Tracking and tackling Malaysia’s national debt

Has government debt crossed the RM1 trillion threshold? This article examines the facts and definitions, and suggests actions to curb the national debt, which is now at dizzying high and unhealthy levels.

ANNOUNCEMENTS in recent days by Prime Minister Tun Dr Mahathir Mohamad and Finance Minister Lim Guan Eng that Malaysia’s national debt has reached RM1 trillion have stirred a lot of public interest.

Is this figure correct? If so, is it too large, and what can be done to control or reduce it?

A debate has arisen over the one trillion figure. This is understandable because the federal government’s debt was RM686.8bil at the end of 2017, according to Bank Negara data.

This was also 50.8% of GDP, an important figure because the rule is that federal debt should not exceed 55% of GDP.

However, if a broader view is taken on what constitutes government debt, the overall national debt situation is much more serious. The RM1 trillion threshold has almost certainly been crossed, and the debt-to-GDP ratio is about 68%.

The main reason is that the federal government also stands as guarantor for debts contracted by many government-linked companies and entities. If they are unable to service their loans, the Government is legally obliged to step in and pay, as the 1MDB case has painfully shown.

Thus, government-guaranteed loans should be added to direct government loans. And the outstanding amount of the loans of both should be counted as federal government debt.

At the end of 2017, the total government-guaranteed debt was RM238bil. If this is added to the RM687bil of direct debt, the total federal government debt was RM925bil as at Dec 31, 2017. This was 68% of the 2017 GDP of RM1,352bil. This exceeds the 55% limit, if the broader definition of federal debt is taken.

From January to May, the national debt has further increased. Latest data from Bank Negara show the direct federal government debt rose to RM705bil at end-March 2018, so the latest publicly-known figure for federal debt (direct and guaranteed) is at least RM943bil (without counting the increase since December of government-guaranteed debt).

On top of this are other new direct or guaranteed loans received or contracted in April-May 2018.

Moreover, there might be outstanding debt that the federal government has that it may not even have been aware of. Prime examples are the billion-ringgits of loans taken by 1MDB and its related companies, the exact nature and full status of which are not known and may be revealed only after an audit.

If we add on the increase in government-guaranteed debt since December 2017, the new direct debt since March, and also the debts that have hitherto been unknown and uncounted, the total federal government debt is almost certain to have reached or exceeded RM1 trillion.

Which institutions are included in debts guaranteed by the Government? Not much is publicly known. However, in an answer to a parliamentary question, the Finance Ministry in November 2017 stated that guaranteed loans were given to four statutory bodies and 26 companies under the Ministry of Finance Inc. Their names were not given.

Since the debts of state governments do not seem to be included in the list of federal-guaranteed debt, the total debt of the government as a whole (federal plus state governments) would be higher than if only the federal government debt is counted. The Auditor General’s Report of 2016 revealed that state governments’ arrears in debt repayment to the federal government totalled RM4.23bil in 2016.

Should the narrower or broader definition of government debt be used? It depends. If one wants to know the extent of legal liability of the federal government to service and repay its loans, then it is useful to consider the broad definition of government debt.

If there is an exercise to ensure the federal government is able to service its own debt and that it does not spend too much on debt servicing at the expense of allocations for health, education and other sectors, the narrower definition could be more useful. However, as shown in the 1MDB case, government-guaranteed debt can also lead to large federal debt servicing.

Another pertinent issue is that when the 55% limit rule was made, the definition probably was meant to cover only direct federal debt. It may be preferable to retain this definition in relation to the rule, to enable continuity and comparability, while also to set targets and policies to reduce the broadly-defined government debt.

What needs to be done? For a start, the rapid growth of both components of the government debt should be urgently reversed.

At the end of 2005, federal government debt was RM229bil, rising to RM407bil in 2010. From end-2011 to end-2017, it jumped from RM456bil to RM687bil, while in the same period government-guaranteed debt jumped even faster from RM117bil to RM238bil. Thus, during 2011-2017, the total debt (direct and guaranteed) rose from RM573bil to RM935bil, a big increase of 63% in just six years.

