## 1mysea2021001 ## Source details **Canonical URL:** [1mysea2021001](https://www.imf.org/-/media/files/publications/cr/2021/english/1mysea2021001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1mysea2021001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1mysea2021001.pdf.json) --- ### Pre‑COVID‑19 context - Real per-capita GDP had been growing at an annual pace of 3¾ percent after the Global Financial Crisis. - Low inflation and unemployment; inequality and poverty had declined since the mid-1970s. - Political transition in February 2020: resignation of PM Mahathir Mohamad; King asked Mr. Muhyiddin Yassin to form a government. - Authorities’ policies broadly aligned with Fund advice on fiscal consolidation and structural reforms, though implementation delayed by COVID-19. - Central bank priorities: development of domestic financial and foreign exchange markets; staff and authorities disagree on role of capital flow management measures. ### Economic impact of the COVID‑19 crisis - Epidemiology and containment: - Nationwide Movement Control Order (MCO) implemented in March 2020; less stringent measures in May; localized and conditional MCOs in September. - By late-January 2021, about 180 thousand cases recorded and 0.4 percent fatalities. - Activity and output: - Growth estimated at -6 percent in 2020 (2019: 4.3 percent). - Private consumption declined sharply; economic losses most pronounced in 2020Q2. - Economy rallied in 2020Q3 supported by policy stimulus and resumption of non-essential business operations. - Exports rebounded driven by strong demand for health-related and electronic equipment. - Labor market: - Unemployment fell to 4.8 percent in November from 5.3 percent in May 2020. - Over 60 percent of private-sector job losses in the year to December were in jobs earning under RM3,000 per month. - 39 percent of job losses concentrated among managers and professionals; three-quarters of new placements were in jobs earning under RM1,500 per month. - Inflation: - Headline inflation declined to -1.1 percent in 2020 (2019: 0.7 percent). - Core inflation broadly stable at 1 percent (2019: 1.1 percent). - Fiscal response: - Five COVID-19 relief packages in 2020 totaling RM305 billion (21¼ percent of GDP). - Budgetary component was 3.8 percent of GDP; estimated total COVID-related fiscal spending by year-end was RM38 billion (2.6 percent of GDP); remaining planned for 2021. - Revenue shortfall of 2.6 percent of GDP partly offset by additional dividends from government-related agencies. - Federal government deficit estimated at 6 percent of GDP in 2020, 2.8 percent of GDP above target. - Monetary and financial measures: - Bank Negara Malaysia (BNM) cumulative 125 bps cut in the overnight policy rate (OPR); 100-bps cut in statutory reserve requirement (SRR); allowing government securities’ holdings to count towards the SRR; regulatory flexibility and enhanced SME lending support. - BNM purchased government securities (RM 6.9 billion in April 2020). - Domestic financial conditions eased substantially; non-resident holdings of government securities increased by 8.2 percent by end-2020 vs end-2019. - Banking sector soundness: - Aggregate banking sector total capital ratio at 18.5 percent and liquidity coverage ratio at 150 percent in November 2020. - Net impaired loans remained low at 0.84 percent of total loans in 2020Q3. - External sector: - Net non-resident portfolio outflows of $6.3 billion in 2020Q1 during the global risk-off episode. - Current account surplus estimated at 3.7 percent of GDP in 2020 (2019: 3.4 percent of GDP). - External debt increased to 67.5 percent of GDP by end-September 2020 (63.4 percent in 2019). - Share of external debt denominated in foreign currency about two-thirds of the total. - Gross official reserves $107.6 billion at end-December 2020, at 126 percent of the Assessing Reserve Adequacy (ARA) metric; when adjusted for net forward positions, reserves at 117 percent of the metric. ### Outlook and risks - Baseline projections: - Growth projected to rebound to 6.5 percent in 2021. - Current account surplus projected to decline to 3 percent of GDP in 2021. - Inflation projected to recover to 2 percent as electricity tariff rebates expire and energy prices rise. - Medium-term convergence: growth to 5 percent, inflation stabilize at 2 percent, current account surplus return to downward pre-pandemic path. - Risks: - Downside: protracted or intensified pandemic prompting longer MCOs; escalating trade actions and weaker trading-partner growth; fiscal risks from contingent liabilities; domestic policy uncertainty dampening investment. - Upside: faster-than-expected vaccination rollout. - External position assessment: - Malaysia’s external position in 2020 assessed to be stronger than warranted by fundamentals and desired policies. - Estimated external surplus gap of 3.6 percent of GDP partly explained by lower spending on social safety nets. - Policy implication: strengthen social safety nets and encourage private investment to facilitate external rebalancing. ### Authorities’ views (summarized) - Authorities’ outlook: - Saw growth at 6.5–7.5 percent in 2021; inflation rebounding to about 2 percent. - Agreed risks are tilted to the downside; early vaccine availability an upside risk. - External debt and assessment: - Authorities stressed external debt manageable; “at-risk” share 8.8 percent of total and stable. - Noted intragroup borrowings are around two-fifths of FX external debt and generally stable. - Expressed reservations on EBA model’s ability to capture transitory effects despite staff-proposed adjustors. - Pursuing reforms to strengthen social safety nets and encourage private investment and productivity growth. ### Policies to secure the recovery — fiscal - General stance: - Continue synchronous monetary, financial, and fiscal support until recovery takes hold. - Prepare fiscal reform plans to return to consolidation over the medium term. - 2020 fiscal response composition (selected): - 1.1 percent of GDP in cash transfers to households and vulnerable groups. - 1.0 percent of GDP in wage subsidies to firms. - 0.2 percent of GDP in grants to SMEs. - 0.2 percent of GDP from COVID-19 fund for small infrastructure projects. - 2021 budget allocations (selected): - RM17 billion (1.1 percent of GDP) for cash transfers and wage subsidies. - RM0.5 billion for medical equipment. - Recovery-driven revenue increase expected to reduce fiscal deficit to 5.4 percent of GDP in 2021. - Contingent support: - Additional targeted health and household support under a protracted pandemic could be financed with borrowing under the COVID-19 fund, utilizing available space under the parliament-approved ceiling of RM65 billion. - Debt and fiscal framework: - Domestic debt limit temporarily raised from 55 to 60 percent of GDP effective through end-2022; overall debt limit around 63 percent of GDP. - Staff expects federal government debt to increase to 61 percent of GDP in 2020 and remain close to 62 percent of GDP over the medium term under unchanged policies. - Recommend accelerating preparation of the Fiscal Responsibility Act (FRA) to allow temporary breaches in response to large shocks and define requirements to bring debt back on track afterward. - Consolidation scenarios: - Under unchanged policies, fiscal deficit would average 4.7 percent of GDP over 2021–23, leaving fiscal space nearly exhausted. - A modest additional fiscal effort of 0.5 percent of GDP per annum would help create fiscal space but likely not suffice to lower debt below the previous limit of 55 percent of GDP by 2025. - A larger effort of about 1 percent of GDP annually would bring debt below the previous fiscal anchor. - Consolidation could be achieved via spending rationalization and new revenue measures. ### Revenue mobilization and fiscal strategy - Observations and strategy: - Malaysia’s government revenues are low compared to peers and OECD countries. - Revenue mobilization would help finance priority spending, including on social protection. - A medium-term revenue strategy was initiated with IMF support before the pandemic and should resume swiftly. - Authorities are considering options including a carbon or pollution tax and reintroducing the GST. - IMF staff stand ready to support these efforts through technical advice. ### Monetary, exchange rate, and financial market policies - BNM actions and stance: - Annual credit growth around 3.8 percent as of November 2020. - The OPR stands at 1.75 percent, a record low. - With one-year-ahead inflation expectations stable, the effective real policy rate is close to zero. - Monetary policy should remain data dependent; BNM has comfortable space to further ease policy if downside risks materialize. - BNM appropriately allowed the exchange rate to depreciate in response to the shock. - Gross international reserves have remained stable around $100 billion. - FX market/development measures (end-April reforms, selected): - Exempting exporters from requirement to convert FX goods export proceeds below RM200,000 per transaction. - Allowing hedging of foreign loan obligations up to the duration of underlying tenure (previously limited to 12 months). - Pilot programs to facilitate selected FX forward trades without underlying assets to non-resident index-tracking investors. - Pilot program to allow selected licensed onshore banks or Appointed Overseas Offices to enter into ringgit-denominated interest rate swaps with non-resident financial institutions without underlying commitment. - Staff advice: gradually phase out existing CFMs with due regard to market conditions. - Authorities’ view: disagree on phasing out some FX-market development measures, viewing them as necessary for onshore market development and managing contagion. ### Financial sector resilience and vulnerabilities - Support measures and outcomes: - Automatic loan payment moratorium through September 2020 provided relief to 95 percent of households and SMEs. - Around 85 percent of borrowers had resumed payments