 billion were “commitments”, sent shivers up the finance sector’s spine. Indeed, the spectre of having to manage debt levels that high, at 80% of gross domestic product (GDP), as mentioned by the prime minister, at a time of a global economic slowdown and higher worldwide interest rates, plus the fact that Malaysia’s government revenue is widely expected to decline, adds to the worries of a national budget that is already nearly half-consumed by emoluments and pensions to civil servants, and a substantial 11.7% of it taken by expenses on national debt (per the 2020 national budget).

Chart 1 shows the growth of the national debt level over the past 10 years.

One is reminded of how the sixth and seventh prime ministers railed against this kind of debt accumulation in the past; national debt then was less than RM1 trillion. There are safeguards that nominally limit how much borrowing is allowed by the government. It is supposed to be at 65% of GDP (see Table 1).

It is no secret that Malaysia’s national budget, split into operating expenditure (opex) and development expenditure (devex), is funded principally by tax revenue, duties and borrowings. There is a critical fault in the structure of the national budget, though, that devex is funded in its entirety by borrowings, less any current surpluses (excess of revenue over opex) and other payments received that are applied against contemporary debt (Chart 2).

As Chart 2 shows, the difference between the amount of budgeted devex spending and the amount that must be borrowed to fund it is quite similar.

Happily, we find that the current surplus has been positive from 2011 to 2020 (see Table 2), lessening ever so slightly the amount that must be borrowed for the annual budget.

Nonetheless, the amount of devex-sourced borrowings in the national debt amount is quite substantial (see Chart 3).

All this, of course, means that the amount of debt that the country incurs just grows every budget year. Chart 3 is a 10-year cumulative chart where budget-sourced borrowing is concerned. If one stretches it back to the first year when such borrowing occurred, then the proportion of total debt would doubtlessly be larger.

Although the notion that devex should be totally borrowed started aeons ago, this practice is clearly dangerous at this point of time and unsustainable. It needs to end. Devex must be funded by a combination of tax revenue and a smaller portion of it by borrowings, just like any other country’s budget is.

The amount of national debt must be brought down as quickly as possible to a more comfortable level, back to the legal limit of 65% of GDP in any one year and payments due to debt in the annual budget must be limited to, say, arbitrarily, 8% of the national budget, for both interest and principal repayments.

Not taking any action thenceforth would certainly doom the country to becoming a banana republic in the future, something many external parties have warned us about. How close are we already? Goreng pisang, anyone?


Huzaime Hamid is chairman and CEO of Ingenium Advisors, Malaysia’s financial macroeconomic advisory

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