Malaysia is swimming in debt.
Our national debt has been on a consistent upward trajectory over the past few decades. The chart below illustrates the national debt from 1973 to 2023, highlighting a stunning increase in recent years.
The chart shows that Malaysia’s national debt has surged from approximately RM31 billion in 1978 to around RM1.5 trillion today, an incredible 48-fold increase in a mere 46 years.
This staggering increase is due to various factors, including extensive government borrowing to fund infrastructure projects, social programmes and economic stimulus packages. The Covid-19 pandemic further exacerbated debt levels, with the government spending considerable amounts of money to prop up the faltering economy.
Growing debt-to-GDP ratio
A critical measure of a country’s debt sustainability is the debt-to-GDP ratio, which compares the national debt to the gross domestic product (GDP). Malaysia’s debt-to-GDP ratio has been rising steadily, raising alarm among economists and policymakers.
As of this year, Malaysia’s debt-to-GDP ratio stood at 65.6%, up from 50% in 2011, as shown in the graph below:
This increase indicates that the country’s debt is growing faster than its economy. In comparison, Indonesia and Thailand have much lower debt-to-GDP ratios of 39% and 56%, respectively, highlighting Malaysia’s more precarious fiscal position.
Growing annual debt servicing load
The cost of servicing national debt – the payments required to cover the interest and principal on borrowed funds – is a significant burden on Malaysia’s finances. As the national debt increases, so does the cost of servicing that debt, which diverts resources from other essential areas.
This year, Malaysia’s annual debt servicing load is expected to be around RM46.1 billion, representing around 16% of total government revenue. This figure is expected to rise further as debt levels continue to grow.
In real terms, every extra ringgit we spend servicing our debt is one less ringgit that we could have used for educating our children or shoring up our public services.
Comparison with other government expenses
To contextualise the impact of debt servicing, it is crucial to compare it with other major government expenditure. In 2023, Malaysia’s budget allocated approximately RM52 billion to education, RM17 billion to defence and RM36 billion to healthcare. The annual debt repayment cost, therefore, surpasses the defence and healthcare budgets and constitutes a significant portion of the education budget.
This comparison underscores the substantial financial strain that debt servicing imposes on Malaysia’s fiscal policy, limiting the government’s ability to invest in critical sectors and public services.
Potential consequences of a debt spiral
The potential consequences of Malaysia’s mounting debt are multifaceted and severe. A debt spiral, where increasing debt leads to higher borrowing costs and further debt accumulation, could have several adverse outcomes:
1. Reduced sovereign credit rating: Credit rating agencies may downgrade Malaysia’s sovereign credit rating, making it more expensive for the government to borrow in the future. This could deter foreign investment and undermine investor confidence;
2. Higher interest rates: Rising debt levels can lead to higher interest rates on government bonds, increasing the cost of borrowing and further straining the national budget;
3. Fiscal austerity measures: To manage the debt crisis, the government may be forced to implement austerity measures, including spending cuts and tax increases. These measures can slow economic growth, reduce public services and increase social unrest;
4. Currency depreciation: A debt crisis can lead to a loss of confidence in the national currency, causing it to depreciate. A weaker currency can increase the cost of imports, contribute to inflation and erode the purchasing power of citizens; and
5. Economic recession: In severe cases, a debt crisis can trigger an economic recession, characterised by declining GDP, rising unemployment and reduced consumer spending. A prolonged recession can have lasting negative effects on the country’s economic development and standard of living.
Comparison with debt crises in other countries
Malaysia’s situation is showing some resemblance to the debt crises experienced by countries like Egypt and Sri Lanka. Both nations faced severe economic turmoil due to high levels of national debt, leading to significant economic and social challenges.
Egypt: In the early 2010s, Egypt grappled with a debt crisis characterised by high debt-to-GDP ratios, soaring inflation and declining foreign reserves. The government implemented austerity measures and sought international assistance to stabilise the economy, but the social impact was profound, with increased poverty and unemployment.
Sri Lanka: In recent years, Sri Lanka has faced a severe debt crisis, with debt levels exceeding 90% of GDP. The country struggled with large debt repayments, leading to a currency crisis, inflation and social unrest. Sri Lanka sought assistance from the International Monetary Fund (IMF) to manage its debt and stabilise the economy.
Malaysia’s current debt-to-GDP ratio of 65% is lower than that of Egypt and Sri Lanka during their crises, but the trend is concerning. Without decisive action, Malaysia risks falling into a similar debt spiral.
Conclusion
Malaysia’s growing national debt is a clear and present danger to our country’s stability. The consequences of a debt spiral – as distant and as unlikely as it may seem now – are catastrophic, as Egypt, Greece and Sri Lanka have amply demonstrated. So how do we fix this?
We’ll explore this in my next article. Stay tuned. - FMT
The writer can be contacted at kathirgugan@protonmail.com.
The views expressed are those of the writer and do not necessarily reflect those of MMKtT.
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