by October 2020. - BNM reduced maximum financing rates for SMEs and introduced targeted lending facilities (e.g., SRF, TRRF, HTF). - Soundness metrics (selected): - Aggregate capital ratio 18.5 percent (November 2020). - Liquidity Coverage Ratio around 150 percent (November 2020). - Net impaired loans 0.84 percent of total loans in 2020Q3. - Stress tests and risks: - Macro stress tests suggest banks would remain resilient; implied rise in overall impairments to just above 4 percent of total loans by end-2021 would lead to a 2 percentage points decline in banks’ aggregate capital ratio, accommodated with existing buffers. - Continued vigilance warranted for commercial real estate sector exposures given continued weakening and pre-existing oversupply. - Household and corporate debt: - Household debt increased to 87.5 percent of GDP by June 2020 (2019: 82.9 percent). - Household assets were 190 percent of GDP at end-2020Q2. - BNM stress tests suggest borrowers with monthly income below RM3,000 account for 66 percent of borrowers who would default by end-2021. - Non-financial corporate debt increased to 108 percent of GDP by end-June 2020, from 99 percent at end-2019. - About a quarter of corporate debt is externally held. - IMF staff research suggests the share of debt-at-risk at end 2019 was relatively high. - Debt resolution and inclusion: - SDRS transferred to the Credit Counseling and Debt Management Agency effective September 2020 with increased resources. - BNM issued a policy document on digital bank licensing on December 31, 2020; applications due by end-June 2021; plan to notify granting of licenses to up to five applicants in Q1 2022. ### Climate change and financial sector risk assessment - Joint Committee on Climate Change (BNM and Securities Commission) focused on risk management; governance and disclosure; product and innovation; engagement and capacity building. - BNM finalizing a Climate Change and Principles-Based Taxonomy. - Key challenge: lack of data needed to support risk management and product solutions. ### Structural reforms, governance, and transparency - Anti-corruption and governance: - Around a quarter of initiatives in the 2019–2023 National Anti-Corruption Plan (NACP) had been implemented as of end-December 2019. - Asset declaration system for members of government and parliament introduced in 2019; monthly income and total asset data published. - Further reforms needed to strengthen the Malaysia Anti-Corruption Commission and align asset declaration laws with international best practice. - Public finance transparency: - LAKSANA unit established to report on COVID-19 spending; recommendation: enhance by a publicly accessible database tracking spending for each initiative. - Publish beneficial ownership information of companies awarded procurement contracts. - Twelfth Malaysia Plan (12MP) priorities: improving healthcare, inclusion, upgrading digital infrastructure, and greening the economy. - Authorities should articulate specific policies, including a medium-term public investment program, to help achieve 12MP goals. ### Social protection, pensions, and inequality - Poverty and inequality: - Share of population living in absolute poverty declined from almost 50 percent in the 1970s to 0.4 percent in 2016 under the previous poverty line; under revised 2019 poverty line (RM2,208) share increased to 5.6 percent. - OECD relative poverty measure shows almost 17 percent of Malaysian households in relative poverty in 2019. - Social assistance: - In 2016, government spending on social assistance around 0.8 percent of GDP. - Around ¾ of social assistance spending used for unconditional cash transfers. - Coverage: around ¾ of the Malaysian population covered by various social assistance programs; almost universal in the lowest quintile; 44 percent coverage for the top 20 percent. - Social assistance benefits constitute 3 percent of income of beneficiaries on average; among the poor, social assistance constitutes 9 percent of income. - Around 30 percent of social assistance payments received by poorest 20 percent; almost 10 percent directed to richest 20 percent. - Social assistance estimated to close less than 20 percent of the poverty gap and reduce the number of the poor by around 10 percent. - Social insurance and pensions: - Employment Insurance System (EIS) introduced in 2018; contributions total 0.2 percent of wages/payroll for employers/employees. - EIS benefits start at 80 percent replacement rate, taper off quickly, and last up to 6 months. - EPF contributions: employees 11 percent (minimum) and employers 12-13 percent (depending on age). Account structure: “Account I” (70 percent) withdrawable only at retirement (age 55); “Account II” (30 percent) withdrawable from age 50 for permitted outlays. - Participation: EPF and KWAP estimated to have covered around 50 percent of Malaysian labor force in 2018; only around a third of working age population are active members. - Adequacy: WB (2020) study indicates ¾ of contributors will only be eligible for a monthly benefit of RM1,050 given low accumulated balances. - Policy options: increase minimum withdrawal age (example: increasing to age 65 would effectively double replacement rate for long-tenure workers), broader mandatory enrollment, consider social pension, encourage replenishment of EPF accounts. - COVID-19 social protection response: - Total expenditure on subsidies and social assistance stood at RM20 billion, or around 1.4 percent of GDP in 2020; additional spending in 2021 budget brought total to RM18.9 billion, or 1.2 percent of GDP (source presents both numbers in context). - Direct cash transfers: RM17bln or 1.2 percent of GDP earmarked for new universal cash transfers. - Wage subsidies estimated to benefit up to 4.8 million workers (March program); 2021 budget new tourism-targeted subsidy expected to benefit up to 0.9 million employees. - EPF measures: households allowed to reduce EPF contribution rates from 11 percent to 7 percent between April and December 2020; withdrawals of RM500 a month from Account II without tax penalties between April 2020 and March 2021; 2021 budget allowed withdrawals up to RM500 per month for 12 months from Account I (maximum RM6,000), expected withdrawals from Account I of RM4 billion. - Unemployment benefits: extended duration from 6 to 9 months; allocated RM150 million expecting to benefit up to 130,000 jobseekers. - Policy recommendations: - Social assistance: reduce leakage to higher-income deciles, increase benefits for the poor, and better target limited resources. - Unemployment insurance: broaden coverage to align with labor market trends (gig and self-employed workers). - Pensions: encourage replenishment of EPF accounts, broader mandatory enrollment, higher minimum withdrawal age, consider social pension. - Coordination: unify and streamline administration of social protection; Malaysia Social Protection Council could lead. ### Digitalization, e‑payments, and financial inclusion - Pre-pandemic digital adoption: - Digital consumers projected to increase to 21 million in 2020 from 13 million in 2017; share of adult population digital customers projected to rise to 83 percent in 2020 from 54 percent in 2017. - Around 85 percent of Malaysia’s adult population had an account with a financial institution as of 2017. - Internet banking penetration rose to almost 100 percent in 2019 from below 30 percent in 2009; mobile banking penetration exceeded 50 percent in 2019. - Pandemic effects on payments: - E-payment via mobile and internet banking increased sharply during COVID-19. - Currency in circulation as a share of GDP rose by 17 percent compared to pre‑COVID levels. - E-wallet initiatives: ePENJANA credited RM50 to 11.4 million unique e-wallet subscribers (adults aged 18 and above) for stimulus disbursement (text truncated in source). - Transaction shares (end‑2019): - Credit cards represented 61 percent of the value of transactions. - E-money stood at 10 percent of total value transacted. - In volumes, E-money constituted around 2/3 of transactions; credit and debit cards about 1/3. - Policy initiatives: - BNM announced plans for licensing up to five digital banks; policy document on licensing framework issued December 31, 2020; applications due by June 30, 2021. - Recommendations: enhance payment infrastructure, widen merchant acceptance, protect consumers, ensure AML/CFT and data privacy safeguards, monitor financial stability risks from e-money substitution. ### Debt sustainability — external and public debt analyses - External debt and drivers (selected): - External debt-to-GDP ratio: 67.5 percent as of 2020Q3 (end-2019: 63.4 percent). - Short-term external debt by original maturity: 39 percent of total external debt (26 percent of GDP) as of 2020Q3. - Gross external financing needs estimated at 31 percent of GDP in 2020; expected to moderate to about 24 percent of GDP by 2025. - Gross official reserves: $107.6 billion as of December 2020; coverage over 100 percent of short-term external debt by original maturity; about 126 percent of the IMF ARA metric (117 percent when adjusted for net forwards). - External debt stress tests: - A 30 percent real exchange rate depreciation in 2021 could push external debt above 63 percent of GDP by 2025. - A permanent drop in the current account balance of 1.5 percent of GDP could lead to external debt in excess of 54 percent of GDP in the outer years. - Public debt (selected): - Federal government debt projection: remain below the temporary threshold of around 63 percent of GDP in 2020 and stabilize around 61 percent of GDP in the medium term under current policies. - Nominal gross public debt (selected years): 2019: 51.1 percent of GDP; 2020: 52.5 percent of GDP; 2021: 61.1 percent of GDP; 2026: 62.2 percent of GDP. - Public gross financing needs (selected years): 2019: 8.8 percent of GDP; 2020: 4.1 percent of GDP; 2021: 9.3 percent of GDP; 2022: 11.3 percent of GDP. - Public debt stress tests and scenarios: - Combined shock would bring debt over 70 percent of GDP in the medium term. - Contingent liability shock (absorbing guarantees totalling 20 percent of GDP over 5 years) would raise debt-to-GDP to 82 percent in the medium term. - If the higher debt ceiling expires end-2022, gradual consolidation of around 1 percent of GDP per annum would be needed to lower public debt to around 57 percent of GDP in the medium term; options include raising non-oil revenues (e.g., reinstating GST), trimming expenditures, or a combination. ### Key policy guidance and staff appraisal (selected) - Macroeconomic policies should remain supportive until the recovery is fully entrenched. - Preparations for fiscal consolidation (spending rationalization and revenue-increasing measures) should proceed without delay; completion of the Fiscal Responsibility Act would help anchor public finances. - Strengthening social protection would improve efficiency and coverage and help facilitate external rebalancing. - The accommodative monetary policy stance is appropriate; financial supervisory authorities should remain vigilant. - High household debt requires close monitoring as borrowers will likely face increased stress with the gradual phasing out of loan moratoria. - Authorities’ enhancements to the debt resolution framework are welcome. *Source: 1. Growth and Exports — IMF Malaysia country report content provided.