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Malaysia: Selected Issues

International Monetary Fund. Asia and Pacific Dept
Published Date:
March 2019
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Medium-Term Fiscal Framework in Malaysia

A. Introduction

1. Malaysia’s government is considering options to strengthen the medium-term fiscal framework. The authorities are considering steps to achieve fiscal consolidation and improve public financial management. Most notably, the new administration has announced the intention to table a Fiscal Responsibility Act (FRA) by 2021. The formulation of a FRA will not only offer a legal basis for fiscal discipline, but also provide an opportunity to review and strengthen the medium-term fiscal framework in a comprehensive manner. In fact, the recent evolution of fiscal rules across countries highlights the importance of a holistic approach, striking a balance among three properties of such rules – simplicity, flexibility, and enforceability. Against this backdrop, this paper reviews Malaysia’s fiscal framework in light of international best practice and discusses potential reform options.

B. Overview of Malaysia’s Fiscal Framework

2. Malaysia’s fiscal policy is currently anchored by a commitment to keep total federal government debt within 55 percent of GDP. Malaysia’s government has multiple legal limits on debt instruments. MGS (Malaysian Government Securities), MGII (Malaysian Government Investment Issues) and MITB (Islamic Treasury Bills) can only be issued up to a total of 55 percent of GDP under the Loan (Local) Act 1959 and the Government Funding Act 1983. Moreover, the External Loans Act 1963 restricts offshore borrowing within MYR 35 billion. The Treasury Bills Act 1946 limits short-term MTB (Malaysian Treasury Bills) at MYR 10 billion. Overarching these legal limits on debt instruments, fiscal policy is currently guided by a commitment to keep the overall federal government debt within 55 percent of GDP (see Table 1).

Table 1.Malaysia: Debt and Administrative Guidelines
Borrowings are only to finance development expenditureLoan (Local) Act 1959Current balance always in surplus to ensure operating expenditure is financed by revenue
Domestic debt ceiling (MGS, MGII, MITB)Not exceeding 55 percent of GDP

Statute Paper 76 of 2009, Loan (Local) Act

1959 and Government Funding Act 1983
Self imposed limit of 55% of GDPAs of June 2018, in percent of GDP Total: 50.7 Domestic debt: 49.2 Offshore borrowings: 1.5 (RM 21 billion)
Offshore borrowing ceilingNot exceeding RM35 billion

Statute Paper 77 of 2009, External Loans Act 1963
Issuances of conventional Treasury billsNot exceeding RM10 billion

Treasury Bills (Local) Act 1946
Limit of debt service charges (DSC)Allocation for debt service charges are charged items and not required to be tabled to Parliament Federal Constitution Article 98 (1)(b)DSC ≤ 15% of revenue or operating expenditure2018 estimate: 13.1 percent of GDP
Source: Ministry of Finance, Malaysia
Source: Ministry of Finance, Malaysia

3. A medium-term fiscal deficit target of 2 percent of GDP is a key operational guideline. The overall balance has been the authorities’ main operational tool to observe the debt anchor. Although the authorities reset their medium-term consolidation path in the 2019 budget given a higher deficit outcome in 2018, the revised consolidation path is expected to maintain the debt-to-GDP ratio within 55 percent. The government also has a so-called “golden rule”—borrowings are only allowed to finance development expenditure. In addition, there is an administrative guideline that debt service charges should remain below 15 percent of revenue or operating expenditure.

4. Public financial management reforms are in progress. A strong public financial management system is an integral part of a credible medium-term fiscal framework, especially in the context of compliance with fiscal rules. The authorities have made substantial progress on this front. In 2013, the government established the Fiscal Policy Committee (FPC) chaired by the Prime Minister and the Fiscal Policy Office (FPO) within the Ministry of Finance. The FPO supports the FPC through technical and analytical work on medium-term fiscal issues. In addition, the 2016 budget adopted a Medium-Term Fiscal Framework (MTFF), which provides a multiyear projection of the government fiscal position together with underlying macroeconomic assumptions.1 The MTFF is updated annually on a rolling basis. These reforms have strengthened the capacity of public financial management and helped fiscal policy formulation. For example, the 2019 Fiscal Outlook, published together with the 2019 budget, provides a fuller discussion of the 2018 fiscal outturn, including the underlying factors explaining the deviation from the previous fiscal consolidation path. The 2019 Fiscal Outlook also enhances the analysis of fiscal risks and liabilities.

