Malaysia’s Fiscal Deficit: Domestic Borrowing, Sustainability, and the Path Forward

Malaysia’s Fiscal Deficit: A Balancing Act Between Growth and Sustainability

Malaysia’s fiscal health has been under the spotlight in recent years, with policymakers, economists, and the public closely watching the government’s efforts to rein in deficits and manage rising debt. While official statements highlight progress in narrowing the fiscal deficit and maintaining discipline, the underlying reality is more nuanced. Malaysia continues to spend beyond its means, albeit with greater restraint and a sharper focus on long-term sustainability. The central question remains: is the current approach to borrowing and spending building a stronger future, or is it mortgaging tomorrow for today’s development?

How Big Is Malaysia’s Fiscal Deficit and What Drives It?

Malaysia’s fiscal deficit—the gap between government spending and revenue—has been a persistent feature of its public finances. In 2023, the deficit stood at RM91.4 billion, or 5% of gross domestic product (GDP), down from 5.6% in 2022. For 2024, the deficit is projected to narrow further to 4.1% of GDP, with a target of 3.8% in 2025. These improvements reflect a concerted effort by the government to consolidate its finances, as mandated by the Public Finance and Fiscal Responsibility Act 2023.

The deficit is not driven by day-to-day expenses. Malaysia’s revenues are sufficient to cover operating costs such as salaries, pensions, and subsidies. Instead, the shortfall arises from development spending—investments in infrastructure, energy, and other long-term projects that cannot be funded from current revenues. This approach is considered sound fiscal policy, as borrowing for productive investment can generate future growth. However, it still means the country is spending more than it earns, with the difference financed by borrowing.

Domestic Borrowing Dominates

Malaysia’s strategy has been to borrow almost exclusively in its own currency, the ringgit. As of the end of 2023, domestic debt accounted for 97.5% of total government debt, amounting to RM1.14 trillion. Offshore loans made up just 2.5%, or RM29.8 billion. This reliance on domestic borrowing shields Malaysia from the risks of currency fluctuations and sudden capital outflows that can destabilize economies with high foreign debt.

However, heavy borrowing in the local bond market can have side effects. When the government absorbs a large share of domestic credit, it can crowd out private investment by raising interest rates and making it more expensive for businesses to borrow. This dynamic, known as the “crowding out” effect, is a concern for Malaysia’s private sector and overall economic dynamism.

Debt Levels: Are They Sustainable?

Malaysia’s total government debt reached RM1.17 trillion at the end of 2023, equivalent to 64.3% of GDP. When including government guarantees and other liabilities, the figure rises to RM1.53 trillion, or 84% of GDP. These numbers are significant, but statutory debt—comprising Malaysian Government Securities, Investment Issues, and Islamic Treasury Bills—remains below the legal ceiling of 65% of GDP.

Prime Minister Anwar Ibrahim and Treasury officials have emphasized that Malaysia’s debt is within legal limits and that the government is committed to reducing both the deficit and the debt-to-GDP ratio. The medium-term goal is to bring the debt ratio down to 60%, a target supported by ongoing fiscal reforms and improved revenue collection.

Fiscal Responsibility Act: A New Framework

The Fiscal Responsibility Act, enacted in 2023, sets clear rules for fiscal discipline. It requires parliamentary approval for any adjustments to fiscal targets and mandates that the overall debt level must stay below 60% of GDP in the medium term. This legal framework is designed to reassure investors and credit rating agencies that Malaysia is serious about fiscal sustainability.

Expert Perspectives on Debt Sustainability

Economists generally agree that the size of Malaysia’s debt is not inherently dangerous, provided the country can service its obligations without undermining growth or social stability. The key is whether borrowed funds are used for investments that generate returns exceeding the cost of debt. If so, debt can be a tool for development. If not, it becomes a burden on future generations.

Malaysian Rating Corporation Bhd (MARC) commented, “Malaysia’s fiscal deficit target of three per cent by 2026 remains challenging but achievable… Higher economic growth relative to borrowing costs would lead to passive deleveraging, naturally lowering the debt-to-GDP ratio.”

Malaysia’s positive growth-interest rate differential in most years has helped keep debt manageable. However, in 2023, slower growth turned this differential negative, highlighting the importance of robust economic expansion to maintain fiscal health.

What Are the Risks of Heavy Domestic Borrowing?

While borrowing in ringgit reduces exposure to external shocks, it does not eliminate fiscal risks. High levels of domestic debt can limit the government’s flexibility to respond to future crises, such as global downturns or commodity price shocks. Moreover, as debt grows, so do interest payments, which can crowd out spending on essential services and development.

Crowding Out Private Investment

Academic studies and international experience show that persistent government deficits and heavy domestic borrowing can raise interest rates, making it harder for private firms to access affordable credit. This “crowding out” effect can stifle entrepreneurship, slow job creation, and dampen economic growth. In Malaysia, concerns have been raised that the government’s dominance in the bond market could be limiting opportunities for private sector expansion.

Inflationary Pressures

Research also indicates that fiscal deficits can be inflationary, especially when financed by domestic borrowing. While Malaysia has managed to keep inflation relatively low—1.8% in 2024—there is a risk that continued deficit spending could push prices higher in the future, particularly if political instability or external shocks undermine confidence in fiscal management.