* ### 1. Growth and Exports _________________________________________________________________________ 17 ### 1. Growth and Exports ### Pre‑COVID‑19 context - Real per-capita GDP had been growing at an annual pace of 3¾ percent after the Global Financial Crisis. - Low inflation and unemployment; inequality and poverty had declined since the mid-1970s. - Political transition in February 2020: resignation of PM Mahathir Mohamad; King asked Mr. Muhyiddin Yassin to form a government. - Authorities’ policies broadly aligned with Fund advice on fiscal consolidation and structural reforms, though implementation delayed by COVID-19. - Central bank priorities: development of domestic financial and foreign exchange markets; staff and authorities disagree on role of capital flow management measures. ### Economic impact of the COVID‑19 crisis - COVID‑19 epidemiology and containment: - Nationwide Movement Control Order (MCO) implemented in March 2020; less stringent measures in May; localized and conditional MCOs in September. - By late-January 2021, about 180 thousand cases recorded and 0.4 percent fatalities. - Growth and output: - Growth estimated at -6 percent in 2020 (2019: 4.3 percent). - Private consumption declined sharply; economic losses most pronounced in 2020Q2. - Economy rallied in 2020Q3 supported by policy stimulus and resumption of non-essential business operations. - Exports rebounded driven by strong demand for health-related and electronic equipment. - Labor market: - Unemployment fell to 4.8 percent in November from 5.3 percent in May 2020. - Over 60 percent of private-sector job losses in the year to December were in jobs earning under RM3,000 per month. - 39 percent of job losses concentrated among managers and professionals; three-quarters of new placements were in jobs earning under RM1,500 per month. - Inflation: - Headline inflation declined to -1.1 percent in 2020 (2019: 0.7 percent). - Core inflation broadly stable at 1 percent (2019: 1.1 percent). - Fiscal response and government deficit: - Five COVID-19 relief packages in 2020 totaling RM305 billion (21¼ percent of GDP). - Budgetary component was 3.8 percent of GDP; estimated total COVID-related fiscal spending by year-end was RM38 billion (2.6 percent of GDP); remaining planned for 2021. - Revenue shortfall of 2.6 percent of GDP partly offset by additional dividends from government-related agencies. - Federal government deficit estimated at 6 percent of GDP in 2020, 2.8 percent of GDP above target. - Monetary and financial measures: - Bank Negara Malaysia (BNM) actions: cumulative 125 bps cut in the overnight policy rate (OPR); 100-bps cut in statutory reserve requirement (SRR); allowing government securities’ holdings to count towards the SRR; regulatory flexibility and enhanced SME lending support. - BNM purchased government securities (RM 6.9 billion in April 2020). - Domestic financial conditions eased substantially; capital outflows stabilized and non-resident holdings of government securities increased by 8.2 percent by end-2020 vs end-2019. - Banking sector soundness: - Aggregate banking sector total capital ratio at 18.5 percent and liquidity coverage ratio at 150 percent in November 2020. - Net impaired loans remained low at 0.84 percent of total loans in 2020Q3. - External sector: - Net non-resident portfolio outflows of $6.3 billion in 2020Q1 during the global risk-off episode. - Current account surplus estimated at 3.7 percent of GDP in 2020 (2019: 3.4 percent of GDP), driven by stronger goods trade balance and weak imports; larger travel balance deficit due to international travel restrictions. - External debt increased to 67.5 percent of GDP by end-September 2020 (63.4 percent in 2019). - Share of external debt denominated in foreign currency about two-thirds of the total. - Gross official reserves $107.6 billion at end-December 2020, at 126 percent of the Assessing Reserve Adequacy (ARA) metric; when adjusted for net forward positions, reserves at 117 percent of the metric. ### Outlook and risks - Baseline projections: - Growth projected to rebound to 6.5 percent in 2021. - Recovery driven by manufacturing and construction, government spending, recovery in domestic and external demand, and vaccination rollout expected to begin in February. - Current account surplus projected to decline to 3 percent of GDP in 2021. - Inflation projected to recover to 2 percent as electricity tariff rebates expire and energy prices rise. - Medium-term convergence: growth to 5 percent, inflation stabilize at 2 percent, current account surplus return to downward pre-pandemic path. - Downside and upside risks: - Downside: protracted or intensified pandemic prompting longer MCOs; escalating trade actions and weaker trading-partner growth; fiscal risks from contingent liabilities; domestic policy uncertainty dampening investment. - Upside: faster-than-expected vaccination rollout. - External position assessment: - Malaysia’s external position in 2020 assessed to be stronger than warranted by fundamentals and desired policies. - Estimated external surplus gap of 3.6 percent of GDP partly explained by lower spending on social safety nets. - Policy implication: strengthen social safety nets and encourage private investment to facilitate external rebalancing. ### Authorities’ views - Authorities’ outlook: - Saw growth at 6.5–7.5 percent in 2021; inflation rebounding to about 2 percent. - Growth driven by robust external demand and rebound in investment as infrastructure projects resume. - Agreed risks are tilted to the downside; early vaccine availability an upside risk. - External debt and assessment: - Authorities stressed external debt manageable; “at-risk” share 8.8 percent of total and stable. - Noted banks’ and corporations’ intragroup borrowings are around two-fifths of FX external debt and generally stable. - Expressed reservations on EBA model’s ability to capture transitory effects despite staff-proposed adjustors. - Pursuing reforms to strengthen social safety nets and encourage private investment and productivity growth. ### Policies to secure the recovery - General policy stance: - Continue synchronous monetary, financial, and fiscal support until recovery takes hold. - Maintain reliance on accommodative monetary and financial policies given fiscal space at risk. - Prepare fiscal reform plans to return to consolidation over the medium term. - Continue governance and structural reforms to support post-pandemic economic transformation. - Fiscal policy specifics: - 2020 fiscal response composition: - 1.1 percent of GDP in cash transfers to households and vulnerable groups. - 1.0 percent of GDP in wage subsidies to firms. - 0.2 percent of GDP in grants to SMEs. - 0.2 percent of GDP from COVID-19 fund for small infrastructure projects. - 2021 budget allocations: - RM17 billion (1.1 percent of GDP) for cash transfers and wage subsidies. - RM0.5 billion for medical equipment. - Front-loaded support under a sixth package announced in January 2021. - Significant increase in development expenditure to rekindle infrastructure investment. - Recovery-driven revenue increase expected to reduce fiscal deficit to 5.4 percent of GDP in 2021. - Contingent additional support: - Under a protracted pandemic scenario, additional targeted health and household support may be needed and could be financed with borrowing under the COVID-19 fund, utilizing available space under the parliament-approved ceiling of RM65 billion. - Debt and fiscal framework: - Domestic debt limit temporarily raised from 55 to 60 percent of GDP effective through end-2022; overall debt limit around 63 percent of GDP. - Staff expects federal government debt to increase to 61 percent of GDP in 2020 and remain close to 62 percent of GDP over the medium term under unchanged policies. - Recommend accelerating preparation of the Fiscal Responsibility Act (FRA) to allow temporary breaches in response to large shocks and define requirements to bring debt back on track afterward. - Consolidation scenarios: - Under unchanged policies, fiscal deficit would average 4.7 percent of GDP over 2021–23, leaving fiscal space nearly exhausted. - Authorities’ target of 4.5 percent of GDP average deficit over 2021–2023 would only minimally increase fiscal space. - A modest additional fiscal effort of 0.5 percent of GDP per annum would help create fiscal space but likely not suffice to lower debt below the previous limit of 55 percent of GDP by 2025. - A larger effort of about 1 percent of GDP annually would bring debt below the previous fiscal anchor. - Consolidation could be achieved via spending rationalization and new revenue measures. - Social protection reform: - Current system covers a large share of the population and includes unemployment insurance since 2018, but benefit levels are low and some benefits flow to higher-income deciles. - Unemployment and pension insurance exclude a large share of workers. - Recommendations: consolidate and streamline benefits to improve delivery efficiency and increase the share benefiting the most vulnerable. - Authorities plan to review the social protection system. *Source: 1. Growth and Exports — IMF Malaysia country report content provided.