Malaysia raises statutory debt to 65% (good or bad?)

Written by: Averroes

(1.0) Introduction 

The government earlier in September, 2021 decided to raise statutory debt ceiling from 60 to 65% of the gross domestic product (GDP). This came when the Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz told that government would require the Cabinet's approval for the increment and subsequently tabled in Parliament. 

Similar to the United States of America, the Congressional Research Service states that, "the debt limit places a statutory constraint on the amount of money that Treasury may borrow to fund federal operations." Moreover, increasing the debt limit allows extra time to enact changes to adjust budgetary trends. 

To note, so far Malaysia has eight (8) stimulus and assistance packages to preserve the welfare of the rakyat and businesses, while emboldening the healthcare system, and palliate the dilapidating ill economy. 

Following the increase, there would not be any foreign currency borrowings, but instead focused on tapping into the local ringgit market. He mentioned that the country is targeting to reach 3.0% fiscal deficit compared to the predicted 6.5-7.0% of the GDP in 2021. The expected fiscal deficit in 2021 is similar to the one back in the 2008-2009 global financial crisis. 

Chief Economist to Bank Islam Malaysia Bhd, Afzanizam Abdul Rashid offered his views on the fiscal deficit that, the target would need to be pragmatic and credible. What is more important is that the target is achievable, while simultaneously convalescing the economy. 

Th author once wrote an article here, regarding Malaysia's RM1.2 trillion debt, but as of now, the government has not disclosed any latest updates on this matter, as far as the author is aware. 

(2.0) Pros and Cons

Pros:

The Finance Minister explained that, by raising the statutory debt limit, it would allow the government to have 'some fiscal wiggle rooms' to rejuvenate the Malaysian economy, whilst battling obstacles from the Covid-19 Pandemic. It was not defined in detail on what was meant by 'some fiscal wiggle rooms'

Rest assured, he reminded  that the country is still below the 60% statutory debt limit (at 58%), and the government is committed to allay struggles in businesses and the rakyat. The government concurred that the increase is only momentary, and that fiscal consolidation, guided upon the Medium-Term Fiscal Framework, reinforced with the gradual implementation of the Medium-Term Revenue Strategy to imbue the nation's revenue.

Despite the statutory debt limit increase, he added that to complement it, when the adult population reached 100% then there would be major overhauls in policies once our country transitions from a pandemic stage to endemic. This includes policies related to SOPs on the economy. 

Cons:

According to Putra Business School associate professor Ahmed Razman Abdul Latiff, he commented that when increasing the statutory debt limit, it should be viewed as the final alternative and is for a short-term solution. 

Quote-on-quote, he states that;

"It can never be a permanent feature for the government's fiscal strategy. More importantly, it is for the government to start managing its debt sustainably once the economy becomes more stable next year."

The Center for Market Education (CME) gave their observations that there would negative 'unintended consequences' if Malaysia were to allow the raise of statutory debt limit or impliedly borrow more money. Though, the Finance Minister did mention that we would not be borrowing foreign currency, rather domestic borrowings are preferred at RM181.15 billion. 

Firstly, the side-effects of borrowing would be inherited by future generations, not limited to money to be repaid, but results in a weaker currency and low job opportunities. 

Secondly, investors would lose confidence in investing into Malaysia, thus diminishes our credibility for private investments and job opportunities that it provides. The high demand of loanable funds could increase interest rates, which also hinders private investments. 

Rather than borrowing, CME proposed that we should quickly open the economy, locally and to international movements, introduce special fiscal programmes for micro-businesses and tax reforms.

(3.0) The law allowing statutory debt limit increase

Previously, Temporary Measures for Government Financing (Coronavirus Disease 2019 (COVID-19)) Act 2020 allowed the government to increase our statutory debt limit of 55% GDP to 60% as provided under section 3. This Act applied to the Loan (Local) Act 1959 and the Government Funding Act 1983 to increase their respective debt ceiling. 

Since we are to increase our debt limit from 60-65%, the government did say that they would table the proposal in Parliament, similar to the three laws above, the government would increase the statutory debt limit, with the following laws;

Financial Procedure Act 1957 [Act 61]

Treasury Bills (Local) Act 1946 [Act 188]

Loan (Local) Act 1959 [Act 637] - Malaysia Treasury Bills not exceeding RM10 billion and;

Government Funding Act 1983 [Act 275] 

External Loan Act 1963 [Act 403] - offshore borrowings not exceeding RM35 billion

Article 98(1)(b) of the Federal Constitution 

(4.0) Conclusion

To conclude, Malaysia is planning to increase our statutory debt limit from 60 to 65%, which means it allows our country to borrow more money. Previously, it was revealed that Malaysia's debt stood at a confounding figure of RM1.3 trillion. As of now, our debt limit is still below 60% which is at 58% debt-GDP. Both government and other stakeholders states that this measure is only temporary, as to rejuvenate our local economy for the people and businesses. 

Our country's fiscal deficit is expected to increase to 6.5 to 7.0% which means that, our country is making less income as compared to us making more spending. This is largely due to the pandemic, affecting our local industries, primarily the tourism sector. However, with our country almost reaching a 100% of total vaccination for adults, the government is planning to relax SOPs by opening up businesses to cover the statutory debt limit and introduce policies as well. 

(5.0) References;

    Ayisy Yusof.(September, 2021) Malaysia to raise statutory debt limit to 65pct from 60pct: Tengku Zafrul. Retrieved from, https://www.nst.com.my/business/2021/09/724010/malaysia-raise-statutory-debt-limit-65pct-60pct-tengku-zafrul

    Siti Radziah Hamzah. (September, 2021) Increasing the statutory debt limit in Malaysia's hour of need. Retrieved from, https://www.bernama.com/en/business/news.php?id=2004171

    Bernama. (September, 2021) Increasing the statutory debt limit in M’sia’s hour of need. Retrieved from, https://www.dailyexpress.com.my/news/178115/increasing-the-statutory-debt-limit-in-m-sia-s-hour-of-need/

    Sunbiz. (September, 2021) CME: Raising statutory debt limit not a good idea. Retrieved from,https://www.thesundaily.my/business/cme-raising-statutory-debt-limit-not-a-good-idea-KH8292158

    Belanjawan. (2020) Section 4: Debt Management. Retrieved from, https://belanjawan2021.treasury.gov.my/pdf/revenue/2021/section4.pdf

    Congressional Research Service. (2021) The Debt Limit. Retrieved from, https://sgp.fas.org/crs/misc/IF10292.pdf


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