National debt nearing danger level

Malaysia’s debt problem, compounded by the 1Malaysia Development Bhd (1MDB) financial scandal, is close to reaching a dangerous level.

(The Sun Daily) – The situation has been further aggravated by the economic fallout caused by the Covid-19 pandemic, and drastic measures must be taken to address the problem, according to economists.

Such measures could include cutting back on capital expenditure and raising taxes or introducing new ones, they told theSun.

According to Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz (pix), Malaysia’s debt now stands at 58% of gross domestic product (GDP), just 2% shy of the 60% debt ceiling.

The ceiling was raised from 55% last year as a temporary measure to counter the pandemic’s economic impact. On the other hand, if the debt-to-GDP ratio is based on 2020 rates, it has reached 62.2% (RM879.56 billion).

Zafrul said if liabilities are included, the debt accounts for a whopping 89.2%, of which 15% is in the form of guaranteed commitments as well as to finance unproductive legacy debts such as 1MDB loans.

Combining the debt and liabilities, the country is now sitting on a RM1.26 trillion deficit.

Sunway University professor of economics Dr Yeah Kim Leng said the 1MDB scandal was one of the largest contributors to the nation’s debt problem. It is understood that the country still has RM31.1 billion of 1MDB debts to settle.

Yeah said other debts were mostly incurred for “productive activities”.

“The rise in total debt and liabilities to over 80% signals increased fiscal vulnerabilities and debt risks in the years ahead.”

On the positive side, the
debt-financed Covid relief and stimulus spending have mitigated the severity of the recession, he added.

He said the crisis is far from over, considering that the sizeable increase in debts is related to massive losses as well as wasteful and unproductive investments related to 1MDB, SRC International and other
loss-incurring government ventures and enterprises.

Consequently, the burden of servicing the debt is now inching closer to 20% of government spending.

Yeah said the implication is that the government will reconsider reintroducing the Goods and Services Tax and, when the economy recovers as expected next year, raise income tax for individuals in the high-income bracket as well as businesses.

Another economist, Tan Sri Ramon Navaratnam, said the government will have to drastically cut back on capital expenditure.

Ramon, who is chairman of the Centre for Public Policy Studies at the Asian Strategic and Leadership Institute, said provisions in the New Economic Policy should also be relaxed to encourage private investment.

He pointed out that the 1MDB scandal has destroyed public and international confidence in Malaysia.

“Money politics must also be addressed or else inflation and a collapse of the economy will come sooner than expected.”

Economist Prof Dr Jomo Kwame Sundaram said as the debt ceiling had been breached, it is necessary to borrow more to finance relief efforts.