* ### 25. Renewed efforts towards government revenue mobilization are needed over the ### 25. Renewed efforts towards government revenue mobilization are needed over the medium term. ### Revenue mobilization and fiscal strategy - Malaysia’s government revenues are low compared to peers and OECD countries. - Revenue mobilization would help finance priority spending, including on social protection, thus supporting inclusive growth and facilitating external rebalancing. - A medium-term revenue strategy was initiated with IMF support before the pandemic and should resume swiftly. - An evaluation of specific revenue options should proceed expeditiously to allow timely roll-out of revenue-enhancing measures when the economy recovers. - Authorities are considering options including a carbon or pollution tax and reintroducing the GST. - IMF staff stand ready to support these efforts through technical advice. ### Authorities’ views on fiscal response and medium-term consolidation - The authorities noted their policy response helped contain the crisis while the 2021 budget aims to support a continued recovery and build resilience. - Cash transfers represented the largest share of direct fiscal support. - Stimulus measures were adjusted throughout the year to respond to changing needs of the economy and population. - Fiscal support going forward will be increasingly focused on reskilling/upskilling, and on the most-affected sectors. - The authorities reaffirmed commitment to medium-term fiscal consolidation, noting progress was temporarily delayed by the pandemic but would promptly resume in 2021. - They will advance the medium-term revenue strategy and consider new sources of revenues once the recovery is entrenched. - They reiterated commitment to finalizing the FRA. - The authorities are looking into options to reform social protection policies with a focus on improving protection for children and the elderly and consolidating service provision. ### Monetary, exchange rate, and financial markets policies - BNM’s proactive policy response and accommodative monetary stance improved economic outcomes. - Annual credit growth was around 3.8 percent as of November 2020. - The OPR stands at 1.75 percent, a record low. - With one-year-ahead inflation expectations stable, the effective real policy rate is close to zero. - No signs of liquidity strains; both short- and long-term real interest rates suggest domestic financial conditions are appropriately accommodative. - Monetary policy should remain data dependent; BNM has comfortable space to further ease policy if downside risks materialize. - BNM appropriately allowed the exchange rate to depreciate in response to the shock. - Gross international reserves have remained stable around $100 billion. - Monthly FX market turnover returned to pre-COVID levels after a March-April 2020 decline. - Guidance: continue to allow the exchange rate to depreciate if downside risks materialize; in case of an inflow surge, some reserve accumulation would be appropriate while still allowing the exchange rate to adjust as a first line of defense. - Domestic FX market reforms implemented at end-April include: - exempting exporters from the requirement to convert FX goods export proceeds below RM200,000 per transaction - allowing hedging of foreign loan obligations up to the duration of underlying tenure (previously limited to 12 months) - pilot programs to facilitate selected FX forward trades without underlying assets to non-resident index-tracking investors - pilot program to allow selected licensed onshore banks or Appointed Overseas Offices to enter into ringgit-denominated interest rate swaps with non-resident financial institutions without underlying commitment - IMF staff advise gradually phasing out existing CFMs with due regard to market conditions. ### Authorities’ views on monetary and FX measures - Authorities agreed with staff’s assessment with reservations. - They view monetary policy as highly accommodative with the OPR at a record-low and intend to maintain such accommodation until recovery is firmly entrenched. - Monetary policy will remain data dependent; further easing is possible if outlook worsens, coordinating with fiscal policy. - Continued efforts to deepen domestic FX markets have bolstered the exchange rate’s shock absorber role; exchange rate will be market determined. - Authorities disagree with staff on phasing out FX market development measures classified by staff as CFMs, viewing them as necessary to deepen onshore market, manage contagion from opaque offshore markets, and underpin policy on non-internationalization of the ringgit. ### Financial sector policies and resilience - BNM’s policies (loan moratoria, SME financing facilities, encouragement of prudent loan restructuring, regulatory flexibility) helped cushion macro-financial impact. - The automatic loan payment moratorium through September 2020 provided relief to 95 percent of households and SMEs. - Around 85 percent of borrowers had resumed payments by October 2020. - BNM’s support of financial innovation and digitalization contributed to increased use of e-payments during the pandemic. - Macro stress tests (top-down and bottom-up) suggest banks would remain resilient; implied rise in overall impairments to just above 4 percent of total loans by end-2021 would lead to a 2 percentage points decline in banks’ aggregate capital ratio, accommodated with existing buffers. - IMF staff baseline points to continued stress on banking system; BNM should update stress tests and scenario analysis frequently. - Continued vigilance warranted for commercial real estate sector exposures given continued weakening and pre-existing oversupply. ### Household and corporate debt risks - Household debt increased to 87.5 percent of GDP by June 2020 (2019: 82.9 percent). - Household assets were 190 percent of GDP at end-2020Q2. - BNM stress tests suggest borrowers with monthly income below RM3,000 account for 66 percent of borrowers who would default by end-2021. - These low-income borrowers hold 17.1 percent of total banking system household debt as at end-June 2020. - As debt moratoria end, banks and supervisors should be ready to address a possible rise in household loan impairments. - Non-financial corporate debt increased to 108 percent of GDP by end-June 2020, from 99 percent at end-2019. - About a quarter of corporate debt is externally held; the remainder largely held by domestic banks and institutional investors. - IMF staff research suggests the share of debt-at-risk at end 2019 was relatively high. - Corporates’ non-performing loans, especially in affected sectors, could rise significantly. - Automatic loan payment deferment programs did not include large corporates; banks have supported restructuring on a case-by-case basis. - Financial conditions for the corporate sector expected to remain challenging in 2021; supervisors should monitor credit and support efficient reallocation of credit from non-viable to viable firms. - Unwinding of support measures should be calibrated to the pace of the recovery and start only after activity improves durably. ### Debt resolution and inclusion - Debt resolution framework enhancements: - Corporate Debt Restructuring Committee operational procedures refined for larger corporates. - Small Debt Resolution Scheme transferred (effective September 2020) from BNM to the Credit Counseling and Debt Management Agency, with increased resources. - The agency now serves as a one-stop platform for individuals and SMEs seeking debt restructuring and provides financial education and advisory services. - BNM is promoting inclusion through digital bank licensing: - Policy document on licensing framework issued on December 31, 2020. - Applications due by end-June 2021; BNM plans to notify granting of licenses to up to five applicants in Q1 2022. - Digital banks will operate under a simplified regulatory framework during a foundational phase. - License approvals will prioritize value propositions to enhance access in financially underserved areas. ### Climate change and financial sector risk assessment - Joint Committee on Climate Change (chaired by BNM and the Securities Commission) focused on (i) risk management; (ii) governance and disclosure; (iii) product and innovation; and (iv) engagement and capacity building. - BNM finalizing a Climate Change and Principles-Based Taxonomy to categorize economic activities by impact on climate change and facilitate financial flows to activities supporting transition to a lower-carbon economy. - BNM focusing on strengthening surveillance and supervisory frameworks to incorporate climate change risk and leveraging involvement in the Network of Central Banks and Supervisors for Greening the Financial System. - A key challenge: lack of data needed to support risk management and product solutions. ### Authorities’ views on financial sector - Authorities broadly shared staff’s assessment: financial sector entered the pandemic with sizeable buffers. - Impact on banking sector asset quality has been limited to-date, aided by debt moratoria. - Non-performing loans may rise, but banks have necessary buffers. - Supervisory vigilance will be maintained; greater reliance on institution-specific stress tests jointly conducted with banks. - Continued policy support may be needed to avoid pro-cyclical bank lending behavior. - Insolvency regime enhancements are in place; more resources could be provided if needed. - Authorities continue focus