KUALA LUMPUR (May 28): The Government can bump up its debt level to improve the wellbeing of the people and ensure that the country’s economic recovery agenda is on track, but the spending has to be prudent.

Economists feel that the deficit target revision was not unexpected as the Government currently needs to be ahead of the curve with respect to providing support and stimulate the economy amid a slowing pace in investments from the private sector.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the nature of the shocks that the country is facing at the moment has emanated from the health crisis, which would take time to subside.

In that sense, the Government would need to set the right priorities, and in this instance, plans to reduce the budget gap would need to be put on hold, he said.

“It is not so much about the Government’s capacity to borrow, but rather what the programmes are that can really help the rakyat navigate the current challenges especially those who have been out of job and Small and Medium Enterprises (SMEs) and other businesses which are struggling to service their debts, pay rent or other expenses due to cash flow problems,” he told Bernama.

The Ministry of Finance (MoF) yesterday announced that the deficit target has been revised to 6% from 5.4% of Gross Domestic Product (GDP) for 2021, having factored in continuing measures from 2020 economic stimulus packages, as well as the PERMAI and PEMERKASA packages launched in the first quarter of this year.

Consequently, the Federal Government’s statutory debt is also estimated to increase from 58% in 2020, to 58.5% by end-2021.

“This is still below the statutory limit of 60%, which was approved by Parliament in August 2020.

“The country’s debt profile remains favourable with more than 90% of Government debt denominated in ringgit, supported by ample domestic liquidity and long maturity issuances which support funding flexibility,” the MoF said in a statement after The Fiscal Policy Committee meeting chaired by Prime Minister Tan Sri Muhyiddin Yassin.

In a study done by Bank for International Settlements, the threshold for the government debt before it becomes a drag to economic growth is 85% of GDP.

According to Mohd Afzanizam, the Government has the ability to raise funds from the capital market.

“Thus far, the response from the market whenever the Government issues the Malaysian Government Securities (MGS) or Government Investment Issues (GII)…they are constantly oversubscribed, suggesting there is good demand from the bond/sukuk investors,” he said.

In terms of spending, Professor Datuk Dr Shazali Abu Mansor, an economic analyst at Asia e University, said the Government must allocate the money for immediate expenses that involve small-scale projects nationwide such as repair works for drains, repainting of school buildings and restoring Internet services.

As for financial assistance for the people, he said daily-paid workers should be the top priority.

“It is okay to have a high debt (during this pandemic) but the Government must be accountable. The more we spend, the faster the economy can expand,” he said.

Shazali hoped the borrowings are within the country as much as possible to maintain a circular economy and to avoid the depreciation of ringgit due to fund outflows.

Besides increased borrowings, he suggested the Government to consider raising income through the tax system — increase the tax rate among the Top 20 income category, implement windfall tax on industries that benefit greatly from the Covid-19 crisis, and reintroduce the Goods and Services Tax (GST) but on selected items.

Meanwhile, Sri Murniati Yusuf, a public finance manager at the Institute for Democracy and Economic Affairs, said when the Government decided to go for a higher debt level, the allocation for servicing the debt would be even higher.

As a consequence, a higher debt allocation would impact the allocation for other important needs in the future such as maintaining schools, hospitals and roads.

“Of course, we have to note that this percentage does not automatically increase with the increase of debt.

“It can decrease if the economy grows better and government raises more revenue. Economic growth, therefore, is one of the key factors in keeping debt sustainable,” she said.

In addition to providing assistance to the vulnerable, she believes the Government should have effective policy measures to reduce the digital divide across regions and general regional disparities that the Government has been trying to address in the past decades.

Effective policy measures would require the Federal Government to work closely and in coordination with the State governments, she said.

“The success of policy measures to tackle the current pandemic and restore the economy after the crisis will require close coordination between these two levels of governments,” she added.

The International Monetary Fund, in its Fiscal Monitor April 2021 report, revealed that government deficits and debt have risen to unprecedented levels, given major fiscal support, along with a sharp fall in revenues caused by contractions in output.

It said average overall fiscal deficits as a share of GDP in 2020 reached 11.7% in advanced economies, 9.8% in emerging market economies, and 5.5% in low-income developing countries.

Global public debt climbed to 97.3% of GDP in 2020, a surge of 13 percentage points from the level projected before the pandemic.

The report noted that many emerging market and developing economies have faced borrowing constraints, particularly those economies with elevated debt, large gross financing needs, and a high share of external or foreign-currency-denominated debt.

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