C. Remaining Challenges

Guiding Principles from International Best Practice

5. The recent evolution of rule-based frameworks across countries highlights the importance of striking a balance among three properties – simplicity, flexibility, and enforceability. Each property is desirable for effective fiscal rules. But it is challenging to satisfy these three properties at the same time, as there are clear trade-offs among them. For example, a too simple rule could be easy to enforce, but could lack flexibility to respond to severe economic shocks. By contrast, a too flexible rule might not help enforce the originally-intended fiscal discipline as it risks allowing the government to easily deviate from principles. Building on international experiences, Eyraud and others (2018) propose the following guiding principles to address these trade-offs:

  • Comprehensive framework: The fiscal framework should include a debt anchor to ensure medium-term debt sustainability and a limited number of operational rules. The fiscal anchor (typically debt-to-GDP ratio) and operational rules (such as fiscal balance rules and expenditure rules) need to be mutually consistent.
  • Well-defined flexibility: Flexibility should be stipulated in a simple and transparent manner, for example by a clear escape clause. Complicated mechanisms should be avoided as they could undermine the ability to guide expectations and be subject to manipulation.
  • Strengthened compliance: Enforceability should be secured by enhancing compliance mechanisms and raising accountability costs for noncompliers.

The following subsection gives an assessment of Malaysia’s current fiscal framework with focus on these three guiding principles.

Figure 1.Guiding Principles for Fiscal Rules

Sources: IMF staff based on Eyraud and others (2018) and Lledo and others (2019).

Assessment of Malaysia’s Framework

6. The authorities’ debt anchor seems to have played a critical role in fiscal discipline. After the Global Financial Crisis (GFC), the federal government deficit surged from 3.1 percent in 2007 to 6.7 percent in 2009. The federal government debt increased from 40.1 percent in 2007 to 50.8 percent in 2009 and peaked at 54.4 percent in 2015 (see text chart). However, over the post-GFC period, the debt anchor of 55 percent of GDP has never been breached, and may have helped the gradual fiscal consolidation. In addition, the authorities’ clear commitment to keep the overall federal government debt within 55 percent of GDP has facilitated communication to the public, compared to legal limits on respective debt instruments.

Federal Government: Fiscal Deficit and Debt

(In percent of GDP)

Sources: Ministry of Finance, Malaysia

7. The authorities’ fiscal deficit target is simple, closely linked to debt dynamics, but not fully operationalized in the annual budget process. Fund staff simulations suggest that, under the status quo scenario without fiscal consolidation, there is a 15–20 percent probability that the debt trajectory will exceed the debt-to-GDP ceiling of 55 percent.2 To contain the probability of breaching the anchor at a prudent level (within 10 percent), the debt level in normal times should be lowered to 46 percent of GDP (see Figure 2). Against this backdrop, the authorities’ fiscal consolidation path appears broadly consistent with the debt anchor, as it would reduce the debt-to-GDP ratio to 47 percent of GDP by 2024. These simulations demonstrate the advantages of fiscal deficit targets in terms of simplicity and direct linkage with debt dynamics. This also helps the authorities’ communication to the public and markets. However, in the absence of a full-fledged medium term macro-framework, the authorities’ medium-term deficit target is not fully operationalized in the annual budget process, which could weaken its enforceability.

Figure 2.Risks of Breaching Debt Anchor

8. It is also important to be mindful of the procyclical nature of an overall fiscal balance commitment. In general, nominal fiscal deficit targets do not consider the cyclical position of the economy. Hence, during periods of economic downturn, meeting the target could require undesirable expenditure cuts to offset the decline in tax revenue. In addition, the overall fiscal balance is affected by debt service payments, which cannot be fully controlled by the government. In the case of Malaysia, the procyclical nature of fiscal deficit targets is further exacerbated by the dependence of oil-related revenues on the economic cycle. The authorities could calibrate the fiscal stance by taking into account the underlying economic conditions. However, structural changes and exogenous shocks would render this exercise difficult, adding complexity to public communication. This underscores the importance of well-defined escape clauses to guide expectations about fiscal stance.

9. There is scope for further improvement in public financial management. The adoption of the MTFF in the 2016 budget was an important first step to embed the debt anchor and fiscal deficit target in a medium-term framework. However, the publication of multi-year fiscal projections is still limited to aggregate numbers with only a few macro assumptions. At the same time, the three-year projection period may not be fully consistent with the authorities’ medium-term deficit target (as the achievement of a 2 percent deficit target could take longer than 3 years). Underlying macroeconomic assumptions seem to be in a realistic range (Table 2). But the credibility of official projections could benefit from regular and independent realism assessments. The deficit target could be enhanced by specification of consolidation measures.

Table 2.Malaysia: Macroeconomic Assumptions in MTFF
Assumptions for 2019–2021 (Fiscal Outlook 2019)Assumptions for 2016–2018 (Economic Report 2015/2016)201620172018 1/Average (2016–2018)
Real GDP growth4.5–5.54.5–
Nominal GDP growth6.8–8.27.0–

IMF staff estimates.

Sources: Ministry of Finance, Malaysia; CEIC Data; and staff estimates.

IMF staff estimates.

