Malaysia’s Fiscal Policy Management

1. Malaysia’s Fiscal Policy Management

2. The Objectives This presentation will briefly touch on: 1. Constitutional and administrative system 2.Malaysia’s fiscal stance 3. The role of fiscal policy ineconomic development 4.Financing and debt management 5. Procedural safeguards and numerical rules to ensure fiscal sustainability

3. Constitutional and Administrative System • The government practices participative democracy akin to West Minster Model • It is multi-tiers – Federal (central), State(provincial) and Local (municipal) • There is a separation of power into executive, judiciary and legislature at all levels of government • The Malaysian Constitution gave more power and jurisdiction to the central government • The Federal Government has more power to raise revenue and to expense operating and development allocations • The Federal Government provides grants and transfers to State Governments as provided under the terms and proviso of the Constitution • Will discuss more detail the financial relationship between the Federal and State Governments in section 5 of the presentation

4. Fiscal Stance • Malaysia has the flexibility to adopt fiscal stance according to the state and the need of the economy: • anti cyclical • pro growth • developmental • The key to fiscal flexibility is to ensure that the mandatory spending and the size the government is not too large, fiscal deficit (if any) is not structural, and public debt level not excessively high

5. The Role of Fiscal Policy • Over the decades, the Government of Malaysia has effectively used the fiscal policy (through tax measures and allocation of operating and development expenditures) to attained a broad range of macroeconomic objectives: • growth & equity (e.g. the NEP and NDP) • macroeconomic stability • reform & restructuring (tax incentives to facilitate reform and structuring of economy) • sectoral and regional development (tax incentives and expenditure directed at targeted sectors)

6. GDP growth and public expenditure share to GDP (%)

7. Federal Government Position(1993-2005) RM billion 2.4% 2.3% 0.8% 0.7% 0.2% -1.8% -3.2% -5.7% -5.5% -5.6% -5.3% -3.8 -4.3% Surplus / deficit as percent of GDP

8. Federal Government Finance (RM billion)(1980-2005) RM billion Total Expenditure Revenue Deficits OE Surplus Current surplus DE

9. Maintaining Fiscal Flexibility and Sustainability • Malaysia’s experience: • Operating expenditure (OE) not exceeding current revenue; Borrowing was for development expenditure • Avoiding large scale welfare or social programmes • Limiting Federal Government deficit to 6% of GDP • Limiting debt service charges to less than 20% of OE • Financing from non-inflationary domestic sources; External borrowing as a last resort • Spending to enhance efficiency, productivity and GDP potential

10. Financing & PublicDebt Management • Borrowing raised were used only to finance development expenditure • The bulk of the borrowing (more than 80%) were from non-inflationary domestic sources • The Government monitors all external debts of the economy which include: the external debt of the Federal Government; the external debt of public enterprises (guaranteed and non guaranteed); the external debt of the private sector • The Government monitors the domestic debts of the Federal Government and the guaranteed domestic debts of public enterprises

11. National and Federal Government Debts (1980-2004) % to GDP National Federal Govt

12. Procedural Safeguards and Numerical Rules • All annual tax and expenditure proposals (the national and state budgets) require Parliamentary/state assembly debates and approval • The Budgets spell out: major policy thrusts for the coming year; new tax proposals and changes in existing tax rates; detail expenditures based on programs, projects and activities • The Government “shall not borrow except under the authority of Federal Law” • The Constitution does not authorize the state (provincial) governments to borrow except from the Federal Government • All issues of municipal bonds require Federal Government’s approval

13. Procedural Safeguards and Numerical Rules • Debt service charges (interest expense) are charged expenditure, i.e. it takes precedence over other operating expenditures • The public accounts are subjected to audit – the tenure and position of the Auditor General is similar to the High Court Judge

14. Procedural Safeguards and Numerical Rules • Federal Laws provides for maximum levels of debt that can be committed by the Federal Government. For example: • External Loan Act, 1963 provides a ceiling of RM60 billion for all Federal Government foreign market borrowing • Loan (Local) Ordinance 1959 provides a ceiling of not more than 40% GDP for Malaysian Government Securities (MGS) • Treasury Bill (Local) Act, 1946 provides a ceiling of RM10 billion for Treasury Bills • Government Investment Act, 1983 provides a ceiling of RM 15 billion for Government Investment Issuance (based on Islamic principle)

15. Procedural Safeguards and Numerical Rules 19992000 2001 2002 2003 2004 International reserve to short term debt (times)5.26.54.94.15.15.9 Reserve to retained import (times)5.94.55.15.46.88.2 External debt to export (%)43.537.143.843.940.335.2 External debt to GDP (%)53.946.951.951.347.344.1 Debt service ratio 6.35.8 6.86.66.24.3 Fed. Govt. Debt service charges of total OE (%)17.016.015.114.114.012.0

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