DUE to the impact of Covid-19, governments the world over, including Malaysia, have had to ramp up spending with borrowing or issuance of public debt.
In practice, printing money is followed by printing of more money, as in the case of Zimbabwe and the Weimar Republic of post-World War One Germany.
We still need to issue Malaysian Government Securities (MGS) alongside Government Investment Issues (GII) and sukuk to cover our development and infrastructural expenditure.
This will not only maintain the integrity of our ringgit but may also fuel fresh demand from foreign investors or buyers.
The last time Bank Negara could be said to print money was during the Asian Financial Crisis of 1997/98 when Danaharta issued triple-A zero-rated coupon bonds to institutional investors, such as the Employees Provident Funds, Khazanah, pension funds and insurance companies that were later to be exchanged for the non-performing loans from participating banks.
While some worry about the burden of government debt passing on to future generations in the form of higher taxes, it has to be highlighted that it is customary for governments to roll over their maturing debt with issuance of fresh debt.
Even during the recession of 2008, which did not particularly affect Malaysia as our financial system was sound and stable due to high levels of capital adequacy ratio, our budget deficit was 7.0 per cent and was even higher before that.
With the government aiming to reduce the budget deficit to 3.0 to 3.5 per cent of gross domestic product (GDP) just prior to Covid-19, we have ample room and historical precedent to increase our borrowing and by extension our expenditure to double that amount, as confirmed by the finance minister.
But what are the other benefits of government borrowing or public debt issuance?
Firstly, government debt is simply an extension of the government's monetary policy stance, i.e. the Overnight Policy Rate (OPR) set by Bank Negara.
We know that the OPR is meant to influence the market interest rate.
Now, while MGS yields or rates do not influence the market interest rate directly, they do influence the pricing of private sector debt securities, such as corporate bonds and money markets.
In turn, this will factor into the balance sheet of banks and therefore, their base rate calculations used for loans.
Secondly, and just as important, is the fact that government bonds, and it cannot be strongly emphasised enough, provide a safe haven for investment in risk-free, sovereign assets.
Approximately 97 per cent of our debt is in ringgit, therefore the chances of the government defaulting are nearly zero.
Of course, this begs the question of money printing at the end. However, we don't have to resort to this position.
Remember that the government is always in a position to roll over its maturing debt perpetually.
Thirdly, the necessity of government debt can be seen in its role and value as a provider of liquidity for the financial markets, albeit recycled.
Funds obtained by private sector lenders through direct fiscal injection is sucked out of the economy and goes back into the coffers of the government.
At the same time, the bonds themselves become part of the financial system — ready to be traded or used as collateral for borrowings.
This is how the liquidity of the financial system is enhanced.
As such, government debts act and serve as a lynchpin of stability of financial markets by ensuring ample liquidity without the need for the central bank to resort to quantitative easing (QE), which is the creation of fresh reserves in exchange for high-quality assets.
Bank Negara is too cautious and careful to engage in QE and rightly so.
Our government of whatever political stripe has always been acutely aware of the need to be prudent in expenditure and borrowings, hence the 55 per cent ceiling of the debt-to-GDP ratio.
At the end of the day, government debt is necessary.
The government is not about to gamble away the future of our public finances by unnecessarily printing money and also in no danger of "over-borrowing" while ensuring the debt raised is used for productive yield that has multiplier effect.
The writer is head of Social, Law and Human Rights at EMIR Research, an independent think tank focused on strategic policy recommendations based on rigorous research
The views expressed in this article are the author's own and do not necessarily reflect those of the New Straits Times
