The hidden sources of national debt

The sources of vulnerability are often found in off-budget agencies where legislative oversights are either minimal or non-existent.

COMMENT

By Chua Tong Ka

Former prime minister Mahathir Mohamad has raised many questions relating to 1MDB and ultimately how its debts may infringe on the financial sustainability of the government.

The issues raised by Mahathir beget many more questions.

There are many sources of fiscal and debt vulnerability. Right now, I do not think we have handled them comprehensively and transparently.

The budget tabled each year for the scrutiny of Parliament confines itself to the revenue, expenditure, borrowing and debt levels of the federal government only.

What about the state governments, the local authorities, the statutory bodies, public enterprises, government-linked corporations and privatised entities whose revenues and borrowings are guaranteed by the government?

Technically, the fiscal and debt positions of the government should include the positions of all these entities.

Unless the federal government exercises strict control over the spending and borrowing of these other entities of the government, its fiscal and debt positions are likely to run out of control.

The experience of many countries has shown that the sources of vulnerability are often found in the provincial governments and off-budget agencies where legislative oversights are either minimal or non-existent.

1MDB is a government-linked corporation. Who has approved its borrowings and debt ceiling? Did Parliament ever get to decide on this?

PKFZ is a privatised entity. Who has approved the bonds issued by PKFZ that is guaranteed by the government? Did Parliament ever get to decide on this?

Felda is a statutory body. Who will eventually take responsibility for its operations and borrowings?

What about the many other privatised projects that are routinely given revenue and profit guarantees by the government?

Government loan guarantees are worth a lot of money. It is a moral hazard to give these guarantees indiscriminately.

Bonds investors are savvy investors. Does anyone seriously think they will ever buy the bonds issued by PKFZ or 1MDB if these bonds are not guaranteed by the government?

Here lies the danger—all caution is thrown to the wind when investors see that these bonds are guaranteed by the government. As investors, why do they care whether the projects to be financed by the bonds are viable or not? To them, the guarantee of returns is all that matters.

The same applies to state governments, local authorities, statutory bodies and public enterprises.

Whatever debts they incur will be eventually shouldered by the federal government. That is why the Federal Constitution and the Financial Procedure Act 1957 provide strict control over borrowings by the state governments and public sector entities.

Fiscal vulnerability and unsustainability are not due to the federal government’s operations per se. They are due to off-budget agencies under the purview of the federal government being allowed to run wild.

Parliamentarians must ask themselves why they are locked out of the decision process.