on enabling financial innovation to reach underserved segments via planned digital banks and on testing operational resilience, including to climate change risks. ### Structural reforms and governance - Around a quarter of initiatives in the 2019–2023 National Anti-Corruption Plan (NACP) had been implemented as of end-December 2019. - An asset declaration system for members of government and parliament was introduced in 2019; monthly income and total asset data have been published. - Planned introduction of laws under the NACP to govern detailed asset declarations (including beneficially owned assets) should be done to align with international best practice. - Further reforms to strengthen the Malaysia Anti-Corruption Commission needed to ensure independent appointment of its Chief Commissioner and clarify service and resignation/termination rules. - Ministry of Finance LAKSANA unit established to report on COVID-19 spending; should be enhanced by a publicly accessible database that tracks spending for each initiative. - Beneficial ownership information of companies awarded procurement contracts should be published to safeguard against misuse of funds. - Reforms delayed by the pandemic and change in government should promptly resume, including procurement reform, freedom of information, and establishment of an Ombudsman. - Authorities should continue to enhance AML/CFT framework; recent legislative steps to increase transparency of beneficial ownership need effective implementation. - Supervisory authorities should focus on enforcing measures for politically-exposed-persons considering ML/TF risks. - Legal and implementation measures to regulate virtual assets are on track. - Twelfth Malaysia Plan (12MP) focus areas: improving healthcare, inclusion, upgrading digital infrastructure, and greening the economy. - Authorities should articulate specific policies, including a medium-term public investment program, to help achieve 12MP goals. ### Authorities’ views on governance and structural reform - Authorities reaffirmed commitment to improving governance; acknowledged progress delayed by the pandemic but engagement with stakeholders will resume. - Mid-Term Review of the NACP expected to be submitted to parliament in 2021Q1. - LAKSANA unit ensuring transparency of all COVID-19 fiscal spending. - Authorities expect to launch the Twelfth Malaysia Plan (12MP) in 2021 with sectoral priorities including services and agriculture and immediate focus on improving digitalization. ### Staff appraisal — key conclusions and policy guidance - Authorities’ robust policy response cushioned the pandemic’s blow; vulnerabilities remain manageable. - Activity plunged in 2020Q2 but rebounded in 2020Q3, supported by coordinated monetary, financial and fiscal stimulus. - Sizable pre-existing buffers mitigate macro-financial impact; external debt, although high, remains manageable. - Malaysia’s external position remains stronger than warranted by fundamentals and desired policies. - Macroeconomic policies should remain supportive until the recovery is fully entrenched. - Staff’s baseline scenario of a strong rebound in 2021 is subject to considerable downside risks; should these materialize, additional fiscal and monetary stimulus would be needed. - Authorities’ commitment to fiscal consolidation and reform is welcome and should be followed through after the economy picks up. - Adjustment through spending rationalization and revenue-increasing measures, once recovery is cemented, would help rebuild fiscal buffers. - Preparations for such measures should proceed without delay; completion of the Fiscal Responsibility Act would help better anchor public finances. - Strengthening the social protection system would improve efficiency and coverage and help facilitate external rebalancing. - The accommodative monetary policy stance is appropriate; financial supervisory authorities should remain vigilant. - Indicators suggest liquidity is appropriate, markets are functioning smoothly, and the banking system is financially sound. - Supervisors should remain alert to continued stress on banks in the near term. - High household debt requires close monitoring as borrowers will likely face increased stress with the gradual phasing out of loan moratoria. - Authorities’ enhancements to the debt resolution framework are welcome. *International Monetary Fund — Malaysia country report excerpt.* ### 48. The authorities’ initiatives to deepen domestic FX markets are welcome and should ### The authorities’ initiatives to deepen domestic FX markets are welcome and should ### Domestic FX markets and exchange-rate policy - The authorities’ initiatives to deepen domestic FX markets are welcome and should continue. - Recent actions have appropriately improved efficiency and expanded available hedging instruments. - The authorities should continue to allow the exchange rate to cushion shocks to the economy. ### Financial structural reforms: inclusion and climate change - The authorities’ focus on inclusion and climate change in the context of financial structural reforms are promising. - Prioritizing, when approving digital bank licenses, value propositions that enhance access in financially underserved areas is a welcome step in the context of e-payments’ increased importance during the COVID-19 pandemic. - Incorporating climate change risk in reforms to the financial sector surveillance and supervisory framework is an important step towards a climate resilient economy. ### Governance reforms and transparency - Further progress on governance reforms is needed. - The commitment to transparency, including regarding COVID-19 related spending, is welcome. - The authorities should follow through on the initiatives outlined in the National Anti-Corruption Plan. - Reforms delayed by the pandemic and the change in government should promptly resume, including inter alia legislative initiatives on asset declaration, procurement reform, freedom of information, and establishment of an Ombudsman. *Source: 1mysea2021001 - 48–50* ### 51. It is recommended that the Article IV consultation with Malaysia be held on the ### It is recommended that the Article IV consultation with Malaysia be held on the standard 12-month cycle. ### Growth and exports: 2020 shock and recovery signals - Growth in Malaysia, and in other ASEAN countries, was hard-hit in 2020 by the COVID-19 pandemic. - Private domestic demand, which had underpinned growth in recent years, contracted sharply in 2020Q2 against the backdrop of strict lockdown measures. - Sectoral performance in 2020Q2: - Agriculture improved in 2020Q2. - All other sectors contracted sharply, led by construction, partly driven by restrictions from the MCO. - Trade flows: - Exports strongly declined in early 2020, but rebounded in Q3, supported by strong manufacturing exports, vegetable oils, and other manufacturing goods. - Import volumes fell, particularly sharply in 2020H1, led by machinery, mineral fuels and chemicals, as adverse risk-sentiment weighed on domestic investment. - Current account: - The current account surplus narrowed in 2020H1 relative to the previous year, but widened in Q3 following strong PPE exports. Key time-series snapshot (selected) - Real GDP (percent change, annual): 2016 4.4; 2017 5.8; 2018 4.8; 2019 4.3; 2020 -6.0; 2021 6.5; 2022 6.0; 2023 5.7; 2024 5.3; 2025 5.0. ### Inflation, producer prices, and labor market - Headline inflation fell sharply in 2020 on the back of lower global oil prices and electricity prices. - Core inflation remained stable. - Producer prices declined, driven by the slump in commodity and crude materials prices. - Industrial production was disrupted by the pandemic and containment measures; Malaysia’s industrial production fell relative to peers. - Labor market: - Unemployment reached historic highs in 2020Q2 but later improved slightly after easing of MCO restrictions. - Growth in manufacturing and services wages contracted as both sectors were badly hit by the pandemic. - Selected labor and price indicators: - CPI inflation (period average): 2016 2.1; 2017 3.7; 2018 1.0; 2019 0.7; 2020 -1.1; 2021 2.0; 2022 2.0; 2023 2.0; 2024 2.0; 2025 2.0. - CPI inflation (excluding food and energy): 2016 2.6; 2017 1.6; 2018 0.4; 2019 1.1; 2020 1.0; 2021 1.5; 2022 1.7; 2023 1.9; 2024 2.0; 2025 2.0. - Unemployment rate: 2016 3.5; 2017 3.4; 2018 3.3; 2019 3.3; 2020 4.5; 2021 3.8; 2022 3.6; 2023 3.5; 2024 3.5; 2025 3.5. ### Monetary developments and financial conditions - Bank Negara Malaysia (BNM) lowered the policy rate to historic lows and lending rates declined. - Real interest rates have declined. - Money and deposits: - Demand deposits and currency in circulation have grown more rapidly in 2020. - Total deposits rose, potentially owing to precautionary motives amid elevated uncertainty, driving up broad money growth. - After significant tightening in early 2020, financial conditions improved later in 2020. Selected monetary indicators (end-of-period / growth) - Overnight policy rate: 2016 3.00; 2017 3.00; 2018 3.25; 2019 3.00; 2020 1.75. - Broad money (12-month percent change): 2016 2.7; 2017 4.8; 2018 7.7; 2019 2.7; 2020 5.0. - Credit to private sector (12-month percent change): 2016 5.3; 2017 5.4; 2018 8.3; 2019 5.0; 2020 4.0. - Money multiplier (broad money/narrow money): 2016 3.8; 2017 3.7; 2018 4.0; 2019 4.0; 2020 4.0. ### Capital flows, exchange rate, and reserves - Portfolio debt inflows returned in 2020Q2; equity outflows persisted through end-2020. - Ringgit-denominated government securities markets remained broadly stable. - BNM’s gross FX reserves stabilized. - The ringgit partly recovered after depreciation pressures in March and April 2020. - The stock market regained some March–April 2020 losses, easing financial conditions. Reserve and external liquidity indicators (selected) - Gross official reserves (US$ billions): 2016 94.5; 2017 102.4; 2018 101.4; 2019 103.6; 2020 107.6; 2021 108.1; 2022 110.2; 2023 108.9; 2024 112.6; 2025 114.5. - Reserves (months of following year's