The recent admission by the Second Minister of Finance Datuk Seri Johari Abdul Ghani that the Malaysian government would not be able to achieve a zero budget deficit by 2020 should not come as a surprise among those who have been studying the Malaysian budget. This is despite the many promises announced by Prime Minister Najib that Malaysia would reach this zero budget deficit by 2020. (find reference)
Debt service charge increase from RM14.2 billion in 2009 to RM30.8 billion in 2018. The share of the budget to pay for debt service charges has increased from 9.1% in 2009 to 13.2% in 2018 (estimated). (See Figures 1 and 2 below)
Figure 1: Federal Government Operating Expenditure by Object including debt service charges (2009 to 2011)
Figure 2: Federal Government Operating Expenditure by Object including debt service charges (2016 to 2018)
This increase in the debt service charges as a % of the budget should not be surprising given that the growth in the federal debt is much higher than the increase in the federal revenue. From 2009 (Najib became Finance Minister in September 2008) to 2017, the federal debt grew by 89.7% or an annual growth rate of 11.2% compared to a 37.5% growth or an annual growth rate of 4.7% for the Federal Revenue during this period (See Table 1 and Figure 3 below).
Table 1: Growth in the Federal Debt versus Federal Revenue, 2009 to 2017
|(RM billion)||2009||2017||Change||% Growth||Annual Growth||CAGR|
CAGR: Compounded Annual Growth Rate
Note: 2017 Federal Debt and Revenue are estimates
Figure 3: Growth in the Federal Debt versus Federal Revenue, 2009 to 2017
What should be MORE worrying is the fact that payments for debt service charges incurred by 100% owned Ministry of Finance (MoF) Special Purposes Vehicles are also being paid by the government but are being ‘hidden’ in other parts of the budget. For example, payments for strategic sectors have increased from RM1.286 billion in 2017 to RM3.748 billion in 2018 according to the 2018 budget estimates. Included in this payment is a RM1.1 billion payment to Dana Infra / Govco, which is the SPV in charge of issuing debt to finance the MRT lines and also the Pan Borneo Highway. This was verified in a written parliament to me by the Ministry of Finance II dated 29 November 2017 (Appendix 1).
In addition, other repayments (Lain-Lain Bayaran Balik) has also increased from RM1.528 billion in 2017 to RM4.236 billion in 2018. The biggest portion of this payment is for Private Finance Initiatives (PFIs) totalling RM3.971 billion (See Appendix 2).
PFIs are actually expenditure for development projects that are funded by 100% owned MOF SPVs such as Pembinaan PFI Sdn Bhd which has accumulated debt of approximately RM26 billion and Pembinaan BLT Sdn Bhd which issued RM10 billion worth of bonds that were to be financed by yearly ‘rental’ payments by the government of Malaysia to fund the building of police quarters.
If we add up these off-budget sheet debt service charges (approximately RM5 billion for 2018), the total debt service charge would be RM35 or approximately 15% of the total budget which is just at the threshold under the administrative fiscal rules. (See Figure 4 below)
Figure 4: Description of Debt Service Charges in the 2018 Economic Report (pg. 84)
As the amount of debt issued by 100% MOF owned SPVs continue to increase with projects such as the MRT Line 2 and Line 3, the LRT Line 3 and the Pan Borneo Highway, we can expect the total debt service charges (hidden and non-hidden) to continue to grow faster over the next decade. This can be partly seen in the 21% in the debt guaranteed by the federal government from RM187.32 billion at the end of 2016 to RM226.88 billion at the end of September 2017.
I am not against development expenditure which brings long term benefits to the rakyat. But by ‘hiding’ the debt servicing obligations of such expenditure behind these SPVs, we are allowing wastage and corruption in other parts of the operating and development expenditure (under the Prime Minister’s Department, for example) to persist. What is worst for the rakyat is when funding to public higher education institutions and public hospitals are cut in order to pay for these ‘hidden’ debt servicing charges.
If this trend continues, I don’t believe that the government would be able to achieve a zero budget deficit even by 2022 or 2023. In fact, it is much more likely that we will have a budget crisis on our hands as our budget position worsens.
Appendix 1: Bayaran untuk Sector Strategik 2018 (RM3.748 billion)
Appendix 2: Lain-Lain Bayaran Balik (RM4.236 billion)