A STUDY ON THE EXTERNAL DEBT AND THE IMPACTS OF MACROECONOMICS ADJUSTMENTS: INTRODUCING ECONOMIC MODEL FOR MALAYSIA'S EXPERIENCE

Ahmad Mosfi Mahmood (University of Malasia Sabah)
Janice Nga Lay Hui (University of Malasia Sabah)
Thirunaukarasu Subramaniam (University of Malasia Sabah)
Rosita Chong (University of Malasia Sabah)

External debt accumulation is a common phenomenon of many countries, especially developing countries and less developed countries. There are three major factors that can contribute to the external debt accumulation: first, nation's importing more than export; second, when the government deficit is incurred; third, high inflation rate that will lead to "capital flight". Malaysia, as a developing country, also has the external debt problem. Asian crisis that started in 1997 had lead ringgit's (Malaysia's currency) to depreciate. The ringgit's depreciation had an immediate negative impact on the nation's external debt position. It has been reported that Malaysia's external debt in ringgit terms increased by 48% to RM171 billion or 64% of GNP at the end of 1997, compared with the pre-crisis debt level of RM115.3 billion or 43% of GNP as at June 1997. However, Malaysia remained in the category of moderately indebted country. This study will analyse the impact of macroeconomics adjustments to the external debt of Malaysia's economy. A simple macroeconomic model to determine the impact of monetary, fiscal and exchange rate policies will be developed to explain the Malaysia's experiences. Money supply, national government deficit and exchange rate are the variables that represent the monetary policy, fiscal policy and exchange rate policy, respectively. The expected result is, the adjustments of these macroeconomics policies have a significant impact on the external debt problem. Thereby, some policy suggestions can be made to overcome external debt problem.