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Malaysia’s Fiscal
Policy Management
1
The Objectives
This presentation will briefly touch on:
1. Constitutional and administrative
system
2. Malaysia’s fiscal stance
3. The role of fiscal policy in
economic development
4. Financing and debt management
5. Procedural safeguards and
numerical rules to ensure fiscal
sustainability
2
Constitutional and Administrative System
• The government practices participative democracy akin to
West Minster Model
• It is multi-tiers – Federal (central), State (provincial) and
Local (municipal)
• There is a separation of power into executive, judiciary
and legislature at all levels of government
• The Malaysian Constitution gave more power and
jurisdiction to the central government
• The Federal Government has more power to raise
revenue and to expense operating and development
allocations
• The Federal Government provides grants and transfers to
State Governments as provided under the terms and
proviso of the Constitution
• Will discuss more detail the financial relationship between
the Federal and State Governments in section 5 of the
presentation
3
Fiscal Stance
• Malaysia has the flexibility to adopt fiscal
stance according to the state and the need of
the economy:
– anti cyclical
– pro growth
– developmental
• The key to fiscal flexibility is to ensure that the
mandatory spending and the size the
government is not too large, fiscal deficit (if
any) is not structural, and public debt level
not excessively high
4
The Role of Fiscal Policy
• Over the decades, the Government of Malaysia has
effectively used the fiscal policy (through tax
measures and allocation of operating and
development expenditures) to attained a broad range
of macroeconomic objectives:
– growth & equity (e.g. the NEP and NDP)
– macroeconomic stability
– reform & restructuring (tax incentives to facilitate
reform and structuring of economy)
– sectoral and regional development (tax incentives
and expenditure directed at targeted sectors)
5
GDP growth and public expenditure share to GDP (%)
6
Federal Government Position
(1993-2005)
RM billion
10
2.4%
2.3%
5
0.8%
0.2%
0.7%
0
-5
-1.8%
-10
-3.2%
-15
-20
-5.7%
-5.5%
-5.6% -5.3%
-4.3% -3.8
-25
-30
93
94
95
96
97
98
99
'00
'01
'02
'03
'04P '05 B
Surplus / deficit as percent of GDP
7
Federal Government Finance (RM billion)
(1980-2005)
RM billion
120
Total Expenditure
100
Revenue
Deficits
80
OE
Surplus
60
Current surplus
40
DE
20
0
80
91
93
95
97
99
'01
'03
'05B
8
Maintaining Fiscal Flexibility and
Sustainability
• Malaysia’s experience:
– Operating expenditure (OE) not exceeding
current revenue; Borrowing was for development
expenditure
– Avoiding large scale welfare or social
programmes
– Limiting Federal Government deficit to 6% of
GDP
– Limiting debt service charges to less than 20% of
OE
– Financing from non-inflationary domestic
sources; External borrowing as a last resort
– Spending to enhance efficiency, productivity and
GDP potential
9
Financing & Public Debt Management
• Borrowing raised were used only to finance
development expenditure
• The bulk of the borrowing (more than 80%) were
from non-inflationary domestic sources
• The Government monitors all external debts of the
economy which include: the external debt of the
Federal Government; the external debt of public
enterprises (guaranteed and non guaranteed); the
external debt of the private sector
• The Government monitors the domestic debts of
the Federal Government and the guaranteed
domestic debts of public enterprises
10
National and Federal Government
Debts (1980-2004)
% to GDP
90
80
70
60
National
50
40
Federal Govt
30
20
10
0
80
85
90
95
96
97
98
99
'00
'01
'02
'03
'04P
11
Procedural Safeguards and
Numerical Rules
•All annual tax and expenditure proposals (the national and state
budgets) require Parliamentary/state assembly debates and
approval
•The Budgets spell out: major policy thrusts for the coming year;
new tax proposals and changes in existing tax rates; detail
expenditures based on programs, projects and activities
•The Government “shall not borrow except under the authority
of Federal Law”
•The Constitution does not authorize the state (provincial)
governments to borrow except from the Federal Government
•All issues of municipal bonds require Federal Government’s
approval
12
Procedural Safeguards and
Numerical Rules
• Debt service charges (interest
expense) are charged expenditure,
i.e. it takes precedence over other
operating expenditures
• The public accounts are subjected to
audit – the tenure and position of the
Auditor General is similar to the High
Court Judge
13
Procedural Safeguards and
Numerical Rules
•Federal Laws provides for maximum levels of debt
that can be committed by the Federal Government. For
example:
•External Loan Act, 1963 provides a ceiling of RM60
billion for all Federal Government foreign market
borrowing
•Loan (Local) Ordinance 1959 provides a ceiling of
not more than 40% GDP for Malaysian Government
Securities (MGS)
•Treasury Bill (Local) Act, 1946 provides a ceiling of
RM10 billion for Treasury Bills
•Government Investment Act, 1983 provides a
ceiling of RM 15 billion for Government Investment
Issuance (based on Islamic principle)
14
Procedural Safeguards and
Numerical Rules
1999
2000
2001
2002
2003
2004
International reserve
to short term debt (times)
5.2
6.5
4.9
4.1
5.1
5.9
Reserve to retained
import (times)
5.9
4.5
5.1
5.4
6.8
8.2
External debt to export (%)
43.5
37.1
43.8
43.9
40.3
35.2
External debt to GDP (%)
53.9
46.9
51.9
51.3
47.3
44.1
Debt service ratio
6.3
5.8
6.8
6.6
6.2
4.3
Fed. Govt. Debt service
charges of total OE (%)
17.0
16.0
15.1
14.1
14.0
12.0
15
16