Towards a bankrupt Malaysia?

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Subramaniam Pillay looks at the worrying rising trend of federal government debt and wonders if Malaysia will go bankrupt. At our current rate of borrowing, it won’t take long before we become another Greece.

Figure 1: Outstanding debt of the Malaysian federal government - Source: Bank Negara Malaysia

That the budget that was tabled in the Dewan Rakyat on 7 October 2011 was an election budget is very clear. There have been numerous detailed comments on the budget by politicians and analysts (since then). In this article, we are just going to focus on one of the long term issues from the budget. It concerns the increasing debt burden of the federal government.

How big is the government debt?

The accompanying chart shows the federal government’s outstanding debt at the end of the successive years. As can be seen, the debt has been increasing since 1970. From the detailed data available form Bank Negara’s website, in 1991, it reached a temporary peak of RM99bn and then decreased to RM90bn by 1997. From then, it has been virtually doubling every five years. By the end of 2011, we can expect the figure to reach RM450bn.

In other words, since the Asian crisis of 1998, we have been growing by borrowing heavily. In the 10 years since 1999, our debt has quadrupled. If we continue on this path, by 2020, our national debt will reach RM1.6 trillion. If our population is 40 million then, each Malaysian will have a debt burden of more than RM40000 and this does not include our own personal borrowing. Assuming an interest rate of 5 per cent, paying the interest alone will cost the taxpayers RM80bn per year!

The government has been reassuring us by saying that our debt is manageable. It argues that the debt at the end of 2012 will be only 54 per cent of our GDP, which is relatively low compared to the current crisis nations like Greece and Italy. (GDP is a measure of the total value of all the goods and services produced in a year in the country.) While it may not reach the levels of Greece by 2012, at our current rate of borrowing it won’t take long before we become another Greece. Just to put this in perspective, our giant neighbour, Indonesia has a debt of only 23 per cent of GDP! Singapore has no debts.

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The federal government debt alone does not tell the full story. Many government-owned enterprises also have borrowings. If these figures are included, then the total debt would be much higher. It is difficult to get the complete data on these borrowings.

Why has the debt been growing so rapidly?

Since the 1998 Asian Financial Crisis, the government expenditure has consistently exceeded its revenue by a considerable margin. For example, in 2011 the spending is estimated to be RM229bn while the revenue will be only RM183bn. So the shortfall of RM46bn has to be met by borrowing.

Of course it is not expected that the government balances its books every year. Prudent economic management requires the government to balance its budget over an entire business cycle. So we can have deficits during bad years and budget surpluses during good years. Since 1998, we have had at least two business cycles; yet every year without fail we have had budget deficits!

This is evidence of fiscal irresponsibility. Here is a government which does not know the meaning of saving for a rainy day. A good example is the situation in the current year.

Table 1 shows that the actual revenue for 2011 is going to be higher than the budgeted figure by RM17.6bn. This is mainly due to the increased income from the rise in oil prices in 2011. The federal government relies heavily on different forms of revenues (corporate tax, petroleum profit tax, royalties, Petronas dividends etc.) that originate from the production and export of oil and gas in Malaysia. The proportion can be 30-40 per cent of the total government revenue. Thus a rise in the world price of oil translates directly into higher income for the government. So essentially, we had a windfall income.

What would a prudent government do with this windfall? It would reduce the planned borrowing. But that’s not our BN government’s way of financial management. Uncannily, the increase in the actual spending is going to be the same amount of RM17.6bn! When asked about this at one of the post-budget forums, a Treasury official explained that it was mainly due to higher spending on salaries and increased subsidy for petrol and diesel. We can understand the increased subsidy but why the higher salary? Did we just increase the size of the bureaucracy? This is a clear case of a government which has no control on its spending.

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Why is the federal government spending more than it earns?

There are a few reasons for this consistent imbalance. A major factor is the large leakage in government spending due to corruption and wasteful spending that has been highlighted by the Auditor General year after year in his annual reports. It has been estimated that we can easily save RM25-30bn without changing any of the deliverables if we can get rid of corruption and cronyism. Transparent practices like open tendering can cut down the cost of much of the procurement and project spending.

