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Wednesday, March 30, 2011

RM 407 million Debt and NO WORRIES????


The Malaysian Insider carried a press statement by Bernama HERE which said:

The country’s debt last year amounted RM407.1 billion or 53.1 per cent of Gross Domestic Product (GDP) and is no cause for worry, Dewan Rakyat heard today.

Deputy Finance Minister Datuk Awang Adek Hussein said of the amount, RM390.4 billion or 96 per cent was internal while RM16.7 billion or four per cent was external debt.

“Concern should be on foreign debt but at only four per cent, it is not worrying. Our GDP ratio is much lower than others including developed countries,” he said when winding up debate on the ministry’s Supplementary Supply Bill (2010) 2011.


Awang Adek said the debts were from loans to finance the deficit and finance development projects. The loans will generate revenue to the government as it is an investment.


“The returns will be higher. This is normally the case except during an economic slowdown.”

Feeling curious, I surfed the net for more data and this is what I found - a different set of figures.

According to Index Mundi HERE:

Debt - external: $72.6 billion (31 December 2010 est.)
$67.4 billion (31 December 2009 est.)

Year External Debt Ranking Percentage Change

2003 $47,500,000,000 20
2004 $48,840,000,000 24 2.82 %
2005 $53,360,000,000 25 9.25 %
2006 $52,000,000,000 38 -2.55 %
2007 $57,770,000,000 37 11.10 %
2008 $53,090,000,000 45 -8.10 %
2009 $75,330,000,000 42 41.89 %
2010 $58,790,000,000 49 -21.96 %
2011 $72,600,000,000 43 23.49 %

CLICK HERE to see the World Bank Fact Sheet.

CLICK HERE to see the Bank Negara Version which matches the Bernama statement.

THIS LINK shows that our external debt is increasing.

Note the breakdowns for short-term, medium term and long-term debts. Cross compare on your own to see if the figures MATCH or tally!

For those believers in Keynesian economics, there is usually a tolerance for fairly high levels of public debt with the hope that they can pay for public investment in lean times. Then, if boom times follow, the debt can be paid back from rising tax revenues.

In the past, many nations willingly took on public debt to finance large infrastructural capital projects that ran into millions and billions e.g. highways etc. Theoretically, they thought that this could stimulate the economy and increase business confidence since there would be more workers with money to spend.

Wikipedia HERE gives some guidelines to understand the structure of public debt and how to analyze its risk. It says we should:

* Assess the expected value of any public asset being constructed, at least in future tax terms if not in direct revenues. A choice must be made about its status as a public good — some public "assets" end up as public bads, such as nuclear power plants which are extremely expensive to decommission — these costs must also be worked in to asset values.

* Determine whether any public debt is being used to finance consumption, which includes all social assistance and all military spending.

* Determine whether triple bottom line issues are likely to lead to failure or defaults of governments — say due to being overthrown.
* Determine whether any of the debt being undertaken may be held to be odious debt, which might permit it to be disavowed without any effect on a country's credit status. This includes any loans to purchase "assets" such as leaders' palaces, or the people's suppression or extermination. International law does not permit people to be held responsible for such debts — as they did not benefit in any way from the spending and had no control over it.

* Determine if any future entitlements are being created by expenditures — financing a public swimming pool for instance may create some right to recreation where it did not previously exist, by precedent and expectations.
The above information is from THIS LINK.

With a high debt, it means that government borrowing is an important part of fiscal policy and management of aggregate demand in any economy. When the government is running a budget deficit, it means that in a given year, total government expenditure exceeds total tax revenue.

We must remember that in the long run, a high level of government borrowing adds to the accumulated National Debt. This means that the Government has to spend more each year in debt-interest payments to holders of government bonds and other securities. Naturally, opportunity cost is involved here because interest payments could have been used for other items such as on health services. Besides, it also represents a transfer of income from people and businesses that pay taxes to those who hold government debt and cause a redistribution of income and wealth in the economy.

At the end of the day, we have to ask ourselves, has there be wasteful public spending in our country? We have seen an increase in spending in arms, boats and other military equipment but are there more hospitals and schools and low cost housing for the rakyat? Can we truly believe that there are benefits of higher spending especially if the scale of waste in the public sector is high? That amount of money would be better off being used by the private sector or used for other projects that directly benefit the rakyat such as in health care or education.



I am no accounting or economics expert but I am worried when I read about such facts, figures and statements. How about you?


*If you have the time, do check out my post on What A World of Difference. Thanks! Have a restful evening.

- masterwordsmith

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