TWO ECONOMISTS have cautioned the Government against taking debt creation lightly, as Malaysia inches closer to its 65% gross domestic product (GDP) debt ceiling.
They also advised the Government not to increase the country’s debt ceiling, following recent reports of Malaysia’s debts standing at RM1.045 tril or 63.8% of the GDP as of June.
As stated in the Temporary Measures for Government Financing (Coronavirus Disease 2019) (Amendment) Act 2021, the country’s statutory debt limit should not exceed 65% of its GDP.
Last Thursday (July 21), the Finance Ministry said the Federal Government’s debt service payment stood at RM43.1 bil or 18.4% of the Government’s revenue.
Centre for Market Education chief executive officer Dr Carmelo Ferlito said debt creation undermines long-term growth opportunities and creates inflation, which is already on the rise globally.
“A higher debt is a symptom of the Government not being able to sustain its expenses with its tax and non-tax revenues,” Ferlito told FocusM.
“In the long run, a higher debt means a lower inability to handle emergencies and fewer development opportunities as all Government resources have been eaten up by current expenditures and higher inflation,” he added.
Institute for Democracy and Economic Affairs (IDEAS) research director Dr Juita Mohamad said a higher debt-to-GDP ratio would indicate a country is less likely to pay back its debt.
“This will lead to a higher risk of default, which, in turn, may then lead to negative impacts on the domestic financial system and the region, depending on the economy itself,” she said.
“Give the wrong signal”
Increasing the country’s debt ceiling, on the other hand, would indicate to the market that Malaysia is “unreliable” and “simply increases its limit” in order to handle debt.
“It would give the signal that the Government is keen to undermine growth prospects and accepts inflation,” said Ferlito.
Juita said it can be difficult to lower the debt-to-GDP ratio during times of crisis, as the Government would want to increase borrowing to encourage growth, and boost demand and employment.
However, she cautioned against doing this, citing a World Bank study which found that countries with a long-term debt-to-GDP ratio higher than 77% experienced significant slowdowns in economic growth.
“The study found that this pattern is more pronounced in emerging countries, whereby even with a lower threshold, the negative impact it would have on growth is bigger,” she added.
In order to better manage the country’s public debt, Ferlito said a few things are necessary.
“First and foremost, avoid policies that do not bring any benefit at all but which are extremely costly – like lockdowns.“Second, restructure the public sector. Keep current expenditures under control, which means, in particular, the costs of the public administration, civil servants and so on.
“Third, restructure the tax system and extend the tax base to simplify the system and enforce better and higher collection,” he said.
Juita, meanwhile, said Bank Negara Malaysia (BNM) can promote growth by lowering interest rates.
“In theory, to decrease the debt-to-GDP ratio, higher economic growth can increase the GDP proportion of the equation, and this will lead to lower debt-GDP percentage in general.
“Alternatively, other sources of revenue for the Government can be explored as a way to pay off debt in the medium to long term,” she said. – July 27, 2022