In addition, spending can be reduced on military procurements. If a fraction of the money that is saved here can be used to improve the quality of our diplomats in Wisma Putra, we can avert any potential threat to national security. We can also cut down on the excessive use of foreign and local consultants by the government for work that ought to be done by the civil service. Reduction of subsidies to the operators of privatised projects such as the independent power producers and toll road operators will also narrow the deficit.

Another reason for the deficit is the under collection of revenues including income tax and customs duties. Better compliance to and enforcement of existing laws and provisions can increase government revenue. It is common knowledge that many business operators evade paying their full share of income tax by under declaring their true income. Similarly, evasion of customs duties is rampant due to corruption in the Customs department.

What will happen if the debt keeps increasing at the same rate in future?

As the debt gets larger, interest payments will take an increasing share of total government spending. Table 2 shows this clearly.

If the government continues with the trend of the past 13 years, by 2020 we may be spending about 18-25 per cent of the operating budget on interest payments. In fact as the borrowing increases, the government will be forced to pay higher interest rates to borrow more because its credit rating will be downgraded. (For example, in Europe, currently the German government can borrow at around 2 per cent per annum while the Italian government has to pay about 7 per cent for its loans.) So the interest cost will rise exponentially.

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This will leave much less money for other social and economic spending. It will also widen income inequality as the government will have to cut spending on many public goods like education, health care and public transport. At the same time, the interest it pays goes mainly to foreigners and the better off segment of the population.

What is even more worrying is that given our large revenue from petroleum-related sources, we should not really be running deficits. It is only a matter of time before we run out of oil and gas and thus become net importers of these two commodities. When that happens, our budget situation may become very critical.

A prudent Malaysian government would have saved a sizeable portion of the petroleum revenue from the past few decades as a fund for rainy days. Many other countries have done this. Norway is a prime example. Abu Dhabi is another country which has a huge sovereign wealth fund set up from its petroleum windfall. Botswana in southern Africa saved its windfall earnings from the discovery of diamonds and invested it abroad for its long-term well being.

Unfortunately, we are governed by a spendthrift government which is beset with problems of corruption and incompetency. Unless the situation changes, we are leaving a huge burden to our children and grandchildren. They are not going to forgive us if we do not try to change the situation.

Dr Subramaniam Pillay, an Aliran exco member, is an adjunct associate professor with the School of Business at the University of Nottingham Malaysia.

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rushdi ahmad
rushdi ahmad
5 Apr 2017 2.55am

Another [offensive words deleted] with their cherry picks fact so to make gov looks bad, interestingly our international credit rating still rated as A+ neither IMF nor World Bank say anything about it so does Asian Development Bank as Feb 2017, but [offensive words deleted] just swallowed everything not point arguing these idiots because they believe the world will end soon..

get your facts right
get your facts right
9 Apr 2013 12.49am

Some facts from CIA website:
Dr Subramaniam said Singapore has NO DEBT. Bull… Singapore’s Debt is 111.4% of GDP (2012 est.). Singapore ranked number 13 in Public Debt % of GDP. Malaysia ranked 54. Indonesia ranked 121.Since U guys like to compare to Spore, our GDP growth in 2012 is 4.5% whereas Spore is only 1.3%.

Dr Subramaniam only picks on comparison areas on which Malaysia looks bad. If you want to compare to Indonesia, then why don’t you compare their GDP percapita or unemployment rate. Our GDP percapita is $16,900 whereas Indonesia only $5,000. Our unemployment rate is just 3.2% whereas Indonesia is 6.1%. Our population below poverty line is 3.8% whereas Indonesia is 11.7%. When it comes to external debt, we are ranked 47 highest. Countries like EU, US, UK, Japan, Canada, Brazil, HK, China, South Korea, India, Indonesia, UAE, Taiwan, Thailand, etc have higher external debts than us.

