Thus limiting the fiscal space and the ability to raise additional borrowing for counter-cyclical response.
Furthermore, the higher debt level will lead to higher debt service charges, thus retraining the government’s capacity to allocate for other expenditures.
In this regards, the Government said it remains committed to fiscal consolidation in the medium term as outline in the 12th Malaysia Plan with deficit target of 3.5% to GDP by 2025.
The continuous provision of fiscal support in the medium term is projected to lead a more gradual pace of fiscal consolidation, resulting in a more moderate decline in the debt-to-GDP ratio.
However, the planned fiscal reforms, anchored by the introduction of the Fiscal Responsibility Act, adoption of Medium-Term Revenue Strategy and expenditure reviews, will accelerate the resumption of fiscal consolidation post-crisis.
These initiatives will build sufficient buffers in ensuring the country’s fiscal and debt sustainability in the medium and long term.
Debt sustainability of a country can be defined as a situation in which a sovereign is expected to be able to continue servicing its current and future payment obligations without exceptional financial assistant to going into default.
Under the DSA framework, the debt burden threshold for emerging markets is benchmarked at debt-to-GDP ratio of 70% and gross financing needs-to-GDP of 15%.
The Covid-19 pandemic has severely affected the global economy and led countries to implement expansionary fiscal feature measures, particularly providing support to household, business and health services.
With limited fiscal space, many countries have resorted to raising additional borrowings to cater for additional expenditure to save lives and livelihood.
The government will continue its expansionary fiscal policy in the Budget 2022 to ensure the rakyat’s wellbeing, protecting businesses continuity and revitalising the economy.
In addition, the 12th Malaysian Plan 2021-2025 has set a development expenditure ceiling of RM400bil, which is expected to increase the Federal government borrowings.
As such, gross financing requirements, including additional allocation for the Covid-19 Fund, are expected to remain sizeable at 12% to GDP.