Malaysia

1

Malaysias Fiscal Policy Management
2
The Objectives

• This presentation will briefly touch on
• 1. Constitutional and administrative
  system
• 2. Malaysias 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

3
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

4
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

5
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)

6
GDP growth and public expenditure share to GDP ()
7
Federal Government Position(1993-2005)
RM billion
2.4
2.3
0.7
0.8
0.2
-1.8
-3.2
-5.7
-5.6
-5.5
-5.3
-3.8
-4.3
Surplus / deficit as percent of GDP
8
Federal Government Finance (RM billion)(1980-2005
)
RM billion
Total Expenditure
Revenue
Deficits
OE
Surplus
Current surplus
DE
9
Maintaining Fiscal Flexibility and Sustainability

• Malaysias 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

10
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

11
National and Federal Government Debts (1980-2004)
to GDP
National
Federal Govt
12
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
  Governments approval

13
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

14
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)
  

15
Procedural Safeguards and Numerical Rules
    1999 2000 2001 2002 2003 2004 Internation
al 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 Exter
nal 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 Fe
d. Govt. Debt service charges of total OE
() 17.0 16.0 15.1 14.1 14.0 12.0
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