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 CPI Introduction

economy-ringgitThis is the second part of a three-part CPI series on Malaysian debt. The first part, entitled, 'Investigate Malaysia's debts now' , surveyed the overall debt situation.

This part examines the trend in government debt. The upcoming part, Malaysia's debt: the misleading debt-to-GDP ratio will concern Malaysia's total debt.

Statistics reveal that in the last 15 years, the Malaysian government's debt increased at an unprecedented rate.

The graph below shows the statistics for the government's combined domestic and foreign debts from 1991 till the present. Forecasts are provided up to the year 2017.


The figure shows the government's borrowings from the savings of domestic citizens and from foreign creditors.

Here we ignore private debt, even though it adds to the government's debt burden, because a portion of private debt is publicly guaranteed. We also ignore other unrevealed debts.

What the statistics are saying

During the 1990s, the reported debt level was mostly flat. It declined slightly towards the end of the decade. At the close of 1991 it was RM99 billion, and by the end of 1996 it was close to 91 billion.

After 1997, the government's debt began to steadily climb until 2007. In those 10 years, the debt level rose from RM91billion to RM274 billion. This is an increase of RM183 billion, or an annual average addition of debt of RM18.3 billion.

From 2008 onwards, the borrowings escalated exponentially.

In 2008 alone, an extra RM43 billion of debt was amassed. From RM274 billion at the start of that year, the debt level rose to about RM502 billion by the end of 2012 — an increase of RM228 billion in five years. The average increase in debt in this period was RM45.6 billion per year.

The IMF forecast the debt level for the years 2013 to 2017. The annual increase in debt is predicted to be higher, at a yearly RM55.4 billion. The projected debt level for 2017 is RM779 billion.

This assumes that there is still plenty of domestic funds available to carry the borrowing up to that level (the lion's share of government debt is, after all, domestic debt).

If not, debt would have to be secured from external sources.

The assumption is also that the government will continue to borrow. This is likely to be true. As we have seen, the trend suggests that the government's appetite for debt has been growing, not abating.

The annual increases in debt are substantial sums: a single year's borrowing can dwarf a decade's worth of inward foreign direct investment.

There has been no sign of the debt accumulation reducing or levelling out since the East Asian economic crisis of 1997.

Large government deficits were first incurred in the aftermath of this crisis. Then-prime minister Mahathir Mohamad justified this as part of government spending in commercial enterprises to stimulate the economy.

In reality, the loan proceeds were allegedly used for questionable purposes, such as to fund large-scale projects awarded to crony capitalists and to bail out their failing companies.

The federal government's borrowing shifted into higher gear from 2008, the year the Barisan National coalition lost its two-thirds parliamentary majority.

The deficit expenditures have been justified as a short-term tool. But they have continued for almost a decade and a half; they have become a permanent feature of the government’s financial policy.

The government's financial imprudence is therefore a primary cause of the country's indebtedness.

What this means for the average citizen

It is pertinent to ask whether at this rate Malaysia will attain in 2020 the so-called high-income status envisioned by the New Economic Model.

In the graph, we can see that the government's debt could come close to RM1 trillion by that year.

The actual debt level might, of course, fall well short of that.

Even so, the strain of the debt load on the people is likely to be significant.

Consider the amount of interest payable every year for the current debt of RM502 billion, or for RM779 billion in 2017. Information on this needs to be disclosed and put into the public realm.

Undertaking debt on this scale is unsustainable for a country of our size and economic potential. The World Bank has said that the Malaysian economy is likely caught in a 'middle-income trap'. Economic growth in the years ahead is projected to be slower. Other contributing factors include Malaysia's wide income and wealth disparities.

When we are compelled to push our land and labour resources to new limits to produce economic growth in the attempt to surmount large debts, there will be damaging social and environmental consequences. We will have to rapidly liquidate our oil and other resources at the expense of the wellbeing of future generations.

The average citizen could be taxed more.

To free up cash to service debt, there could be cost-cutting in the provision of public services, such as healthcare. This might already be happening; recently there were shortages of medicines and blood tests in the public hospitals and health clinics. Workers might also face longer working hours for the same or lower income.

A more devious method may also have to be deployed to deal with domestic debt.

This is when the borrowing government increases money supply by printing money to devalue the debt. The lending citizens lose out. Inflation speeds up and the currency will weaken.

In summary, a 'new normal' of a lower standard of living is probable, given:

(i) the increasing scale of government debt and the repayments required for these, and

(ii) the country's comparatively limited earning potential, bearing in mind the 'false' economic growth being attained by irresponsibly depleting natural resources, polluting the land and squeezing greater 'productivity' out of the workforce.

Tackling debt ought to be a major subject of political discourse in Malaysia.