Debt-to-GDP ratio in Malaysia

I came across an article reporting that the Malaysian Government is mulling over a GST plan, set at 7%. As a student in economics, I see the appeal in broadening the tax base and minimising the distortion in taxes, which are evident when the minister alluded that the government is also reducing income and corporate taxes. Setting aside the issues of government spending (jobs for the boys?).

One of the statements piqued my interest however.

“At the World Economic Forum in Davos, when I proposed this Malaysian mechanism of keeping 55 per cent as a ceiling for debt to GDP, many world economists and leaders said it was impossible.

“This is because Malaysia is very unique for still having its debt below 55 per cent,” Jala said, adding, as examples countries such as Singapore (100 per cent debt to GDP ratio), United Kingdom (80 per cent) and France (81 per cent).”

A quick check from BNM suggests that the government is able to borrow one year’s worth of debt at roughly 3%, and average annual nominal GDP from 2002-2012 is about 8.95%. With a 55% Debt-to-GDP target, the primary deficit expressed as a percentage of GDP is “allowed” to be as high as -3.27%.

IMF data shows that primary deficit, as a percentage of GDP in 2012 was -3.152%, and at that level the Debt-to-GDP ratio can indeed be stabalised at 55%. However, it is noteworthy that nominal GDP growth in 2012 was only 6.21%. If the government could still access the debt market for one-year bills at 3%, and if GDP grows at 7% on average, the allowed primary deficit is -2.2%. If the government could not trim the deficit by one percentage point, the Debt/GDP ratio of 55% will not be sustainable.


“He said for the past four years with Najib as premier, the country’s budget deficit had shown significant decrease year-on-year, and gave an assurance that the track record would continue.”

Minister Idris Jala probably wasn’t using the primary budget deficits in his figures. According to the IMF WEO database, primary budget deficits for the years 2008,2009,2010,2011 and 2012 are respectively, -2.139%,-5.123%,-3.042%,-2.105% and -3.152%.

P/S: Under the Data Sources Page, you can find the excel sheet with the calculations I have made to substantiate the points I raised here.

In addition, for those of you who are interested in this Debt/GDP circus, there is a pdf file named Debt Dynamics that provides the intuition and math.


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