KUCHING: Finance Minister Lim Guan Eng needs to get the concept of ‘budget’ and ‘bankruptcy’ correct to avoid being accused of incompetency, says University of Malaya professor Dr Fatimah Kari.
Fatimah, who is an expert in the field of Trade and Environment, Microeconomics, Macroeconomics, International Trade and Environmental and Resource Economics at the Department of Economics, Faculty of Economics and Administration, said in terms of concept, it was not ‘economically correct’ to say a state would go bankrupt, as the more appropriate term would be ‘budget deficit’ as it would better describe the government’s fiscal management.
“The Minister of Finance better refer back to Economics 101 and use the proper concept to be ‘economically correct’, as improper or rather incorrect use of terms may reflect incompetency in understanding economics and economic instruments,” she told The Borneo Post when contacted yesterday.
The academician was asked to comment on Finance Minister Lim Guan Eng’s claim last Friday about Sarawak going bankrupt in three years if it continued to be governed by the Gabungan Parti Sarawak (GPS) coalition.
“Bear in mind, ‘bankruptcy’ is not an economic term but ‘budget deficit’ is, as you will find in any economics textbook or policy document.
“I assume he (Lim) is referring to ‘budget deficit’, which in that case would be a perfectly normal state of the economy. Malaysia has run on a budget deficit for several years and we don’t consider the government (past or present) as bankrupt,” she said, adding that the public needed to be educated on the concept of budget deficit as the word ‘bankrupt’ does not have any economic meaning – at least in terms of policy response and fiscal management.
Fatimah went on to state that if economic deficit was the issue, that deficit must be managed and paid, or else it would create debt, which would make it more difficult to raise funds.
“If this debt grows, it can pose dangers on two fronts. First, it must be paid with interest and secondly, inability to control budget deficit will lead to difficulty in raising funds.
“Eventually this points out to further increase in interest rates that will indicate riskiness in any economic system.
“However, some other instruments can be put in place to address interest rates to be capped at reasonable level.”
She said the Sarawak government could keep adding each year’s deficit to the debt for a long time and as long as interest rates remained low, the interest on the debt would remain manageable.
“The World Bank says the tipping point is when a country’s debt-to-GDP ratio is 77 per cent or higher. Thus, there is some ‘threshold’ that can guide any policies in managing budget deficit and debt ratio,” she elaborated.
Fatimah believed that the Sarawak government might opt for other options such as using previous savings to finance the operational and development expenditure, or to introduce new taxes or other sources of revenue.
“In this regard, the five per cent petroleum tax introduced in the Sarawak 2019 State Budget serves as the policy response that the state can rely on in the event that state government spending may offshoot the target,” she said.
She stressed that Sarawak had forecasted a fairly reasonable surplus of RM122 million on the back of 4.6 per cent growth in 2018, and forecast nationwide growth of 4.9 per cent in 2019.
On Lim’s three-year prediction, she said economic decision in making strategies did not exist in a vacuum and in isolation.
“For any economic strategist, the three-year period may be long enough to see some good economic growth figures coming on stream. I don’t deny the downside risk of the present global economic slowdown; however, long-term investors (foreign direct investment) will come in provided there is political stability and clear economic policies and guidelines that can protect their interest.
“In this regard, the state government may offer new sectors such as downstream processing in oil and gas, services and IT-related sectors. In the end, policy response needs to be bold and focus more on how to create growth that will affect the wellbeing of the people,” she said.
Fatimah also advised the Sarawak government to continue convincing domestic and foreign investors as to the clear and bold economic policies that were in place.
“Admittedly, the budget deficit may increase and escalate into bad debt and such situation will force investors to question whether the government can manage the deficit and debt-to-GDP ratio.
“At the end of the day, prudent management of budget deficit and government debt is a more ‘intelligent way’ at debating this issue, instead of an outright declaration of ‘bankruptcy’ that the minister had mentioned,” she said.