Sources: Ministry of Finance, Malaysia; CEIC Data; and staff estimates.

10. Institutional coverage is also an issue for consideration. Currently, the MTFF is centered on the federal government budget. However, the consolidated public-sector balance shows different dynamics compared to the federal government balance. Anchoring the MTFF on federal government fiscal outcomes risks missing an important dimension of the public sector. In fact, the new administration has taken steps to bring on budget identified off-budget spending. The 2019 Fiscal Outlook extended the analysis of local and state governments and statutory bodies, including the related government guarantees and possible future payment obligations related to Public-Private-Partnerships (PPPs) projects. These efforts could be explicitly framed into the MTFF because the limitation of coverage could create loopholes and undermine the enforceability of fiscal rules.

Fiscal Deficit: Federal Government and Consolidated Public Sector

(In percent of GDP)

Sources: Ministry of Finance, Malaysia

Outstanding Loan Guarantees

Sources: Ministry of Finance, Malaysia

D. Reform Options

11. The FRA should be the center of an overall reform strategy and should stipulate key features of the fiscal framework to ensure a long-lasting impact. Defining key features of the fiscal framework in high-level legislation will help increase the credibility and durability of reforms. Specifically, the FRA should clearly stipulate fiscal objectives, the fiscal anchor, and the key components of the medium-term fiscal framework including operational rules and the institutional set-up. Well-defined escape clauses should be included in the FRA to secure needed flexibility while limiting discretionary deviation from operational rules. In addition, the FRA should also include reporting requirements, as timely reporting and publication of fiscal outcomes are critical to increase accountability and compliance.

12. The Medium-Term Fiscal Framework should be further elaborated under the FRA. The MTFF needs to be consistent with the fiscal objectives and key features specified in the FRA. Technical details could be further developed in lower-level legislation or government decrees. Potential options include:

  • Providing more detailed annual fiscal projections and macroeconomic assumptions
  • Extending the projection period (5–10 years) in line with the time-horizon of medium-term fiscal targets
  • Incorporating a multi-year budgeting process with the aim of guiding line ministries
  • Specifying policy measures to deliver needed fiscal consolidation over the medium-term
  • Periodically monitoring the realism of macroeconomic assumptions
  • Providing annual fiscal risk statements
  • Expanding the institutional coverage

13. Introducing an expenditure rule could strengthen the fiscal framework. Expenditure rules can help avoid procyclicality and are generally easy to communicate and implement, and compliance can be relatively easily monitored. There are potential alternatives including targeting the non-oil primary balance or the structural balance. Non-oil primary balance rules would help protect fiscal policy formulation from oil-price fluctuations. Nonetheless, these rules would not fully address the issue of procyclicality associated with non-oil business cycles. Structural balance rules take into account the business cycle and one-off factors. However, compared to expenditure rules, structural balance rules could be difficult to compute, monitor, and communicate.

14. An expenditure rule should be designed to secure debt sustainability, support countercyclical policy, and meet government spending needs. Specifically, the proposed expenditure rule would include the following key features:

  • The expenditure rule would cap the growth rate of primary expenditure. This allows automatic stabilizers to operate by helping contain expenditure growth in an economic upturn while preventing large expenditure cuts in a downturn. Expenditure rules in percent of GDP should be avoided as they tend to be procyclical.
  • The growth rate of expenditure would need to be consistent with the authorities’ debt anchor. The expenditure rule should achieve the debt anchor under realistic assumptions on GDP growth, revenue, and financing costs and be resilient to cyclical fluctuations. Nonetheless, since primary expenditure has only partial implications on debt dynamics, there is a risk that the implementation of an expenditure rule would not deliver intended debt dynamics due to, for example, a permanent shift in trend growth. To address this concern, a feedback mechanism is warranted to adjust the growth rate of expenditure when the projected debt trajectory deviates from the anchor.
  • The growth rate of expenditure would be calibrated to meet the government’s strategic objectives. Given Malaysia’s relatively low tax revenue and the need to raise spending to meet social and development objectives, revenue mobilization is a priority, as the expenditure rule also needs to be based on realistic and achievable revenue projections. Therefore, the growth rate of expenditure should not be constrained by current revenue mobilization capacity. Rather, specific revenue mobilization measures would need to be developed to meet the needs specified by the spending rule and ensure its consistency with planned revenues.3

15. Illustrative scenarios: Table 3 illustrates the application of expenditure rules based on staff’s macro-fiscal projection (trend nominal GDP growth at 7 percent). Without additional revenue mobilization, the growth rate of expenditure would need to be 5 percent—below the trend nominal GDP growth—to achieve a fiscal deficit of 2 percent of GDP by 2024 (in line with the authorities’ consolidation plan). However, this would lower the non-interest expenditure in percent GDP from 15.9 percent in 2020 to 14.5 percent in 2024 and undermine the authorities’ ability to meet social and development objectives. On the other hand, as shown in the Staff Report (main text, paragraph 14), staff recommends that the primary expenditure broadly remain at the same level in percent of GDP to accommodate additional spending needs. In this case, revenue mobilization measures need to be specified to allow non-interest expenditure to grow at the trend nominal GDP growth rate while achieving a fiscal deficit of 2 percent by 2024 To this end, revenue in percent of GDP should increase from 15.0 percent in 2020 to 16.1 percent in 2024.

