How we can get out of the debt trap

 

From Gopala Krishnan

Recently, Prime Minister Anwar Ibrahim reiterated the government’s commitment to end our dependence on debt and to restore investor confidence.

Malaysia’s sovereign debt has risen sharply over the last decade and this can be attributed to a combination of factors. They are:

1) Government spending: Increased spending on infrastructure projects, social welfare and public sector wages contribute to the rise in sovereign debt.

The government often borrows to finance these projects and programmes, especially when revenue from taxes and other sources is insufficient.

2) Economic stimulus packages: In response to the economic downturn as a result of the Covid-19 pandemic, the government implemented a series of economic stimulus packages funded primarily through borrowings, increasing the sovereign debt burden.

3) Subsidy programmes: Malaysia has historically subsidised essentials like fuel, food and utilities. While they help citizens, they also put a strain on state finances and contribute to rising debt levels if not properly managed.

4) Weak revenue growth: Limited revenue growth due to slow economic growth, tax evasion or ineffective tax collection can force the government to rely more heavily on borrowings to fund expenditures.

Over several years, successive governments have been reluctant to address the need for a complete overhaul of the country’s tax regime under the pretext that it will burden the common man and business interests.

5) External shocks: External factors such as global economic crises and fluctuations in commodity prices have had an impact on Malaysia’s economy, leading to an increase in borrowings to mitigate the effects of these shocks.

6) Investment in strategic sectors: Malaysia has borrowed to invest in strategic sectors such as technology, education and healthcare to enhance long-term economic competitiveness.

While these investments can yield returns in the future, they initially contribute to higher sovereign debt levels.

7) Debt-ridden state-owned enterprises: Malaysia has a large number of state-owned enterprises that are deep in debt, requiring bailouts or financial assistance at alarmingly regular intervals.

These bailouts can increase the government contingent liabilities and indirectly contribute to higher sovereign debt levels.

Overall, a combination of fiscal policies, economic conditions and external factors have led to the significant increase in Malaysian sovereign debt over the past decade.

Managing this debt burden effectively while ensuring sustainable economic growth remains a challenge for policymakers. Now that sovereign debt levels are deemed too high, what steps can be taken to reduce it?

The way out

Reducing sovereign debt typically involves a combination of fiscal discipline, economic reforms and prudent financial management. In Malaysia, some strategies to reduce sovereign debt might include:

1) Fiscal consolidation: Implement measures to reduce government spending, increase revenue through taxation or other means to achieve a balanced budget.

2) Economic growth: Foster economic growth through policies that promote investment, innovation and productivity which can increase government revenue and reduce the debt-to-GDP ratio.

3) Privatisation: Selling state-owned assets or enterprises to raise funds and decrease the government’s debt burden must be urgently considered.

4) Strengthening institutions: Improve governance, transparency and accountability to ensure efficient use of public funds and to prevent corruption.

5) Diversification of revenue sources: Expand the tax base, reduce reliance on volatile revenue streams and explore alternative sources of funding.

6) Debt management: Implement effective debt management and strategies to optimise borrowing costs, manage risks and ensure sustainable level of debts.

Overall, a comprehensive approach that combines fiscal discipline with efforts to stimulate economic growth and improve financial management is essential for reducing sovereign debt in Malaysia.

The challenges

Many obstacles stand in the way of us achieving these goals. They include:

1) Economic growth constraints: Sustaining robust economic growth is crucial for generating revenue and reducing the debt-to-GDP ratio.

However, there are structural inefficiencies, low productivity growth and external economic uncertainties that can hinder efforts to boost economic expansion.

2) Revenue volatility: Malaysia’s revenue sources are vulnerable to commodity price fluctuations, particularly in the oil and gas sector.

This volatility can affect government revenue streams, making it challenging to plan and execute debt reduction strategies effectively.

3) High dependence on oil and gas revenues: Malaysia relies heavily on revenues from oil and gas exports which can be volatile due to fluctuations in global prices.

Diversifying revenue sources to reduce reliance on these sectors is a challenge that requires significant structural reforms and investment in alternative industries.

4) Fiscal pressure: Addressing fiscal pressures such as rising public sector wages, pension obligations and healthcare costs while simultaneously reducing debt level requires careful fiscal management and structural reforms.

5) Infrastructure investment needs: Malaysia requires substantial investment in infrastructure to support economic development and competitiveness.

Balancing these investments needs with debt reduction goals can be challenging, particularly if infrastructure projects are financed through borrowing.

Perhaps, the private sector needs to be roped in to reduce the burden on the government.

6) Political challenges: Implementing austerity measures and fiscal reform necessary for debt reduction can invite resistance from various stakeholders, including interest groups, political parties and the public.

Political will and consensus building are essential for overcoming these challenges.

7) State-owned enterprises debt: Malaysia has significant debt associated with state-owned enterprises.

Addressing the financial health of these entities and reducing their debt burdens without burdening the government is a mammoth and complex task requiring structural and efficient reforms.

8) External factors: Global economic conditions, interest rate movements and geopolitical risks can have a negative impact on Malaysia’s ability to reduce sovereign debt.

These factors are often beyond the government’s control but can significantly influence debt reduction efforts.

Addressing these challenges requires a comprehensive approach that combines fiscal discipline, economic reforms, prudent debt management and sustainable growth strategies.

Moreover, fostering transparency, accountability and good governance are essential for building trust and confidence among investors and the public in Malaysia’s debt reduction efforts.

Gopala Krishnan, a 40-year veteran in treasury and investment banking, is a director in a company that acquires distressed assets and is also head of group corporate strategy and policy in a renewable energy venture. - FMT

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.