KINIBIZ Federal government debt is expected to increase to RM541.3 billion or 54.8 percent of the gross domestic product (GDP) this year, just a sliver under the 55 percent debt ceiling, according to the latest Economic Report by the Finance Ministry.

This is an increase of RM39.7 billion or 1.5 percentage points of GDP from the previous year. In 2012 government debt stood at RM501.6 billion or 53.3 percent of GDP.

NONE“Total government debt is expected to increase mainly due to higher borrowings to meet financing requirements,” the Finance Ministry explained in the 2013/2014 Economic Report.

As in previously years, the overwhelming majority of government debt is domestic as opposed to external debt.

Domestic debt, which is primarily denominated in ringgit, should account for 96.8 percent or 523.9 billion of total debt in 2013.

Meanwhile, federal government external debt is projected to be marginally higher at RM17.4 billion or 1.8 percent of GDP, due to the appreciation of the US dollar, the Economic Report stated.

Government debt continues to be shielded from foreign exchange fluctuations, said the report, as external debt which is mainly denominated in US dollars and Japanese yen should account for only 3.2 percent of total debt this year.

On the high debt level, the report said: “debt servicing capacity is within prudent limits. The government will ensure that debt service charges at 10.1 percent of revenue will not crowd out productive spending programmes.”

Debt service charges will be capped below 15 percent of revenue while total government debt will be held under the 55 percent of GDP mark, said the report.

‘A government guarantee is not debt’

In a full page of the Economic Report, the Finance Ministry found it necessary to explain why government guarantees are not considered as debt.

“Government guarantees are provided to enable statutory bodies, government-linked and state-owned companies to undertake strategic projects which may have a long gestation period, require heavy capital expenditure or are less commercially viable and risky but vital for development,” the report stated.

“A government guarantee is not debt. However it is a contingent liability or an indirect liability on the government.

“Should the borrower fail to repay the loan, the government will be required to meet the debt obligations.”

The issuing of government debt has been contentious, especially more so when they are not reported as government debt.