The Malaysian government recognises the need to enhance fiscal risk management and establish a more robust fiscal framework, with a commitment to further reduce debt and liability by being prudent and fiscally responsible.
The "Fiscal Outlook and Federal Government Revenue 2019" report said the existing tools to enhance revenue and expenditure efficiency are fragmented and need to be complemented with a fiscal risk management framework, which is more strategic and forward looking.
"Guided under the competency , accountability and transparency principles, the government will further embark on fiscal governance enhancement initiatives to ensure fiscal discipline and generate sustainable economic growth," the report said.
Since independence, it said the government has embarked on 12 five-year development plans with the aim of achieving economic development and improving the wellbeing of the people.
Malaysia has gradually developed from an agriculture-based economy to an industrialised nation, with a well-diversified economic structure and per capita income of US$9,828, as at end of 2017, and one core element of the nation's economic transition is the government development initiative through fiscal policy instruments.
However, excessive use of fiscal tools will increase fiscal risk exposures, particularly debt and liabilities, it said.
The fiscal risk is generally defined as the possibility of deviations of fiscal outcomes from what was expected at the time of the budget or another forecast.
"Despite strong economic fundamentals, as an open economy, our currency and financial markets are vulnerable to investors' perception, particularly with regard to governance and conduct of the government.
"Volatility in capital flows will lead to increased risk premium and impact the cost of doing business, which will cause economic and financial vulnerabilities.
"This will, in turn, affect the nation's fiscal balance and debt position, subsequently distorting the national development agenda and reduce the people's wellbeing," the report said.
With the global economy and trade becoming more interconnected among countries, the report said the economy was more exposed to external and domestic risks which in turn influenced the targeted fiscal outturn and debt position.
Therefore, MOF said a growing need for comprehensive identification and management of fiscal risk is imperative, particularly for Malaysia to ensure the nation's fiscal balance and indebtedness is contained at a sustainable level.
The fundamental aspect of effectively managing the fiscal risk exposure is to identify the sources of fiscal risk.
According to the International Monetary Fund's (IMF) conceptual framework, there are three main categories of fiscal risks, namely general economic risk, specific risk and structural or institutional risk.
While the features of the fiscal risk may vary across countries, the fiscal components and factors are identical, particularly in the form of resources such as revenue and expenditure, said the report.
Each of these components would then have to be assessed, particularly on its exposure to the fiscal and debt position.
With effective fiscal and monetary policy, the nation would be able to maintain its macro stability and remain competitive in the global economy, it said.
The government, it said, was also guided by several administrative guidelines to strengthen fiscal discipline further such as there must be an operating surplus, where operating expenditure must be well within revenue.
In terms of debt servicing, to ensure debt affordability and productive spending, debt service charges (DSC) should not exceed 15 per cent of revenue or operating expenditure.
Moreover, it said the Ministry of Finance recently established two main committees, namely the Public Finance Committee and Tax Reform Committee.
The Public Finance Committee is chaired by the Finance Minister, with members comprising the Minister of Economic Affairs, Governor of Bank Negara and senior government officials with the main aim of strengthening the institutional structure of the country's fiscal management.
The high-level committee would deliberate on important fiscal issues, including mitigation plan in fiscal risk management.
As for the Tax Reform Committee, its main objective was to enhance the tax structure and revenue base, the report added.