Global Trends by Martin Khor

Monday 27 August 2018

Merdeka and our economic independence 

This Merdeka week, we should resolve to control both the government and external debts – each at a trillion ringgit level – in order to retain our economic independence.


It’s a few days more to Merdeka 2018.  A good time to remember that nothing is more precious than our independence.  Where we have the right and means to determine our own economic and social policies.

Keeping that freedom and space, the country and its leaders must then make and implement good policies and practices that improve the people’s lives and well-being.

This is easier said than done. A wrong turn on the road can land the country in trouble, and even have its independence snatched away.

The new Pakatan Harapan government has highlighted how government borrowing had increased explosively under the previous regime, until the country was on the brink of a debt crisis.


Averting that trap has correctly been a top priority of the government during and after its first 100 days.  Prime Minister Tun Dr Mahathir Mohamad’s trip to China last week was aimed at addressing the high cost of three projects.  If they are cancelled or postponed, there will be compensation costs, but these will be less wasteful than pouring more money into the over-priced projects.

There is also the 1MDB saga and many other direct or government-guaranteed loans that went sour.  If loans are taken for projects that do not yield enough revenue to service the debts, they add to the problem.  And if the total loans are huge, the government is in trouble.


Since the federal government debt has reached one trillion ringgit or more, it is imperative to bring it down to a manageable level.  Not an easy job at all.

Already a large part of the government budget must be set aside to service the debt, with less available for operations and development. 

Some of the Pakatan manifesto promises will have to take longer to fulfil, because there is less money. Many understand that saving the country from economic disaster is more important than having goodies now, that we can’t afford.

For example, cancelling all highway tolls just can’t be done now, and may be unwise even later; at the least, it should be selectively done.   Revenues should be raised for example by increasing “sin taxes” on cigarettes and gambling, and by new taxes on sugar-filled products including soft drinks.

Many projects on the drawing board or in the pipeline should be reviewed.  Even some projects that make sense may need to be postponed. Those that are not economically feasible (they can’t yield sufficient revenue) should not be implemented, unless they are really urgently needed. 

Some projects have overly high cost estimates but also projected revenues that are unrealistically hiked up, for example with over-blown estimates of numbers of passengers who will use a highway, train or light-rail transit (LRT).  

In designing and carrying out the reforms, it is important that the costs of policy adjustments do not fall on the bottom sections of society.

While the focus has been on government debt, it is also necessary to carefully manage the country’s external debt. These are debts owed by the government and its enterprises, private companies and banks to foreigners and foreign institutions. 

In recent years, the country’s external debt has been growing, reaching RM936 billion at end-June.  This comprises the external debt of government (RM184 bil), banks (RM354 bil), other institutions including companies (RM387 bil) and monetary authorities (RM12 bil). 

About two-thirds of the total debt is denominated in foreign currency (mainly US dollars) and a third (mainly government bonds) are ringgit-denominated.

Though the external debt level is high, Malaysia presently does not have a problem servicing it.  The international reserves, at RM421.7 bil at end-June, are sufficient to cover the debt servicing costs.

There is need, however, to keep a close tab because the international situation has darkened considerably.  And many countries, Malaysia included, are affected.

A “perfect storm” has in fact started.  The US has stopped pumping billions into its banking system, reversing its quantitative easing policy, so there is now less liquidity.  US interest rates are rising.  Funds that surged into emerging economies are moving out.  Currencies of developing countries are declining against the US dollar, and their stock markets are declining. The trade war is adding to the gloom.

It just needed a trigger to set off a chain of events. This seems to have just arrived with the currency crisis in Turkey.  The country was already very vulnerable, with a big current account deficit, large external debt, low foreign reserves and high inflation.  When the US doubled the tariffs on Turkey’s steel, that triggered an exodus of funds from Turkey and a fall in its currency which has lost 40% of its value against the US dollar since the start of the year.

The Turkish government is now in full battle mode, trying to keep the country from having to go to the IMF for a bail-out.  It is in a tough battle trying to defend its economic independence.

Spooked by the Turkey crisis, on top of the trade war, foreign funds in the past few weeks have been leaving many developing countries, including Malaysia.

The dreaded term “contagion effect” is increasingly used to describe the situation.  Most vulnerable are countries that have high external debt, current account deficit and low reserves.   Fortunately Malaysia is not in this frontline of the crisis-prone countries.

But there is global turbulence on the near horizon, and we should prepare for it, on top of the efforts to control the domestic problems of government debt, budget deficit, unviable projects, high cost of living, and a host of social issues.

As we found out in the 1997-99 financial crisis, and as the Turkey implosion is now reminding us, it is crucial to defend our economic independence, and that can be done only by keeping out of a debt crisis.  A country forced to take a bail-out loan from the IMF faces conditions which are often humiliating and inappropriate.  It loses its independence.

So let us happily celebrate this Merdeka, for there is much to be glad about this year with a new government with the promise of a New Malaysia.  And also let us remind ourselves of the importance of retaining enough freedom to make our own policies, and to ensure we do make the right policies to maintain and defend our economic independence and national sovereignty.