DEBT-FINANCED expenditure is the way out of the unprecedented twin crisis of Covid-19 and a weak economy, said economists.

Spending more, even if it means raising the country’s self-imposed debt ceiling, is the need of the hour, they said in response to the government’s tabling of the Temporary Measures for Government Financing (Coronavirus Disease 2019) Bill 2020, to allow more financing to mitigate the impact of the Covid-19 outbreak on the economy.

The bill, which was tabled for first reading, seeks to increase the ceiling amount of borrowing raised by the government from the current 55% to 60% of gross domestic product (GDP).

Today, Bank Negara Malaysia will also announce second quarter GDP figures, which economists expect to register a double-digit contraction of up to 17%.

Senior fellow at the Malaysian Institute of Economic Research Dr Shankaran Nambiar said fiscal policy which requires more spending from the government is necessary to keep the economy going.

“I would not worry about raising the debt limit. In extraordinary circumstances such as the present one, more borrowing is the way out,” he told The Malaysian Insight.

A drop in government revenue is expected with the two-month shutdown of businesses during the movement-control order (MCO), as well as a decline in spending by firms and households.

“It is typical for a crisis of this sort to see government revenue, consumption and net exports all fall.  With the resulting fall in aggregate demand, it is essential that government expenditure increase.”

The bigger concern is how expenditure would be allocated to business sectors and the targeted segments of the population.

“They should be sensitive to distributional concerns,” Nambiar said.

Sunway University Business School professor of economics Dr Yeah Kim Leng said to finance the fiscal deficit, the government will need to increase its spending beyond the self-imposed ceiling of 55%.

The Finance Ministry has projected the fiscal deficit for 2020 to range between 5.8% and 6% of GDP.

“The higher counter-cyclical spending due to Covid-19, combined with lower revenue, will widen Malaysia’s fiscal deficit for this year and next,” Yeah said, adding that the debt to GDP ratio in 2019 was 53%.

The impact of the move on the market is likely to be neutral as all countries are facing a large deficit spending because of the pandemic.

“Secondly, the proposed increase in the debt limit to 60% of GDP remains in line with international norms for developing economies.

“Developed nations have much higher debt levels that currently exceed 100%,” he said.

Third, the self-imposed limit on direct debt does not affect the country’s total debt load as analysts consider both direct and indirect debt obligations in assessing the country’s debt sustainability, Yeah noted.

The increase in government spending should be viewed as counter-cyclical in nature to mitigate economic shocks and even out the growth cycle as part of its role in ensuring macroeconomic stability.

Yeah said Putrajaya will not face difficulties accessing borrowings to finance the deficit, given ample domestic liquidity and surplus in savings.

The government also has the opportunity to access low-cost foreign borrowings due to its low external debt and prevailing near-zero global interest rate environment.

“More importantly, the projected increase in government borrowings is not expected to cause a crowding out of the private sector in the domestic debt capital market.”

Taking into account the economic stimulus package, the national debt is expected to stand at RM1.264 trillion by year-end, Deputy Finance Minister 1 Abdul Rahim Bakri told the Dewan Rakyat.

National revenue is projected to be at RM244.5 billion based on Brent crude oil price of US$62 (RM260.50) per barrel in Budget 2020.

However, Rahim said the Covid-19 pandemic and uncertainty in commodity prices will impact on the country’s finances.

On that note, the national revenue for 2020 is expected to be much lower based on the oil price of US$41 per barrel and expected contraction in GDP. – August 14, 2020.