imports): 2016 5.6; 2017 5.5; 2018 5.8; 2019 6.7; 2020 6.5. ### Fiscal policy developments and public debt - The COVID pandemic led to a sharp deterioration in the fiscal balance in 2020. - Revenues were supported by one-off dividends that exceeded budgeted levels. - Expenditures increased significantly as authorities implemented measures to counter the pandemic; development spending rose as a ratio to GDP in recent years. - Federal debt is estimated to have jumped as a share of GDP in 2020 due to an increase in nominal debt and a decline in GDP. - Guarantees (as a share of GDP) increased after remaining stable for several years. Selected fiscal aggregates (percent of GDP, unless noted) - Federal government overall balance (percent of GDP): 2016 -3.1; 2017 -2.9; 2018 -3.7; 2019 -3.4; 2020 -6.0; 2021 -5.4; 2022 -4.6; 2023 -4.3; 2024 -4.2; 2025 -4.2. - Revenue: 2016 17.0; 2017 16.1; 2018 16.1; 2019 17.5; 2020 15.8; 2021 15.2; 2022 15.5; 2023 15.5; 2024 15.5; 2025 15.5. - Expenditure and net lending: 2016 20.1; 2017 19.0; 2018 19.8; 2019 18.5; 2020 21.8; 2021 20.6; 2022 20.1; 2023 19.9; 2024 19.8; 2025 19.7. - Federal government debt (percent of GDP): 2016 51.9; 2017 50.0; 2018 51.2; 2019 52.5; 2020 61.1; 2021 61.8; 2022 62.2; 2023 62.0; 2024 61.9; 2025 61.8. - Consolidated public sector overall balance (percent of GDP): 2016 -5.0; 2017 -3.6; 2018 -4.6; 2019 -9.3; 2020 -11.1; 2021 -11.8; 2022 -10.4; 2023 -9.7; 2024 -9.5; 2025 -9.3. Federal government operations (selected levels, RM billions) - Revenue (RM billions): 2016 212.4; 2017 220.4; 2018 232.9; 2019 264.4; 2020 227.3; 2021 236.9; 2022 259.5; 2023 280.4; 2024 301.3; 2025 323.4. - Expenditure and net lending (RM billions): 2016 250.8; 2017 260.7; 2018 286.3; 2019 278.9; 2020 313.7; 2021 321.7; 2022 337.1; 2023 358.2; 2024 383.7; 2025 410.4. ### Financial sector resilience and vulnerabilities - Credit growth has softened but GDP has declined sharply, resulting in an increase in the credit-to-GDP ratio. - Extraordinary government support helped sustain credit growth despite the contraction. - Corporate sector leverage is below levels prior to the Asian Financial Crisis and compares favorably to peers. - The banking system remains well capitalized and gross non-performing loans are low. - The banking system continues to rely on short-term external debt; banks’ net external asset position has declined since mid-2017. Financial soundness indicators (selected, percent) - Regulatory capital to risk-weighted assets: 2016 17.0; 2017 17.8; 2018 18.1; 2019 18.6; 2020Q2 18.3. - Nonperforming loans to total gross loans: 2016 1.6; 2017 1.5; 2018 1.5; 2019 1.5; 2020Q2 1.5. - Return on assets: 2016 1.3; 2017 1.4; 2018 1.4; 2019 1.5; 2020Q2 1.2. - Liquidity Coverage Ratio: 2016 124.3; 2017 134.9; 2018 143.2; 2019 149.1; 2020Q2 149.2. - Loan-deposit ratio: 2016 89.8; 2017 89.6; 2018 88.3; 2019 88.8; 2020Q2 87.2. ### Household sector and housing market - Housing loan growth has remained stable. - Household debt rose as a share of GDP, mainly owing to lower GDP. - Total credit to households & NPISH as a proportion of GDP remains high compared to other countries and is above levels observed in countries with similar GDP per capita. - Household non-performing loans remain low, helped by the 6-month blanket loan moratorium. - High household financial assets help mitigate vulnerability from growing household debt. - House prices have stabilized, also relative to income and rents; housing market in Kuala Lumpur is moderating. - Residential supply has been increasing, although total construction starts are on a downward trend despite recovery of starts in Kuala Lumpur and Johor. Household and housing indicators (selected) - Household debt (percent of GDP): 2016 86.5; 2017 82.6; 2018 82.0; 2019 82.9; 2020 87.5. - Household financial assets (percent of GDP): 2016 178.6; 2017 176.4; 2018 175.7; 2019 179.2; 2020 190.0. - House prices (percent change): 2016 7.1; 2017 6.5; 2018 3.3; 2019 1.5; 2020 2.2 (periods shown in the source). ### External sector summary and projections - Current account balance (in billions of U.S. dollars): 2016 7.2; 2017 8.9; 2018 8.0; 2019 12.3; 2020 12.6; projections: 2021 11.5; 2022 12.2; 2023 12.8; 2024 13.5; 2025 14.0. - Current account (percent of GDP): 2016 2.4; 2017 2.8; 2018 2.2; 2019 3.4; 2020 3.7; 2021 3.0; 2022 3.0; 2023 2.9; 2024 2.8; 2025 2.7. - Goods exports, f.o.b. (US$ billions): 2016 165.6; 2017 186.4; 2018 205.7; 2019 196.9; 2020 183.8; projections: 2021 196.6; 2022 211.7; 2023 221.4; 2024 233.6; 2025 243.9. - Total external debt (US$ billions): 2016 203.8; 2017 218.8; 2018 223.3; 2019 231.1; 2020 237.9; projections: 2021 243.4; 2022 241.6; 2023 241.2; 2024 238.4; 2025 245.8. - Total external debt (percent of GDP): 2016 67.7; 2017 68.6; 2018 62.3; 2019 63.4; 2020 69.3; projections: 2021 63.8; 2022 58.7; 2023 54.0; 2024 49.6; 2025 47.6. ### Notable cross-cutting observations - The pandemic induced a sharp but heterogeneous contraction across sectors in 2020, followed by signs of recovery in Q3 driven by exports (notably PPE and manufacturing). - Monetary easing, precautionary household and corporate saving behavior, and fiscal support have jointly cushioned immediate financial stress, but fiscal and external metrics reflect elevated pandemic-related pressures. - Banking-sector indicators point to resilience (capital, liquidity, asset quality), but reliance on short-term external funding and elevated public debt warrant ongoing monitoring. *International Monetary Fund — Malaysia: selected figures, findings, and projections as presented in the source content.* ### Appendix I. The COVID-19 Pandemic in Malaysia ### Appendix I. The COVID-19 Pandemic in Malaysia ### A. The COVID-19 Outbreak in Malaysia - First imported COVID-19 case: January 24, 2020. - First Malaysian COVID-19 infection confirmed: February 3, 2020. - New COVID-19 cases in January–February 2020 remained low and were mainly travel-linked, with total infections numbering 23 as of February 29. - A large local outbreak was linked to an annual mass religious event held in Kuala Lumpur from February 27 to March 1, attended by around 14,500 local and 1,500 international participants. - Government cancellations announced March 13 of all international meetings, sports, social and religious events until April 30. - Confirmed cases surged to 673 and the first COVID-19 related fatality was recorded by March 17. - Nationwide Movement Control Order (MCO) implemented: March 18, 2020, initially set to last for two weeks until March 31 but extended several times and relaxed on May 4. - Under the MCO: stay-at-home orders; international and interstate borders, schools and higher education institutes, and non-essential businesses shut; all public gatherings banned; public transportation hours limited. - Quarantine and public health measures: - Compulsory quarantine of 14 days (or other duration stipulated) at designated centers for individuals entering Malaysia. - Contact tracing implemented; MySejahtera mobile application launched in April 2020 for personal health self-assessments and contact tracing. - Individuals testing positive and close contacts hospitalized. - Hospital bed capacity increased (example: Sungai Buloh hospital bed capacity increased to over 2,000 from 900; designated main COVID-19 hospital on March 12). - Prepared indoor stadiums and public halls for utilization should daily cases reach 1,000 a day. - Testing capacity ramped up from 0.02 per thousand to almost 1 per thousand from mid-March to mid-May (second to Singapore in ASEAN countries, where testing averaged 1 per thousand per day). - Standard operating procedures (SOPs), public awareness campaigns, and daily press briefings issued. - Easing of containment: - Conditional Movement Control Order (CMCO) from May 4; most businesses reopened subject to social distancing. - CMCO remained in place until June 9. - Recovery Movement Control Order (RMCO) followed; restrictions gradually relaxed (reopening of schools, allowing interstate travel, certain religious activities). - International travel largely banned except for specific groups and countries with special arrangements (example: Reciprocal Green Lane and Periodic Commuting Arrangement with Singapore starting August 17). - RMCO initially until August 31, extended to December 31 and subsequently to March 31, 2021. ### B. The Impact of Containment Measures on Economic Activity - Mobility and labor market: - Mobility declined drastically in mid-March, 90 percent below its observed levels weeks before the MCO implementation. - Unemployment rate rose to historical levels (no numerical value provided in source). - Business and consumer confidence worsened. - Consumption and services: - Strong contraction in retail sales and credit card transactions during March and April. - Sectors reliant on close human interaction (tourism and services) were badly hit. - International and domestic flights almost completely halted in March (Figure reference in source). - Hotel revenues declined by almost -94 percent relative to 2019 during 2020Q2, with slight recovery by year-end. - By end-September tourist arrivals declined year-on-year by an unprecedented 100 percent. - Trade, manufacturing, and transport: - Shutdown of non-essential businesses led to dramatic decline of exports and imports of goods. - Maritime imports and exports decelerated rapidly around the MCO and reached lowest levels in early May (based on AIS vessel data). - Overall imports and exports contracted in 2020Q2. - After MCO relaxation, maritime exports quickly rebounded but fell sharply again in 2020Q4; imports recovered at a slower pace. - Industrial production and manufacturing PMIs contracted following the MCO (Figure reference in source). ### C. The Latest COVID-19 Wave of Infections - Resurgence timeline and geographic concentration: - Infections surged again in late September 2020. - Surge largely concentrated in Sabah; from September 20 until the state’s peak on November 6, new cases in Sabah accounted for approximately 