IMF Executive Board Concludes 2013 Article IV Consultation with MalaysiaPress Release No. 14/104
March 14, 2014
Malaysia’s growth moderated but registered a healthy 4.7 percent in 2013, and inflation remained low. Activity was supported by strong investment, still-vigorous consumption and, in the face of much needed fiscal tightening in the second half of the year, by improved foreign demand. The momentum should continue in 2014, supported by a long pipeline of multiyear investment projects, consumption underpinned by strong labor markets and supportive, albeit gradually tightening, domestic financial conditions. Together with an improved external environment, these trends should offset mild headwinds from fiscal consolidation.
Amidst capital outflows from emerging market economies and concerns about Malaysia’s relatively high federal debt, the authorities undertook a timely, decisive yet gradual recalibration of their fiscal policies in 2013. In addition to strengthening the sustainability of Malaysia’s public finances, the authorities aim to promote efficiency, equity and growth in their revenue and expenditure systems and are taking steps to minimize the drag to the economy from fiscal consolidation. Their plans to rationalize fuel subsidies are appropriately measured, they have allowed sufficient preparation time for the introduction of the GST, and are strengthening their social safety nets. Last, but not least, the management of fiscal policy has been reinforced by the creation of a high level Fiscal Policy Committee—a powerful new player in Malaysia’s fiscal process.
Bank Negara Malaysia (BNM) has been focused on its growth objective in recent years, maintaining an accommodative monetary stance that is consistent with its dual mandate and appropriate in view of substantial downside risks to growth and subdued inflation, at 2.1 percent in 2013. Going forward, monetary policy makers must contend with somewhat higher headline inflation in 2014−15 as fuel, electricity and other administered prices gradually rise and the GST is implemented. BNM is well positioned to prevent second round effects from higher costs to prices from becoming embedded in the wage-price structure. Timely detection and decisive preemption, through gradual, well communicated, and credible interest rate action, will be needed.
Malaysia’s financial system is sound, backed by a strong regulatory and supervisory framework, and well-placed to withstand stresses, including from a potentially bumpy exit from UMPs—as demonstrated most recently during the capital outflow episode of last spring-summer. Nevertheless, the potential for risk on-risk off cycles together with high household debt and rising house prices all warrant continued vigilance. Recent steps to strengthen financial supervision, including the Financial Services Act and the Islamic Financial Services Acts, and the targeted and phased approach to macroprudential policy, are welcome. The authorities are monitoring property prices and credit growth closely and stand ready to act with additional macroprudential measures as needed.
The authorities are implementing a wide range of multiyear transformation programs and blueprints to strengthen growth and make it more inclusive, and Malaysia has made important progress in human capital accumulation. The authorities are intent on reforming Malaysia’s educational system, reduce shortages of high-skill workers, and alleviate skill mismatches, which are important in raising potential growth and promoting equity within and across generations.
Executive Board Assessment2
Executive Directors noted that near term growth prospects for the Malaysian economy are favorable but exposed to risks from tighter global financial conditions and slower growth in major trading partners. Directors agreed that Malaysia is well positioned to cope with the uncertain external environment, noting the authorities’ skillful management during past periods of market turbulence, healthy reserves, the flexible exchange rate regime, and deep capital markets.
Directors supported the authorities’ recalibration of fiscal policy aimed at reducing federal debt and rebuilding buffers. They welcomed the creation of the high level Fiscal Policy Committee and the plan to reduce subsidies gradually. Directors underscored the importance of improvements in targeting social transfers, restraining wage growth, and broadening the tax base, including through the planned introduction of the Goods and Services Tax (GST) and greater reliance on property taxes. These reforms should help secure the sustainability of Malaysia’s public finances while promoting efficiency, equity, and growth objectives. Directors recommended formulating a credible concrete plan, underpinned by a debt target for 2020, to anchor consolidation efforts and reduce dependence on oil revenues in the face of rising age related spending. Fiscal risks from contingent liabilities also warrant close attention.
Directors agreed that the monetary policy stance is appropriately accommodative, and that the central bank’s credibility should help maintain price stability. They encouraged the authorities to remain vigilant to inflationary pressures and stand ready to adjust their policy rates if subsidy rationalization and the introduction of GST lead to higher sustained headline inflation.
Directors noted that Malaysia’s financial system remains sound, well capitalized, and resilient, thanks to a strengthened regulatory and supervisory framework. They also acknowledged the significant progress made in implementing the recommendations of the Financial Sector Assessment Program. Directors highlighted nevertheless that ongoing global volatility, high household debt, and banks’ exposure to real estate warrant continued vigilance, and may require additional macroprudential measures.
Directors welcomed the substantial narrowing of Malaysia’s current account surplus in recent years and the attendant shift of the sources of growth toward domestic demand. They agreed that increased social spending related to population aging, and structural reforms to strengthen social safety nets and boost investment, combined with continued exchange rate flexibility, should help facilitate further external rebalancing. Directors took note of the staff’s assessment that the external position appears to be moderately stronger than the level implied by medium term fundamentals but stressed the uncertainty surrounding such assessment.
Directors commended the authorities for their ambitious reform agenda, which aims to transform Malaysia into a high income economy. They supported initiatives to upgrade human capital and promote inclusiveness, stressing in this regard that priority should remain on improving education and labor skills.