Higher debt is temporary and manageable, says Bank Negara

The plan to increase the country's statutory debt limit to 60 percent of the gross domestic product (GDP) from 55 per cent is temporary and can be managed by the government.

Bank Negara Malaysia governor Nor Shamsiah Mohd Yunus said increasing the debt level during a crisis is not something new as Malaysia has done it before.

To recap, Malaysia’s debt-to-GDP ratio was 80.7 percent in 1990 before falling to 31.8 percent in 1997.

It then rose to 41.4 percent in 2001 and increased to 52.8 percent in 2009 and the ratio had remained above 50 percent from 2009 to 2018.

“The increase is temporary, and the bank and government do have the capacity. Our interest rates have come down, borrowings are now much cheaper so the impact on the debt-servicing ratio is also going to be much less,” she added.

Malaysia, she said has never had a problem in servicing its debts, which are mainly in ringgit-denominated.

"We don’t have foreign exchange debt, (if we have) that will expose the country to high debt because the currency depreciates," she said.

Explaining in detail, she said the demand and supply shock due to the Covid-19 pandemic is something that has never happened in the past.

"So, do we then just hold on to the need to have a debt and have permanent scarring on the economy and curtail the capacity of the economy? That will be much more damaging in the long run.

“So what is required then is to preserve the economy as much as possible.

So, debt would be a more prudent thing to do rather than just destroy the capacity of the economy just because you just want to keep the debt level (low),” she said.

"So, what is important is that what is it being used for, is it being put into productive use and giving additional social safety net to the vulnerable sectors, (which) is the right thing to do. So, we should increase (the debt limit)."

The central bank today announced a double-digit contraction of 17.1 percent in the second quarter of 2020.

Among the sectors that contributed to the decline in the performance especially for the month of April include retail trade, exports and industrial production index.

Last week, Finance Minister Tengku Zafrul Abdul Aziz sought to raise the country's statutory debt limit to 60 percent of the GDP from 55 percent currently.

Tabled for the first reading in the winding-up debate on the royal address at the Dewan Rakyat (Malaysian Parliament) for his ministry last week, he said the proposal was aimed at, among others, revising the self-imposed debt ceiling.

The higher debt amount is to finance the deficit, taking also into consideration the implementation of the economic stimulus and recovery packages through direct fiscal injection, Tengku Zafrul stressed.

- Bernama