65 percent of the nation’s total new cases. - Surge attributed to lack of adherence to social distancing during the Sabah local elections on September 26. - Targeted containment measures: - Targeted Enhanced Movement Control Order (TEMCO) in four Sabah districts effective September 29 (closures of non-essential businesses, stay-at-home orders, movement restrictions, interstate border closures to non-residents/visitors). - Conditional Movement Control Order (CMCO) on the rest of Sabah effective October 13. - CMCOs implemented in Selangor, Kuala Lumpur and Putrajaya as outbreak spread. - By November 9, CMCOs reinstated across all but three states (Kelantan, Perlis and Pahang) in Peninsular Malaysia until December 6, with closures of schools and entertainment outlets; restricted operating hours for restaurants, shops and convenience stores; prohibition of inter-district and inter-state travel; and curbs on individual mobility. - Under latest restrictions at time of writing, manufacturing, construction, trade and distribution sectors deemed essential and remain open but may be subject to shutdown if cases continue to surge. - Healthcare capacity and testing: - Nationwide testing capacity increased to almost 55,000 per day in mid-October from approximately 38,000 per day in September. - Number of hospital beds across Malaysia expanded from around 6,000 early in October to 25,456 by late-December. - In Sabah, hospital beds quadrupled to around 8,500 in early-November from 2,100 in September. - Health authorities designated specific hospitals to deal with COVID-19 cases. - Vaccine procurement and plans: - Progress suggests vaccines for about 80 percent of the population have been secured: - Pfizer-BioNTech to inoculate 39 percent of the population. - COVAX for another 10 percent of the population. - AstraZeneca to procure vaccines for an additional 10 percent of the population. - Additional 20 percent of the population secured through partnering with Sinovac. - Supply for additional doses being negotiated with Sinovac, other Chinese manufacturers, and Russia’s manufacturer of Sputnik V vaccine. - Malaysia plans to begin administering the Pfizer-BioNTech vaccine as early as February. - Initial vaccine recipients to be frontline healthcare workers and high-risk groups such as the elderly, those with non-communicable diseases and chronic respiratory diseases. *Prepared by Nour Tawk and Han Teng Chua; Emilia Jurzyk and Dan Nyberg. (Content as presented in the source PDF.)* ### 3. Several measures aimed at shoring up firm finances. To support employment, the ### 3. Several measures aimed at shoring up firm finances. To support employment, the ### Measures to support employment and firms - Wage subsidies introduced in the March policy package: part of the salaries of eligible employees covered by official payments for 3 months. - Wage subsidies subsequently extended in the April, June, and September policy packages. - 2021 budget: subsidies to be henceforth targeted to the tourism sector only; January 2021 policy package broadened subsidies to all firms operating in states affected by the MCO in response to virus resurgence. - Grants introduced for microenterprises and SMEs. - Tax and fee reliefs provided for certain groups of enterprises. - Deferral of employers’ contributions to EPF. - Firms also benefited from debt moratoria referenced earlier in the chapter. ### BNM Fund for SMEs — enhancements and facilities - Enhancements covered three facilities: - (i) Special Relief Facility (SRF) to help alleviate short-term cash flow problems faced by affected SMEs with a total amount of RM10 bn (0.7 percent of GDP). - (ii) Agrofood Facility (AF) to increase food production for both domestic consumption and exports. - (ii) Automation and Digitalization Facility (ADF) to incentivize SMEs to automate processes and digitalize operations to increase productivity. - BNM reduced the maximum financing rates charged to SMEs. - November 2020 additional facilities and enhancements: - (i) RM2 bn Targeted Relief and Recovery Facility (TRRF). - (ii) RM 500 mn High Tech Facility (HTF). - (iii) RM 110 mn enhancement to the existing Micro Enterprise Facility. ### Penjana recovery plan and measures for real estate - Home Ownership Campaign re-launched in June 2020 with: - Stamp duty exemptions for purchase agreements signed between June 1, 2020 and May 31, 2021. - Loan-to-Value requirement of 70 percent for third mortgages lifted until May 2021. - Gains arising from disposal of up to three residential properties per individual between June 1, 2020 and December 31, 2021 exempted from the real property gains tax. ### Take-up and outreach of household and firm support measures (impact) - In 2020, cash assistance and e-voucher programs reached around one-third of the population. - Over 322 thousand firms and 2.6 million employees participated in the wage subsidy program. - Around 129 thousand employees secured jobs through the Hiring Incentive Program and Training Assistance. - Over 130 thousand individuals have been approved to participate in the reskilling and upskilling programs. - On the financial side: - More than 95 percent of individual and SME borrowers made use of the automatic repayment deferral initially. - As of November 2020, around 85 percent of borrowers had resumed making their monthly payments. - As of end-December 2020, banking institutions had facilitated 1.3 million applications for repayment assistance by individuals and SMEs in COVID-19-affected sectors, with an approval rate of 95 percent. ### SRF (Special Relief Facility) demand and lending outcomes - Original SRF allocation RM5bn was quickly exhausted; BNM extended SRF to RM10bn. - BNM stopped accepting new SRF applications in early May after 21,240 accounts had been established. - On average, banks took 2-5 days to approve an SRF loan. - With SRF closed to new applications, commercial banks expected to continue supporting SMEs through regular lending operations. - About half of SRF lending was to SMEs in the wholesale, retail and hospitality sectors. - BNM estimates SRF lending provided support to around 200,000 jobs. ### Support to the overall economy — fiscal, monetary, and regulatory measures - Economic stimulus packages contained measures to: - Fund infrastructure projects. - Boost internet connectivity and digitalization. - Ensure food security. - Help industries most affected by COVID-19, such as tourism and entertainment. - BNM regulatory and supervisory measures to increase space for banks to support customers: - Banks allowed to draw down the capital conservation buffer of 2.5 percent. - Banks allowed to operate temporarily below the minimum liquidity coverage ratio of 100 percent. - Banks allowed to utilize the regulatory reserves that were set aside during periods of strong loan growth. These buffers are expected to be restored within a reasonable period after December 31, 2020; BNM expects banks to restore these buffers by September 30, 2021. - BNM set the Minimum Net Stable Funding Ratio requirement at 80 percent, effective on July 1, 2020. The minimum NSFR requirement will be reset at 100 percent from September 30, 2021. - Monetary policy: - BNM’s Monetary Policy Committee reduced the Overnight Policy Rate (OPR) by a cumulative 125 basis points in 2020. - The OPR currently stands at 1.75 percent. - Liquidity measures: - Statutory Reserve Requirement (SRR) ratio lowered from 3 percent to 2 percent effective March 2020. - Banks allowed to recognize Malaysian Government Securities (MGS) and Malaysian Government Investment Issues (MGII) against the SRR requirement effective May 16, 2020. - Flexibility initially available until May 31, 2021, was recently extended to December 31, 2022. ### Fiscal and quantitative measures table (stimulus measures announced in five policy packages in 2020; planned amount over 2020-21 and disbursed as of November 30, 2020) - Support for households: - Cash assistance amd e-vouchers: Planned amount 28.4; Disbursed 26.5; 18.4 - Reduced EPF contributions and retirement savings withdrawals: Planned amount 50.8; Disbursed 17.1 - Reskilling and upskilling: Planned amount 2.0; Disbursed 1.4; 0.3 - Individual tax cuts: Planned amount 1.3; Disbursed 0.0 - Loan moratoria for households: Planned amount 65.0; Disbursed 65.0 - Other: Planned amount 2.9; Disbursed 0.8; 2.7 - Support for enterprises: - Wage subsidies & hiring and training incentives: Planned amount 18.3; Disbursed 16.5; 13.0 - Credit and grants to firms (incl. microenterprises and SMEs): Planned amount 72.8; Disbursed 3.8; 14.2 - Tax and fee relief for businesses: Planned amount 7.2; Disbursed 2.1 - Deferral of employers' EPF contributions: Planned amount 10.0; Disbursed 0.1 - Loan moratoria for firms: Planned amount 35.0; Disbursed 35.0 - Support to the economy: - Additional spending on health and food security: Planned amount 2.6; Disbursed 2.2; 1.7 - Infrastructure and connectivity: Planned amount 8.4; Disbursed 3.9; 6.5 - Other: Planned amount 0.3; Disbursed 0.0; 0.0 - Total: Planned amount 305.0; Disbursed 55.0; 176.2 - Note: Table presents stimulus measures announced in five policy packages in 2020. Disbursed as of November 30, 2020. *Source: IMF staff report (Malaysia).