Public debt and GDP growth in the Malaysian islamic economy

The Malaysian economy was in the last stretch of its 30-year aim to become a high-income developed nation by the year 2020. Although the original vision has been modified since it was first formulated, it largely remains intact, however, the goal appears challenging to achieve. There are significant structural impediments to achieving sustained and inclusive growth, especially to break through the “middle-income barrier” i.e. to become a high-income. Furthermore, Malaysia is particularly an open economy, sensitive to events in the global economy, including China but also the USA and Eurozone. Public debt levels are a secular concern of government noting that Malaysia promotes Islamic economics and finance (which generally proscribes indebtedness as well as outlawing interest and gambling) and it is considered a major tool in the goal towards achieving growth and stability. This paper explores the relationship between public debt levels and GDP growth in Malaysia using time series techniques to ascertain the significance of public debt to growth in the Malaysian context. The findings are limited by data availability and the techniques employed, but suggest that financial variables such as debt and savings have a relative leading impact on GDP growth. Consequently, policy makers would be advised to continue with structural reforms and not relaxing discipline over financial variables as there is a temptation while seeking an extraordinary growth path.