Press Release No. 14/537

Press Release: IMF Staff Concludes 2014 Article IV Mission to Malaysia

November 24, 2014

An International Monetary Fund (IMF) team, led by Alex Mourmouras, visited Kuala Lumpur and Putrajaya during November 13-24, 2014, to conduct discussions for the 2014 Article IV Consultation with Malaysia.¹ The team exchanged views with senior officials of the Government of Malaysia and Bank Negara Malaysia (BNM), and met with representatives from the private sector, think tanks and academia.

At the conclusion of the visit, Mr. Mourmouras issued the following statement:

“The mission commends the authorities for taking significant steps to strengthen the resilience of the Malaysian economy, while maintaining macroeconomic stability. The removal of fuel subsidies, the introduction of a goods and services tax (GST) and the strengthening of social safety nets are decisive moves that should help ensure the sustainability of government finances and allow more spending aimed at promoting sustainable and equitable medium-term growth. Bank Negara Malaysia’s proactive policies, including a series of measured controls on bank lending and an increase in its policy rate last July, have helped contain inflationary pressures and address financial imbalances.

“Malaysia’s near-term growth prospects remain strong. Real GDP growth in 2014 is projected to be close to 6 percent. While growth is expected to moderate to about 5¼ in 2015, private domestic demand is expected to remain robust. A moderate increase in inflation is expected in 2015 following GST implementation but subdued underlying inflationary pressures will mitigate its impact. The current account surplus is projected to rise to about 5 percent of GDP in 2014, as import growth has slowed and supported by a modest recovery in external demand. The current account surplus is expected to remain comfortable in 2015 but will narrow somewhat due mainly to lower oil and gas prices.

“Malaysia is on track to achieve the 2014 federal budget deficit target of 3.5 percent, down from 3.9 percent in 2013. With fuel subsidy removal locking in the impact of lower oil prices, the mission projects that the deficit could decline below 3 percent of GDP in 2015. The overall fiscal strategy should bolster equality, with budgeted cash transfers tightly targeted to low-income groups. The mission welcomes the move toward performance-based budgeting, and the plans to introduce accrual accounting. It recommends that the authorities continue their efforts to improve fiscal management, including developing a medium-term budget framework, a fiscal risks report and greater transparency for government-linked entities.

“While inflationary conditions remain relatively benign, credit growth has been strong for a sustained period, and house prices and financial risk-taking remain elevated. The macroprudential controls implemented by Bank Negara Malaysia over the past two years have helped slow the growth in consumer lending. Nevertheless, household leverage remains high, although risks are mitigated by substantial holdings of financial assets. Additional macro-prudential measures may be needed if financial imbalances intensify. As economic growth strengthened, the move to a tighter monetary stance in July was appropriate to help reverse negative real interest rates and curtail the growth in leverage. Vigilant, proactive supervision and regulation remains important to identify growing risks, especially with regard to the non-bank sector. 

“Malaysia’s recent strong growth, high investment and improvements in business environment scorecards are impressive. But the lower potential growth in the advanced economies makes maintaining this growth performance more challenging and provides an additional imperative for structural reforms. Achieving high-income status by 2020 will require steadfast implementation of a range of structural reforms, as identified by the authorities’ multi-year transformation programs and the upcoming 11^th Malaysia Plan. Continued infrastructure investment, supported by enhanced public finance management, can ease bottlenecks and support sustainable growth. These reforms, reinforced by continued financial sector development and greater financial inclusion, can accelerate productivity growth, encourage higher value-added activities, and help reduce income inequality. Malaysia should also benefit from its outward economic orientation and the strengthening of regional economic and financial integration underway, including the creation of the ASEAN Economic Community in 2015 and other regional trade initiatives.

“The team would like to thank the officials of the Government of Malaysia and Bank Negara Malaysia, as well as representatives from think tanks,the private sector and academics for the useful discussions. We would also like to thank the authorities for their generous hospitality during our stay. We look forward to maintaining a constructive relationship with Malaysia as it progresses towards a diversified, high income economy.

“The mission will prepare a staff report and present it to the Executive Board of the IMF for discussion in February 2015.”

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.