Global Context: Lessons from Other Economies

The International Monetary Fund (IMF) has warned that high public debt, combined with slow growth and rising interest rates, poses risks to financial stability worldwide. Countries with limited fiscal space may find it harder to support their economies during downturns, and excessive debt can make them vulnerable to capital outflows and currency depreciation. Malaysia’s prudent approach to domestic borrowing helps mitigate some of these risks, but the margin for error is slim.

Fiscal Reforms and Revenue Strategies

To address these challenges, Malaysia has embarked on a series of fiscal reforms aimed at strengthening revenue, improving spending efficiency, and ensuring long-term sustainability.

Tax Reforms and Revenue Collection

The government has expanded the Sales and Services Tax (SST) and is considering further tax reforms to broaden the revenue base. While reintroducing the Goods and Services Tax (GST) could generate more revenue, officials have opted for a more targeted approach to avoid overburdening consumers. The focus is on taxing non-essential goods and services while exempting basic necessities.

Improved tax compliance and stronger enforcement have also boosted revenue. In the first quarter of 2025, federal government revenue rose by 3% year-on-year, driven by higher sales and service tax receipts and stronger individual income tax collection.

Targeted Subsidies and Spending Efficiency

On the spending side, the government has retargeted subsidies, particularly for diesel, and optimized grants to statutory bodies. These measures have helped reduce total federal expenditure and shrink the deficit. At the same time, social aid programs such as Sumbangan Tunai Rahmah (STR) and Sumbangan Asas Rahmah (Sara) continue to support vulnerable groups.

Allocations for education and healthcare have increased, reflecting a commitment to inclusive development. The Education Ministry’s budget rose to RM74 billion in 2025, while the Health Ministry received RM45 billion. These investments aim to improve public services and infrastructure, laying the groundwork for future growth.

Can Malaysia Achieve Its Fiscal Targets?

The government’s goal is to reduce the fiscal deficit to 3.8% of GDP in 2025 and to 3% by 2026, while bringing the debt-to-GDP ratio below 60%. Progress so far has been encouraging, with the deficit narrowing for three consecutive years and new borrowings declining from RM100 billion in 2022 to RM76.8 billion in 2024.

Economic Growth: The Critical Variable

Achieving these targets depends heavily on sustained economic growth. In 2024, Malaysia’s GDP grew by 5.1%, exceeding expectations. Private consumption, investment, and trade were key drivers, supported by low inflation and a declining unemployment rate. For 2025, growth is projected at 4.5% to 5.5%, but risks remain from weaker external demand, geopolitical tensions, and global trade disruptions.

Analysts warn that slower growth could make it harder to meet deficit targets. The IMF has downgraded Malaysia’s growth forecast for 2025 to 4.1%, citing the impact of US tariffs and global economic uncertainty. If revenue falls short or spending rises unexpectedly, the government may need to adjust its plans or find new sources of income.

Contingent Assets and Liabilities

Malaysia’s fiscal position is bolstered by substantial contingent assets, including the financial strength of PETRONAS and sizeable sovereign wealth funds. In 2023, PETRONAS contributed RM85.7 billion to government revenue, and liquid assets exceeded RM220 billion, equivalent to 12% of GDP. These resources provide a buffer against fiscal shocks and help reassure investors.

However, contingent liabilities—such as government guarantees for loans and pension obligations—pose long-term risks. Pension payments are rising rapidly, and the existing fund is insufficient to cover future obligations. The government has begun enrolling new public sector recruits in the Employees Provident Fund instead of traditional pension schemes, but further reforms may be needed to ensure sustainability.

Structural Reforms and Institutional Strengthening

Malaysia’s fiscal reforms have been praised by international organizations, including the IMF, for supporting growth, social protection, and macroeconomic stability. The Fiscal Responsibility Act and ongoing efforts to improve governance, digitalization, and climate resilience are laying the foundation for more effective debt management and fiscal consolidation.

Economists cited by VietnamPlus noted, “Malaysia’s sizable national debt does not pose a threat to the country’s long-term prosperity, thanks to its strong economic fundamentals and prudent fiscal management.”

What Are the Broader Implications for Malaysia’s Future?

The debate over Malaysia’s fiscal deficit and borrowing strategy is ultimately about the country’s long-term trajectory. If borrowed funds are invested wisely in projects that boost productivity, competitiveness, and job creation, they can lay the groundwork for sustained prosperity. If not, they risk saddling future generations with debt and limited options.

Malaysia’s experience offers lessons for other emerging economies grappling with similar challenges. Prudent fiscal management, credible reforms, and a focus on productive investment are essential for maintaining stability and fostering growth. At the same time, governments must be vigilant against complacency, as high debt levels can quickly become unsustainable if growth falters or external shocks hit.

In Summary

• Malaysia’s fiscal deficit has narrowed from 5% of GDP in 2023 to a projected 3.8% in 2025, reflecting improved discipline and reforms.
• The government borrows mainly in ringgit, reducing external risk but increasing reliance on domestic credit markets.
• High domestic debt can crowd out private investment and limit fiscal flexibility, especially in times of crisis.
• Fiscal reforms, targeted subsidies, and improved revenue collection are helping to strengthen sustainability.
• Achieving deficit and debt targets depends on sustained economic growth and continued policy discipline.
• Contingent assets like PETRONAS and sovereign wealth funds provide a buffer, but rising pension obligations and other liabilities pose long-term risks.
• Malaysia’s experience underscores the importance of using borrowed funds for productive investment and maintaining credible fiscal frameworks.