There is a case for increasing government loans in certain circumstances, such as to offset an economic recession, cope with a natural disaster or fund projects that can yield returns to repay the loan cost. However, a large part of the recent debt increase seem to have funded projects and expenses of questionable economic viability or social value.

A high increase in debt means the Government has to set aside a larger and larger share of its budget to repay the loans. Debt servicing (payment of interest and repayment of loan) rose from RM6.4bil in 1997 to RM28.9bil in 2017, according to an article in The Edge (Jan 6, 2018).

It adds that in 2018, RM30.9bil is projected to be spent on debt servicing, equivalent to 13% of government revenue, or 96% of the RM32bil personal income tax or 71% of the then expected RM44bil GST collection.

Two examples show the adverse consequences of inappropriate loans. In the infamous 1MDB case, the company accumulated RM43bil in loans in just five years (20102014); by October 2015 its outstanding debt was RM55bil, according to the declassified Auditor-General’s Report.

It estimates that 1MDB will need to pay at least RM42.6bil to service its loans between November 2015 and May 2039 (assuming no new loans after November 2015), of which RM12.7bil is repayment of principal and RM29.6bil is interest payment.

Worse news: RM20.3bil of the 1MDB debt is government-guaranteed, which means tax payers’ money will have to be forked out, if 1MDB and its companies cannot pay up.

In the case of the East Coast Rail Link (ECRL), the original cost estimate was RM30bil but the eventual award given to the Chinese company CCCC was RM55bil, with China’s Exim Bank financing 85% and the Government 15%. Another RM10.5bil was expected to be added to the cost after the elections, jacking up the project cost to RM65.5bil, according to a report in The Star (May 19, 2018). Already, RM13bil of loans have been drawn down.

The Star article exposed how the project is mired in controversies, including why the cost escalated to such a high level and rate (ringgit per kilometre); the economic viability of the project (ECRL would have to carry 60 million tonnes of freight yearly to break even, when KTM nationally carries only 6 million tonnes annually); and speculation that some of the RM13bil of loans already disbursed has been diverted to service 1MDB debts.

These cases show how inappropriate use of loans can cause debt problems and how the federal government can end up in big debt even though it may not have taken the loans directly.

The following now needs to be done: Carry out a thorough assessment of the actual situation regarding federal government debt and government-guaranteed debt, identify causes of the recent huge increases, and have a strategy to deal with each of the major causes.

Assess the debt sustainability of each major loan-financed project (whether approved, being considered or proposed), its economic viability and social benefit, and work out if the bad projects can be terminated or have their terms renegotiated and their size and financing cost reduced.

Put on hold all major projects, approved or proposed, whether at federal or state level, until a reassessment is done, according to worked-out criteria.

Conduct an exercise to review all government expenditure in each ministry, agency and state, to eliminate or reduce wasteful or unnecessary activities and costs.

In doing so, re-prioritise expenditure items, so that more allocation is given to basic necessities such as amenities for the poor and for vulnerable groups, healthcare, environment protection, flood prevention and mitigation, while allocation for mega projects that are not a priority for the bottom half of the people can be cancelled or postponed.

Examine ways to increase government revenue, although not by creating extra burden to the poorer sections of society.

Several of the above measures are already being worked out by the new government and its advisory groups. While getting to the truth of the situation is hard enough, taking actions that call for elimination and cuts to projects and activities will be more difficult.

Most difficult of all is a change of mindsets and habits that have come to be acceptable and routine. The country has for too long been accustomed to economic growth fuelled by huge flows of debts, with too little care for whether they are honestly contracted and used, whether the schemes they fund are economically viable or socially beneficial, and whether overall the nation can absorb the cost.

The financially and politically unsustainable party has come to an end, we hope. It is fortunate we are given the opportunity to relook at the situation before it is too late, and still save ourselves from a nightmarish national debt trap.