by RUPINDER SINGH / pic by TMR FILE

MALAYSIA’S debt-to-GDP ratio is projected to continue increasing without significant fiscal reforms, according to RHB Research group chief economist Sailesh K. Jha.

The annual debt/GDP ratio, including general government debt and contingent liabilities, is estimated to reach 109% in 2025 and 116% in 2026, up from 81% in 2022, under the research house base case scenario, he said in a note today.

The increasing debt-to-GDP ratio is driven by rising contingent liabilities, falling federal government tax effort ratio since 2012, and rising federal government expenditures such as subsidies, emoluments, and development expenditures since 2017.

Sailesh is concerned about the declining non-petroleum related revenues share of total revenues since 2017, which could lead to a worse-case scenario where the debt-to-GDP ratio could reach around 145% of GDP in 2026.

He suggests that the government should implement significant tax enhancement and expenditure reduction policies by 2024 to address this issue.

Sailesh warns that even if the government re-introduces GST at 6% in 2024, the debt-to-GDP ratio will rise to 108.1% in 2026 from 81.1% in 2022 in the base scenario.

He suggests that significant reduction of contingent liabilities, subsidies, emoluments, or development expenditures are necessary to ensure that the debt-to-GDP ratio is on a declining trend from 2025 onwards.

Sailesh reiterates that the possibility of large unanticipated shocks occurring is high in the next few years, given the global financial crisis, the European crisis, the Covid-19 pandemic, and the Malaysia five CDS spike.

He said Malaysia cannot grow itself out of its debt problem, and GDP growth has been driven primarily by labor force expansion and capital accumulation, which are both unsustainable sources of growth in the long run.

Sailesh suggests that the government should implement fiscal reforms that prioritise expenditure rationalisation, revenue enhancement, and debt management.

The government also needs to address the structural weaknesses in the economy by investing in human capital development, enhancing digital infrastructure, and diversifying the economic base.

He proposes that Malaysia can make progress by increasing revenue through tax reforms, such as reintroducing the GST at a lower rate and identifying areas where spending can be cut without compromising the delivery of essential public services.

Reducing contingent liabilities, such as government guarantees, can also have a significant impact on the debt/GDP ratio, he stated.

Sailesh recommends that the government takes bold measures to address the root causes of the debt problem. Malaysia, he said, cannot rely solely on economic growth to solve the debt problem.