IMF Executive Board Concludes 2010 Article IV Consultation with Malaysia

Public Information Notice (PIN) No. 10/114
August 13, 2010

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2010 Article IV Consultation with Malaysia is also available.

On July 30, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Malaysia.1


Malaysia has come out strongly from the world recession. Forceful counter˗cyclical policies, sound balance sheets, and intra˗regional trade have primed the recovery. With rebounding domestic and global demand, output losses have by now been reversed. With strong momentum in late 2009 and the first quarter of 2010, seasonally-adjusted GDP is now close to pre˗crisis levels, reversing a nearly 6½ percent peak˗to˗trough loss. Labor markets are also tightening after showing resilience throughout the downturn. The unemployment rate for 2009 peaked at about 3¾ percent, better than anticipated at the time of the 2009 Article IV consultations. Vacancies in manufacturing are now close to their pre˗crisis peak but slack in other sectors remains. Malaysia’s external position remains strong.

Malaysia’s financial sector has withstood the global recession well. Thanks to the Bank Negara Malaysia’s proactive supervision, measures to ensure uninterrupted access to financing, and prudent lending practices, loan book did not deteriorate as much as feared and started improving in the second half of 2009. Banks and insurance companies remain well capitalized and liquid. Corporate balance sheets are sound. Supported by policy, credit growth remained positive even as output shrunk. It is now gaining steam on its own benefitting from strong demand for consumer loans and mortgages. The recovery in business lending is also robust.

With countercyclical support delivered and the recovery on firmer ground, policy normalization is underway. The monetary tightening so far has been broadly appropriate and the stance remains accommodative. The 2010 budget marks a welcome return to consolidation. The global downturn has energized a rethinking of the development strategy, and medium- and longer-term development issues top the policy agenda.

Malaysia’s near˗term prospects are favorable. GDP is projected to expand by around 7 percent in 2010. As positive base effects play out and policy support is reeled in, growth should moderate in 2011. Both external and private domestic demand will propel activity in the near term.

Executive Board Assessment

Executive Directors commended the authorities for their sound fundamentals and forceful countercyclical policies, which helped Malaysia emerge from the global downturn with a strong forward momentum. A broad-based recovery is underway and policies are returning to more normal settings. The challenge now is to make progress toward the authorities’ target of economic growth and structural transformation.

Directors welcomed the consolidation effort in the 2010 budget. They stressed that a sound and sustained fiscal adjustment is necessary to put the public debt ratio on a downward path and encouraged the authorities to follow the indicative deficit path proposed in the Tenth Malaysia Plan. Directors commended the authorities for their decision to reduce subsidies and encouraged them to persevere with reforms in this area while being mindful of the impact on the poor. They welcomed the intention to introduce a goods and service tax, which would broaden the tax base and lessen the dependence on volatile oil revenues, and encouraged its timely implementation. In addition, the budget framework could be further enhanced by benchmarking budget decisions against a framework that links spending to an intergenerationally equitable drawdown of oil wealth.

Directors considered that monetary policy has been appropriately recalibrated to sustain non-inflationary growth. The measured pace of monetary normalization adopted by Bank Negara Malaysia will help prevent financial imbalances in an environment of low interest rates while still supporting aggregate demand and limiting the drag on growth from needed fiscal consolidation.

Directors took note of the staff’s assessment that the ringgit appears to be weaker than its equilibrium level in real effective terms. They generally agreed with the authorities’ view that a stronger ringgit could boost over time the role of domestic demand as a growth driver and promote a shift toward higher-value added industries.

Directors recognized that continued efforts by the authorities to develop capital markets, broaden intermediation, and strengthen risk management have paid dividend during challenging times. They welcomed the new Central Bank Act, which reinforces the underpinnings of the financial system. Directors also commended the authorities’ decision to participate in the Financial Sector Assessment Program.

Directors acknowledged the authorities’ ambitious vision for a far-reaching economic transformation over the longer term. They agreed that the comprehensive structural reform agenda, at the heart of the New Economic Model, holds out promise of faster and inclusive growth. Directors looked forward to a decisive effort and sustained momentum in implementing this agenda. An effective communication strategy could help forge broad public support for these efforts. Further gradual liberalization of product and labor markets will help exploit policy complementarities, encourage private investment and harness the benefits of reform.