Table 3.Malaysia: Illustrative Scenarios
Trend nominal GDP growth: 7 percent
Consolidation path: Achieving fiscal deficit of 2 percent of GDP by 2024 (in line with the authorities’ plan)
Status quo (without consolidation)Revenue15.0%14.9%14.8%14.7%14.7%
Non-interest expenditure15.9%15.7%15.6%15.4%15.4%
Fiscal balance-3.0%-3.0%-2.9%-2.9%-2.9%
Consolidation without revenue mobilizationRevenue15.0%14.9%14.8%14.7%14.7%
(Expenditure growth: 5 percent every year)Non-interest expenditure15.9%15.5%15.2%14.8%14.5%
Fiscal balance-3.0%-2.8%-2.5%-2.3%-2.0%
Consolidation with revenue mobilizationRevenue15.0%15.2%15.5%15.7%16.1%
(Expenditure growth in line with trend nominal GDP growth)Non-interest expenditure15.9%15.9%15.9%15.9%15.9%
Fiscal balance-3.0%-2.8%-2.5%-2.3%-2.0%
Sources: IMF staff calculations based on Public Debt Sustainability Analysis.
Sources: IMF staff calculations based on Public Debt Sustainability Analysis.

16. Well-defined escape clauses will support the rule-based framework. Fiscal rules need to be resilient to the ordinary business cycle fluctuations. Expenditure rules have advantages in terms of flexibility, as automatic stabilizers operate properly by allowing tax revenue to fluctuate along with the business cycle. At the same time, a well-defined escape clause is needed to allow flexibility in response to tail risk events. The escape clause should define: (i) a limited set of events triggering the operation of the clause, (ii) for how long fiscal policy can deviate from the targets, and (iii) a correction mechanism to the targets after the operation of the escape clause.

17. Effectiveness of fiscal rules hinges on strong compliance. Political incentives to comply with fiscal rules are indispensable for making the rules effective. But, political incentives could deteriorate over time if there are no costs for breaching the rules. Recent efforts by the authorities to increase the accountability and transparency of fiscal outcomes should help increase political incentives by raising the reputational costs associated with noncompliance. Greater fiscal transparency through obligations to publicly explain deviations from the fiscal rule can further enhance compliance. An independent fiscal institution could be useful to analyze fiscal policy developments and alert to the risk of breaching fiscal rules.

E. Conclusions

18. Malaysia’s debt anchor plays an important role in maintaining market confidence. However, the overall fiscal framework should be further upgraded in a holistic manner under the FRA to be tabled by 2021. The FRA should clearly stipulate fiscal objectives, the fiscal anchor, and the key components of the medium-term fiscal framework. The strengthened medium-term fiscal framework should include: longer fiscal projections (5-10-years) building on realistic economic assumptions; a multi-year budgeting process; and concrete consolidation measures over the medium-term. To avoid procyclical fiscal policy, introducing an expenditure rule could be considered. Well-defined escape clauses and a formal accountability mechanism will support the effectiveness of the rules-based framework.


    Eyraud, L.,X.Debrun,A.Hodge,V.Lledo, andC.Pattillo2018. “Second-Generation Fiscal Rules: Balancing Simplicity, Flexibility, and Enforceability.” IMF Staff Discussion Note 18/04, International Monetary Fund, Washington, DC.

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    International Monetary Fund. 2018a. “How to Calibrate Fiscal Rules. A Primer” IMF How-To-Note.

    International Monetary Fund. 2018b. “How to Select Fiscal Rules. A Primer” IMF How-To-Note.

    Lledó, V.,S.Acevedo, andM.Sasson. 2019. “Enhancing Ecuador’s Fiscal Framework: Lessons from Second-Generations Rules-Based Systems.” Forthcoming, IMF Working Paper.

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    Ministry of Finance, Malaysia. 2018. “2019 Fiscal Outlook and Federal Government Revenue Estimates.”

    Ministry of Finance, Malaysia. 2013. “Economic Report 2013/2014.”

    Ministry of Finance, Malaysia. 2015. “Economic Report 2015/2016.”


See Economic Report 2013/2014 and 2015/2016.


See IMF 2018b for the methodology.


For example, the European expenditure benchmark takes into account the revenue side by capping the growth rate of expenditure net of new revenue mobilization measures.

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