• Dave Ananth


Definition of Malaysia’s Government Debt 2018

Image from thethinkfarm.com

Richard Greene, once joked, in an article about US public accounting, that the “basic drives of man are few: to get enough food, to find shelter, and to keep debt off the balance sheet” *1.

What constitutes government (public sector) debt has always been a contentious issue. Government debt affects many factors – the amount of public and private investment, GDP, credit rating and fiscal flexibility, just to name a few. Given its political salience, it is in the best interests of a government to ensure that its debt levels are capped at internationally acceptable levels.

Malaysia has succeeded in piquing its people’s interest in the government debt debate. The definition of “government debt” has been subject to much discussion recently when the current and previous Ministers of Finance publicly disagreed on the actual levels of government debt in Malaysia.

According to Bank Negara Malaysia’s data, the federal government debt at the end of 2017 was RM686.8 billion. This was 50.8% of GDP which is well within the rule that federal debt should not exceed 55% of GDP. However, the new Minister of Finance has announced that the debt exceeds RM1.087 trillion (80.3% of GDP) once government guarantees and public-private partnership (PPP) lease payments were included. *2

Which Minister of Finance speaks the truth? What does government debt consist of?

What IS government debt?

Despite government debt featuring heavily in the political and economic landscape, there is no consensus on how it should be measured.

Timothy C. Irwin provides that to measure government debt, one must answer the following:

· Definition of “government”

· Definition of “debt and deficit”. *3

Definition of “government”

Should the definition of “government” include only the legal entity of the government or should it be widened to include Private Public Partnerships (PPP)?

If a narrow definition is adopted where only the borrowings of the government as a legal entity is counted as debt, then the amount of RM686.8b is not incorrect. However, detractors would point out that this would encourage the government to manage its debt levels by entering into privatisation or PPP. By doing so, debt rules can be circumvented by having these participating private entities borrow. It is a common method employed by governments globally, including Malaysia, to present acceptable government debt levels. Debts of these private entities are excluded from the calculation of direct government debt simply because they do not fall within the definition of “government”.

Should a wider definition be adopted then? Timothy C. Irwin pointed out that it might not prove to be very helpful, using the example the below *4:

“When the government nationalized several banks during the financial crisis of 2008, its balance sheet grew enormously. In June 2009, the debt of the public sector including the banks (but excluding the Bank of England) was 198 percent of GDP, while the debt of general government was 58 percent. To have reported only the finances of the entire public sector would have frustrated attempts to monitor the government's core operations…”

Definition of “debt and deficit”

For purposes of this article, we will only look at the definition of “debt”.

A narrow definition would allow the provision of targeted measurements and information on certain aspects of public finances. However, it would fail to provide an overall view of the government’s savings and of the sustainability of its policies. It would also encourage window dressing, using off-balance-sheet transactions.

A broad definition would be able to provide a more accurate and comprehensive view of the government’s savings and the sustainability of its policies, as most off-balance-sheet transactions would fall within its purview. However, it could be difficult to obtain reliable measurements and may be susceptible to creative accounting where purposeful mismeasurements are performed.


The standard procedure of credit rating agencies is to usually take into consideration the direct liabilities of the government in the calculation of the debt-to-GDP ratio. As such, is the inclusion of contingent liabilities and future debt obligations, ie government guarantees and leases, necessary for purposes of calculating Malaysia’s debt?

Contingent liabilities are generally described as potential liabilities that may or may not occur, depending on the outcome of an uncertain future event.

In this context, contingent liabilities refer to government-guaranteed debt, which is usually reported separately from the federal government debt. Examples of contingent liabilities are the loans under the National Higher Education Fund Corp (PTPTN) and 1Malaysia Development Bhd (1MDB).

If the entities can pay off the debts which are guaranteed by the government, the guarantee by itself does not fall on the government since there is no debt to pay on behalf. For example, entities such as Khazanah Nasional Bhd, Tenaga Nasional Bhd and MIDF are able to pay off their debt. If these entities are unable to service their debt, government is legally bound to pay on their behalf and therefore, such debt will crystalise into a government debt. Hence, debt that is only going to be owing and accruing in the future should not be included in the current government debt.

Apart from government-guaranteed debt, there is a matter of PPP lease payments. These payments do not fall under direct liabilities or contingent liabilities, which led to such debts being dubbed as “off-off-balance sheet” government debt.

PPP, essentially, is a long-term contract between the public sector and a private company covering the design, construction, maintenance, and financing of an asset (eg, infrastructure). It is usually associated with a government-backed guarantee. Such arrangement removes the bulk of infrastructure spending from the government’s budget. However, in return the government will have future commitments to make lease payments in respect of such projects.

Take Pembinaan PFI Sdn Bhd, for example. It is a company owned by the Ministry of Finance that was established in 2006 to source financing for government construction projects to be carried out. Its 2014 financial statement shows a total debt of RM28.75 billion. However, such amount is not recorded in the government-guaranteed debt list between 2015 and 2016.*5

RM1 trillion debt: Cause for alarm?

It is worth noting that debt payments are usually due on an annual basis and therefore, the government is not expected to make a one-off payment of RM1 trillion. Should the current government take necessary measures to boost Malaysia’s economic growth, there is no cause for concern over its debt sustainability.

However, the previous government’s move of emphasising only the federal government debt RM686.8 billion or not reporting the PPP lease payments may be construed as misleading practices.

Debt, in common parlance, is a sum of money due from one person to another (The Law- Dictionary). The word debt is of large import, including not only debts of record or judgment, and debts by specialty, but also obligations arising under simple contract, to a very wide extent, and in its popular sense includes all that is due to a man under any form of obligation of promise (Burril). In my view, I think the best definition is to be practical and to “call a spade a spade” rather than using creative accounting to hide behind irresponsible practices. The words “if he is now indebted to the company” would mean there is an obligation for him to pay the company back, as the debt is now due and presently owing.

In this case, although the government guarantees and PPP lease payments do not need to be included in the calculation of federal debt, it must be still be reported as potential liabilities in the future and must be will be treated as debts as and when they fall due.

For example, if the Government is paying crystallised debt of private companies that cannot service their debt and use the taxpayers’ money is used to pay debt, it becomes a government debt and must be reflected accordingly in the financial statements.

I think Minister of Finance is saying, let’s tell the truth, and shame the devil, and he must be commended for admitting the existence of the issue at hand.

*1 Greene. (1980, November 24). The Joys of Leasing. Forbes, 59.

*2 Guan Eng details how RM1tril govt debt figure was calculated. (2018, May 24). Retrieved from The Star Online: https://www.thestar.com.my/business/business-news/2018/05/24/debt-to-gdp-ratio-above-80pct-says-lim/

*3 Irwin, T. C. (2015). Defining the Government's Debt and Deficit. IMF Working Paper

*4 Irwin, T. C. (2015). Defining the Government's Debt and Deficit. IMF Working Paper

*5 Yeap, C. (2018, January 18). Cover Story: The debt spiral– what’s on the books, contingent liabilities and off-balance sheet items. Retrieved from The Edge Markets: http://www.theedgemarkets.com/article/cover-story-debt-spiral%E2%80%93-whats- books-contingent-liabilities-and-offbalance-sheet-items




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