IMF warns on Malaysia’s public debt risk

15 Dec 16

High public sector debt is a key risk to the performance of Malaysia’s economy, the International Monetary Fund warned as it welcomed plans to cut spending and hike certain taxes.

 

The fund said the Malaysian economy “continues to perform well” despite a challenging global environment, with growth projected at 4.2% for 2016.

However, “elevated public sector and household debt” are two major domestic risks, while low commodity prices add to the challenge of trying to balance the budget.

In October, the country’s embattled prime minister Najib Razak – who has been embroiled in a corruption scandal – presented a 2017 budget aimed at accelerating growth and ensuring fiscal prudence.

Alongside giveaways for business and protections for the poorest, the budget increased some taxes and cut funding for subsidies and areas like higher education substantially in a bid to achieve a deficit equivalent to 3% of GDP (down from 3.4% last year).

The fund said this will “bolster resilience and is appropriate”. Government debt is expected to remain below 55% of GDP.

Another cut to corporate tax could see Malaysia’s tax revenues fall further, after dropping already between 2014 and 2015 – a trend seen in the majority of countries across the region.

The Asian Development Bank’s technical advisor for governance, Gambhir Bhatt, recently told PF International that governance and public sector reforms across the Asia region would be critical to ensuring this does not have an adverse effect on public services.

The ADB this week announced $200.58m in funds to increase the efficiency of public spending in Vietnam and a further $250m to improve public services in the Philippines.

In Vietnam, the funding will support a number of upgrades the government is making to its public expenditure and fiscal management systems, such as the introduction of medium-term expenditure and debt planning, the strengthening of public assets and enhanced transparency.

In the Philippines, the ADB will deliver finance to a number of local government units (LGUs) to help them improve revenue generation, strengthen public financial management systems and regulatory frameworks, and increase transparency and accountability.

LGUs are now responsible for around 27% of all government expenditures in the Philippines after responsibility for service delivery was devolved. 

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