Hang Tua
Hang Tua
26 Jan 2012 6.04pm

You can be sure ordinary Malaysian citizens (including Bumis) will be made to pay for the debt caused by siphioning of funds to corrupt politicians and cronies … Many of the latter own condos in NY or Mayfair or just across the causeway. BTW, it is symptomatic of the stupidity of the supporters of this incumbent regime to argue that coz many countries have deficits, it’s then OK. It’s like pointing to others in hospital and remarking that coz many are sick, it’s OK to be sick! IT’S how sick you are and why you are sick, dumbo! A little bit of dcifit is tolerable, and a deficit spending in order to grow is justified. But an unsustainable level of deficit and deficit caused by siphoning of funds into unproductive causes spells chaplak! Wake up!

Isa Rahim
Isa Rahim
24 Jan 2012 1.52pm

Interesting that the short period during the mid 90s when federal debts were reducing coincides with Anwar’s period as finance minister.

charlie chan
23 Jan 2012 1.45pm

did this article appeared in the MSM- NST , star, BEITA HARIAN or UTUSAN?? why a blackout??, is this not the truth as the mismanagement of the economy continues?? 407 billion in national debts??no new revenue_ any layman can tell you – bankruptcy is on the way> is change not possible?? the weather is also changing here- dry n hot n wet again>> from winter to summer++?? lets pursue change as it is always refreshing??can change happen in 2012

charlie chan
13 Jan 2012 8.51pm

it was reported malaysia had a 12 years running deficit budget. it means we are spending more than we earned.its like spending RM 2 billion whey your income is RM 1 billion. so you borrow RM 1 billion. an economist said at the rate of spending n no new income ,our nation will be BANKRUPT by 2019?? our nation debt is now 407 billions?? how to repay?? follow GREECE to bankruptcy soon?? is this a joke?? we r voted 4th most corrupt nation?? another JOKE???

Abdul
Abdul
1 Jan 2012 4.44pm

We need not be alarmed by this bloated statistic, a great number of countries have debts, including rich countries like USA. I think Malaysia can handle its debt problems and all you people stop worrying the nation. The opposition as always like to scare the nation as if they can do wonders if they are in office. States under the opposition always have deficit budgets, how can they govern our country.

len
len
28 Dec 2011 2.50am

Its very sad to learn that msia is 46 years behind spore in terms of managing its Human resources and national policies. Simply hope that msia could catch up and not trail spore too far back. Good luck.

Richard
Richard
27 Dec 2011 7.41pm

Perhaps this is why UMNO is so dedicated to convict Anwar and remain in Government, because a change of Government will expose all their corrupt dealings since independence.
I only hope if there is a change of government at the next election, whoever wins has the courage to change the systems to get the country back on its feet by training locals regardless of racial origin and remove the dependence of foreign workers as well as change the education system to allow all malaysians to participate in lifting the economy, not just a select few.

Isma
28 Dec 2011 11.05am
Reply to  Richard

Richard, not just convicting Anwar to save themselves, they also convict the rakyat who choose to bypass their biased communication channels and take to the streets to voice out our genuine concerns. They also silence the opposition whenever it suits them by shutting them out of the main stream media. Now they are apparently but suspiciously implementing Bersih’s demands for a clean election but the rakyat really have no way of knowing what tricks they will play to frustrate our aspirations. In the meantime the looting goes on…

najib manaukau
27 Dec 2011 9.53am

No doubt Malaysia is heading in the right diction, for a change, to go into bankruptcy for sure. If not for the black gold it found, Malaysia would have gone there some time ago. Remember the black gold will last only for a limited time, just like in Indonesia some years ago, from an oil exporting country to now now an oil importing country. It is now not even a member of OPEC, how sad. Plus at the rate the 90% tax paying non Malay professional are immigrating. What is going to happen to Malaysia and who are going to make up the loss of taxes of these professionals ? Where is the money coming from just to pay for the 1.2 million civil servants ? Just remember they are so used to be on wheelchairs and tongkats and will unable to look after themselves or unable to immigrate, just to feed themselves or their families. The only sure way is to nationalize the assets of the non Malays, just the way Burma did more than 40 years ago. And what has happened to Burma since… Read more »