RMK13 – Redesigning Financing Plans 

As promised in “RMK13 – Redesigning Policy Makers” – 16/8/25, here I will attempt to discuss the financing plans. Since RMK13 aims to drive sustainable economic growth and propel towards high-income nation status, we must ensure nothing including financing will halt our delayed journey.

Now, how to finance this grand plan? 

There are more than 600 projects in RMK13 with total planned investment of RM611 billion. The RM430 billion earmarked translates to an average of RM86 billion per annum, nearly double the pre-pandemic average of RM48 billion between 2015 and 2019. The government has promised not to take on any more unnecessary loans so as to not burden the younger generation.

Against the backdrop of the global trend of uncertain growth prospects, fiscal consolidation and higher borrowing costs, Malaysia’s Public Finance and Fiscal Responsibility Act 2023 (PFFRA) has capped the fiscal deficit at 3% of gross domestic product (GDP). However, the RMK13 reiterated its commitment to narrow the fiscal deficit to below 3% of GDP by 2030, underscoring the risk of accelerating debt growth. 

There may be justifications for another RM430 billion of new debts but how about overall debt servicing? 

In 2024, the federal government’s debt service charges (DSC) was equivalent to 15.8% of the total operating expenditure (Opex) and expected to reach 16.3% of Opex in 2025. This is the second consecutive year that it will surpass the previously self-imposed threshold of 15.0%. 

Malaysian government debt accounted for 64.6 % of the country’s Nominal GDP in Dec 2024 (2022: 60.2%). Public debt decreased under the postpandemic policy normalisation but rose sharply under the new government in 2023. An all-time high of 65.6% was hit in March 2024. For 2025, according to Kenanga’s estimates, it will experience another record high when total debt is projected to reach RM1.33 trillion or 65.9% of GDP. 

Malaysia may have succeeded in maintaining the investment grade of sovereign credit ratings but we have to be more vigilant on off–balance sheet items.

A worst-case scenario is fulfilling off–balance sheet items (contingent liabilities). Malaysia’s contingent liabilities are relatively large compared to regional peers, standing at 18% of GDP in 2023. Assuming the government is required to fulfill all its committed guarantees in 2025, the debt-to-GDP ratio is projected to surge to 75.6% before decreasing to 71.7% by 2028 surpassing the threshold, all the way.

Note, a significant portion of the guarantee recipients has low or negative returns on assets and the potential need for future capital injections remains.

One promising prospect for enhancing Malaysia’s fiscal health is under the Debt Sustainability Analysis (DSA) framework, developed by the MoF, the IMF and the World Bank. It calculates Malaysia’s debt level could be below 60% of GDP by 2028 under a baseline scenario of an average GDP growth of 4.5%. 

However, the DSA is a main tool to assess risks to debt sustainability in lower-income countries, useful for short-term planning and lacks precise definition of debt sustainability. The risk of overly optimistic macroeconomic projections that underestimate debt burdens, concurrent shocks from geopolitical issues and the underlying structural issues (weak governance and fiscal management) undermine the analysis’s conclusions. Applying imprecisely known risks concerning sustainability is very costly. Simplification of realities cannot reflect all elements relevant for sovereign risk and debt sustainability analysis.

Other actions the government must focus on are as follows:

We must start working on a wider tax revenue base since our tax revenueto-GDP ratio has trended downwards from 15.5% in 2003 to 12.3% in 2024. This ratio has been lower than those of our ASEAN-6 peers since 2017. 

Waiting until the minimum wage hits the range of RM3,000 to RM4,000 to implement GST will be too little too late. 

Rationalising subsidies remains key in capping government expenditure. But, fiscal savings from subsidy retargeting is not sufficient to ensure fiscal consolidation amid a sizable rigid current expenditure and rising social expenditure needs.

We must review and phase out income tax exemptions for industries that no longer require them. Be mindful of the anticipated Global Minimum Tax to ensure multinational corporations contribute at least 15% in tax and not 5% that was given to companies relocating to the JS-SEZ.

A relook should be on the cards to review revenue projections using prepandemic tax elasticity of 0.9.

Over half of operating expenditure is committed towards public sector allocations and debt obligations. Optimising expenditure is particularly necessary due to the limited allocation for development spending. 

Various support given, particularly for SMEs, through grants, loans, and tax incentives, aiming to drive innovation and digitalisation. But are they reciprocating or having a free ride?

Inflation is expected to pick up in the near term due to an imminent hike in RON95 fuel prices from subsidy rationalisation.

Growth assumption needs to be revisited given concerns on global economic slowdown, fall in commodity prices and trade disruptions.

We should strike a right balance between short-term flexibility and mediumterm consolidation to safeguard Malaysia’s economic resilience and stability.

To achieve that, we must be more proactive in enhancing stronger accountability through clear goals and improving transparency, strengthening governance frameworks, rigorous supervision and law enforcement and transparent Public-Private Partnership (PPP) parameters.

I trust there will be strong political will to make things happen and Malaysia needs to build up funds for rainy days.

While we elevate the ceiling, we must also raise the floor.

How do we keep our chins up for RMK13 when we have exceeded limits that we ourselves set with possibilities of breaking it again and again? Who are responsible and accountable for all these and it presents a downside risk to debt sustainability?

And does it tantamount to breaking the law?

What say you…  

 

Saleh Mohammed