The unseen financial liabilities

  • Straight Talking
  • Tuesday, 29 Oct 2013

Let's run an accountant's eye over the nation's assets and liabilities.
AS a professional accountant, I have always wondered how Malaysia's true financial position would be if a balance sheet listing of its assets and liabilities were drawn up.
Would it show that the assets of the country exceeded its liabilities or not otherwise?
At least the government prepares its national budget reporting its income and expenditure annually. The public is able to assess,albeit in a limited way, how well the country is managing its finances.
The limitation is due to the cash accounting system of receipts and payments used by the government today having a major weakness in that it doesn't capture all the revenue and payments due in the actual reporting period.
This means that the 2014 budget tabled by the Prime Minister and Finance Minister, Dato Seri Najib Tun Razak last Friday can be misleading as it may have recorded income from future years and postponed liabilities which have been incurred earlier.
That means that the actual income that the government has reported may have been overstated and it's liabilities under reported.
If that is true then the government should have been forecasting a good financial surplus in the 2014 budget.
That wasn't the case and the government is budgeting a 3.5 percent deficit for next year. This means expenditure exceeds income
This inaccuracy can deceive our policy makers into thinking that they are actually being prudent by sticking to a conservative budget deficit spending target of 3.5 percent when the actual deficit may be higher.
The borrowing that would have to be undertaken by the government to balance the annual budget will later add to the national debt which reflects our long term liability position in the nation's balance sheet.
We haven't got a reporting mechanism to guesstimate the nation's actual liabilities, and that is a problem.
This weakness can be damaging to the country in the long run if the country's potential liabilities cannot be fully accounted for and we are borrowing the wealth of future generations to finance our current lifestyle.
Take the example of the periphery countries of the EU like Greece and Ireland which were performing poorly economically  until they joined the European Monetary Union and started borrowing euros on a massive scale and inflated their previously struggling economies beyond their actual means. We all know what happened to those countries years later.
In addition to the accounting issue, the nation also needs to address the commitments the government has made that are financial liabilities that must be recognized in its financial statements.
For example, the construction of the low cost terminal KLIA 2, has incurred extra liabilities which may not have been recorded on the government's books.
The government has committed itself to completing the project even though the actual cost incurred is more than RM3billion above the originally budgeted cost of RM 1billion.
Since the government uses the cash-based accounting system , it could mean that the government has added RM3billion to the national debt without recording it as a debt.
I hope the government can ensure that recent mega projects like the KL MRT construction the first phase of which is expected to cost RM 30 Billion, Petronas's RAPID project in Johor and others will not incur massive cost overruns and add to the national debt in the future too.
That may be an optimistic expectation since the governments track record on completing projects on time, within budget with high quality is poor.
There is another hidden liability to those projects in the form of high maintenance costs which are usually not budgeted for and can cost a further 10% of the original project cost and would only be captured years later under the current cash accounting system.
Considering the above, I would be curious to learn the sum of additional liabilities due to cost overruns if all the delayed or incompleted projects initiated by the government since the nation industrialized 20 years ago are recognized.
What would our liabilities actually be over and above the official debt figures reported by the government?
There is another commitment that the government is liable for through the government guarantees which the Ministry of Finance gives to help contractors or government agencies like Khazanah and 1MDB secure financing for government projects.  I wouldn't be surprised if that figure turned out to be substantial.
These hidden liabilities have raised a lot of concern about our national debt which is estimated to be approximately RM 500billion or 54% of GDP.
Many would argue that this figure is still low compared to western countries like the UK and the US which have debt levels much higher than us.
They want the government to borrow more and finance more extravagant infrastructure projects. They want the government to create more costly Putrajaya, Multimedia Supercorridor, Bio Valley and High Speed Railway type of projects.
After all,  government-driven construction activities totalling RM 40 billion annually estimated by CIDB add about 1-1.5% to our GDP
Considering that our annual GDP  is consistently running at 4-5% today and significantly less than the 8-9% percent previously, many people want the government to increase its spending on construction to keep our GDP up but at what cost to our debt levels?
On the flip side, we could grow our sources of revenue to reduce our borrowing. But increasing competition from globalisation has eroded our position as an exporter and substantially reduced our foreign exchange income.
Even our previously dependable 'piggy bank' Petronas has cautioned the government that they can no longer support the government's revenue like before.
The government's effort to raise incomes by developing modern agriculture and creating a knowledge based economy has largely floundered due to lack of skilled labour and an overdependence on low skilled labour.
Therefore if the government is unable to grow the national economy substantially and increase our borrowing capacity to further fund its massive infrastructure program, maybe the time has come for the government to be more realistic and 'bite the bullet' to rationalize it's economic ambitions and reduce its dependency on borrowings.
The Prime Minister likes to say that our level of borrowing is acceptable and better than other countries since the source of borrowing is largely domestic, but he mustn't forget that the government should not monopolize the domestic loan market and deny those funds to the private sector.
This 'crowding out' of the private sector by the government and its agencies will reduce the ability of the private sector to invest in the productive sectors of the economy, something which the government does poorly.
Worse, the government will be pouring more money into unproductive sectors and infrastructure projects that bring less benefit to the country but expensive to maintain.
This will harm the country's future economic progress and punish future generations.
Just like our parents did, the next generation deserves to inherit the assets and not liabilities that we leave behind.

> The views expressed are entirely the writer's own.

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