Malaysia: Selected Economic and Financial Indicators, 2005–11

  2005 2006 2007 2008 2009 2010 2011


Growth (percent change)


Real GDP

5.3 5.8 6.5 4.7 -1.7 6.7 5.3

Total domestic demand

5.5 7.7 9.4 6.0 -2.7 5.6 4.6


8.5 6.4 9.7 9.0 1.2 5.5 3.2

Private consumption

9.1 6.8 10.5 8.5 0.7 7.0 4.5

Gross capital formation

-2.5 11.3 8.4 -2.3 -14.6 6.1 9.5

Saving and investment (percent of GDP)


Gross domestic investment

20.0 20.5 21.6 19.3 14.5 17.6 18.5

Gross national saving

35.0 37.2 37.5 36.8 31.0 32.4 32.5

Fiscal sector (percent of GDP)


Federal government overall balance

-3.6 -3.3 -3.2 -4.8 -7.0 -5.7 -5.6


20.3 21.5 21.8 21.6 23.3 22.0 22.1

Expenditure and net lending

23.9 24.8 25.0 26.4 30.4 27.7 27.7

Federal government non-oil primary balance

-6.9 -8.6 -8.8 -11.2 -14.1 -11.5 -10.8

Consolidated public sector overall balance 1/

1.4 -0.3 1.5 -5.6 -3.8 -1.3 -2.3

Total public sector gross debt 2/

59.3 54.2 48.6 48.7 61.7 62.3 63.2

Inflation and unemployment (period average, percent)


CPI inflation

3.0 3.6 2.0 5.4 0.6 2.0 2.1

Unemployment rate

3.5 3.3 3.2 3.3 3.7 3.5 3.2

Money and credit (end of period, percentage change)


Broad money (M3)

8.8 13.6 7.9 10.5 7.8

Lending to nonbank private sector

9.1 6.8 9.2 10.2 6.5

Three-month interbank rate ( percent)

2.9 3.7 3.6 3.6 2.2

Balance of payments (US$ billions)


Trade balance

34.1 37.4 37.6 51.2 40.2 40.7 41.4

Exports, f.o.b.

142.5 160.9 176.1 199.3 157.3 182.1 196.8

Imports, f.o.b.

108.5 123.5 138.5 148.1 117.2 141.4 155.4

Services and income account

-8.9 -6.7 -3.3 -7.1 -2.8 -2.6 -2.6

Current account balance

20.7 26.1 29.7 38.9 31.8 32.3 33.0

(In percent of GDP)

15.1 16.7 15.9 17.5 16.5 14.8 14.0

Financial account balance

-9.8 -11.7 -11.3 -35.4 -22.8 -23.0 -26.0

Overall balance

3.6 6.9 13.2 -5.5 3.9 9.3 7.0

Gross official reserves (US$ billions)

70.5 82.5 101.3 91.4 96.7 106.1 113.1

(In months of following year's imports)

5.8 5.9 6.8 7.6 6.8 6.9 6.8

(In percent of short-term debt) 3/

373.5 466.2 495.4 275.8 363.3 396.2 427.1

Total external debt (US$ billions)

52.3 52.2 56.7 68.2 68.3 68.2 67.4

(In percent of GDP)

38.0 33.5 30.3 30.7 35.4 31.2 28.5

Short-term external debt (percent of total) 3/

36.1 33.8 36.1 48.7 39.0 39.3 39.3

Debt-service ratio


(In percent of exports of goods and services)

5.3 4.8 3.8 2.6 6.5 2.7 2.7

Sources: Data provided by the authorities and IMF staff estimates.

1/ Capital expenditure in the budget includes foreign fixed assets and other items, such as purchase of shares and land, which are excluded from public investment in the national accounts.

2/ Excludes financial public enterprises and nongovernment-guaranteed domestic debt of the nonfinancial public enterprises.

3/ By remaining maturity.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:


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