* ### Appendix V. External Debt Sustainability Analysis ### Appendix V. External Debt Sustainability Analysis ### Key findings on external debt levels and drivers - External debt-to-GDP ratio: 67.5 percent as of 2020Q3 (end-2019: 63.4 percent; end-2018: 62.3 percent). - Main drivers of the 2020 increase: - Decline in GDP due to COVID-19 containment measures. - Public sector borrowing increased by almost 2 percent of GDP compared to 2019 (accounting for more than a third of the increase in external debt). - Non-resident holdings of local-currency debt securities increased by 1.1 percent of GDP. - Composition by currency (as of 2020Q3): - Ringgit-denominated external debt: about one-third of external debt (22 percent of GDP). - Nonresident holdings of domestic debt securities: 65.4 percent of ringgit-denominated external debt. - Ringgit deposits in domestic banking institutions: 17 percent of ringgit-denominated external debt. - Foreign-currency (FC) denominated external debt: two-thirds of external debt (49 percent of GDP). - Non-financial corporate sector: slightly more than half of FC-denominated external debt. - Interbank borrowings and FC deposits in the domestic banking system: 35 percent of FC-denominated external debt. ### Maturity profile and short-term debt - Short-term external debt by original maturity: 39 percent of total external debt (26 percent of GDP) as of 2020Q3. - Composition of short-term external debt: - Intragroup borrowings among banks and corporations: about 45 percent of short-term external debt; described as generally stable and remained stable during the pandemic. - Trade credits: about 13 percent of short-term external debt, largely backed by export earnings. ### Medium-term projections and financing needs - Projected external debt-to-GDP ratio: falls to about 50 percent by 2025 under the baseline. - Drivers of baseline path: continued current account surpluses (excluding interest payments), recovery in economic growth supported by domestic demand, capital inflows, and low external financing rates. - Projected share of short-term debt (original maturity): stabilizes at about 30 percent of total external debt by end of the medium term. - Gross external financing needs: - Estimated to have reached 31 percent of GDP in 2020. - Expected to moderate to about 24 percent of GDP by 2025. ### Vulnerabilities and stress-test results - External debt is most vulnerable to exchange rate and current account shocks. - Specific stress scenarios: - A 30 percent real exchange rate depreciation in 2021 could push external debt above 63 percent of GDP by 2025. - A permanent drop in the current account balance of 1.5 percent of GDP (excluding interest payments) could lead to external debt in excess of 54 percent of GDP in the outer years. - A deceleration in real GDP growth and a rise in interest rates would lead to moderate increases in external debt. - Mitigating factors that reduce shock impacts: - High share of ringgit-denominated external debt: about 33 percent of total external debt. - Largely stable intercompany loans: 15 percent of external debt. - Interbank borrowings: 29 percent of external debt, about four-fifth of which are intragroup borrowings from related offices abroad. ### Reserves and policy buffers - Gross official reserves: $107.6 billion as of December 2020. - Coverage: over 100 percent of short-term external debt by original maturity. - Adequacy: about 126 percent of the IMF ARA metric; net reserves adjusted for net forwards positions are about 117 percent of the ARA metric. - Policy buffers and frameworks: - Exchange rate flexibility and a moderate current account surplus. - Prudential requirements on liquidity and funding risk management for banks’ interbank borrowing, nonresident deposits, and debt issuance. - Central bank approval framework for corporate external borrowings to ensure productive use and foreign-currency earnings support. --- ### Appendix VI. Public Debt Sustainability Analysis — Summary of main points ### Baseline outlook and fiscal assumptions - Federal government debt projection: remain below the temporary threshold of around 63 percent of GDP in 2020 and stabilize around 61 percent of GDP in the medium term under current policies. - Macroeconomic baseline (2021 projections / medium term): - Real GDP growth in 2021: 6.5 percent; nominal GDP growth in 2021: 8.4 percent. - Fiscal deficit: widened to 6.0 percent of GDP in 2020; expected to narrow to 5.4 percent in 2021; average 4.8 percent of GDP over 2021-23; decline to 4.0 percent of GDP over the medium term. - Financing needs: - Gross financing needs defined as fiscal deficit plus maturing debt: projected at 11.3 percent of GDP in 2021 (decline from 13.4 percent of GDP in 2020). - Debt definition and composition: - DSA debt path based on federal government budget, covering more than 90 percent of general government debt; excludes local/state governments and statutory bodies with explicit guarantees. - External financing requirement (sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at end of previous period): 31 percent of GDP. - Share of debt denominated in foreign currency: 3.6 percent of total debt. ### Legal debt limits and ceilings - Debt limits by instrument: - MGS+MGII+MITBs ceiling raised from 55 percent of GDP to 60 percent of GDP in 2020 (includes Sukuk Prihatin in 2020); the increase remains in place until end-2022 and would revert to 55 percent in 2023 unless new legislation is passed. - Debt limit for MTBs: RM10 billion (unchanged). - Offshore borrowing limit: RM35 billion (unchanged). - Effective debt ceiling for federal government debt: around 63 percent of GDP in 2020; expected to gradually decline to 62/57 percent by 2026 depending on whether the 60 percent threshold lapses in 2023. ### Realism and fan-chart risk assessment - Forecast bias and realism: - Past median forecast error for the GDP deflator: -1.8 percent (staff forecasts relatively optimistic); forecast bias has improved. - Projected 3-year adjustment in the cyclically adjusted primary balance (CAPB): percentile rank of 33 percent compared to historical experience for high-debt market access countries; CAPB level percentile rank of 77 percent. - Probability assessments: - Under symmetric distribution: around 50 percent probability that debt will remain below 62 percent of GDP over the medium term. - Under asymmetric (restricted upside) distribution: around 33 percent probability that debt will remain below 62 percent of GDP over the projection horizon. ### Stress tests, reform scenario, and risks - Baseline: federal government debt remains within the authorities’ new debt anchor of around 63 percent of GDP in 2020 and within the DSA debt burden benchmark of 70 percent in the medium term. - Stress test outcomes: - Real interest rate shock and primary balance shock: debt expected to rise above the authorities’ defined limit in the medium term. - Real growth shock: would cause debt to rise to just below 70 percent of GDP. - Combined shock: would bring debt over 70 percent of GDP in the medium term. - Contingent liability shock: assumes government absorbs all guarantees (including COVID-19 packages) totaling 20 percent of GDP over 5 years and negative feedback on interest rates; debt-to-GDP would rise to 82 percent of GDP in the medium term, breaching the DSA threshold. - Illustrative fiscal consolidation scenario: - If the higher debt ceiling expires end-2022, gradual fiscal consolidation required to lower public debt to around 57 percent of GDP in the medium term. - Estimated fiscal effort required: around 1 percent of GDP per annum. - Options for consolidation: raising non-oil revenues (e.g., reinstating the Goods and Services Tax), trimming expenditures, or a combination. - Heat-map vulnerabilities: - Large external financing requirement: 31 percent of GDP (above upper threshold of early warning benchmarks). - Share of debt held by foreigners: 26 percent of GDP (above lower threshold of early warning benchmarks). - Mitigant: existence of large domestic institutional investors who tend to make opportunistic investments. ### Selected numeric indicators and projections (high-level extracts from DSA tables and figures) - Nominal gross public debt: - 2019: 51.1 percent of GDP - 2020: 52.5 percent of GDP - 2021: 61.1 percent of GDP - 2022: 61.6 percent of GDP - 2023: 63.0 percent of GDP - 2024: 62.6 percent of GDP - 2025: 62.5 percent of GDP - 2026: 62.2 percent of GDP - Public gross financing needs (selected years): - 2019: 8.8 percent of GDP - 2020: 4.1 percent of GDP - 2021: 9.3 percent of GDP - 2022: 11.3 percent of GDP - 2026: 8.0 percent of GDP - Real GDP growth (selected projections): - 2019: 5.4 percent - 2020: 4.3 percent - 2021: -6.0 percent (actual) then projected 6.5 percent (baseline) - Medium-term projections: 5.7, 5.3, 5.0 percent (various years shown) - Effective interest rate (defined as interest payments divided by debt stock): - 2019: 4.3 percent - 2020: 4.4 percent - 2026 projection: 5.3 percent - Public debt held by non-residents: 26 percent of GDP (2020, noted in heat map) - External financing requirement (by definition used in DSA): 31 percent of GDP (2020) *Source: Appendix V. External Debt Sustainability Analysis and Appendix VI. Public Debt Sustainability Analysis (excerpts).* ### Appendix VII. Inequality, Poverty, and Social Protection in ### Appendix VII. Inequality, Poverty, and Social Protection in Malaysia ### A. Introduction - COVID-19 emergence in Malaysia in February 2020 led to wide-spread closures and bans on public gatherings and travel. - Unemployment rate increased from 3.3 percent in Q1 2020 to 5.1 percent in Q2 2020. - Most affected sectors—manufacturing, transportation, and tourism—saw over 5 percent decline in employment within Q2 2020. - Employment Insurance System introduced in 2018 provided benefits for workers laid off from standard full-time jobs but did not cover street vendors, e-hailing drivers, or many informal/gig economy workers. - The pandemic strained the healthcare sector and highlighted the need to review social insurance and social protection in light of changing population structure and needs. ### B. Inequality and Poverty in Malaysia: Progress Over the Years but Room for Improvement - Long-term trends and historical context: - Biggest strides in reducing inequality occurred between 1976-1989. - Progress slowed after the Asia Financial Crisis; inequality improved after the GFC at a slower pace and increased again in 2019. - Comparative levels: - Market inequality (before taxes and transfers) remains somewhat above averages in the Asian EMs and lower than the advanced economies average. - Net inequality (after taxes and transfers) remains above the average in EM Asia and significantly higher than in the AEs. - Growth incidence and distributional growth: - Real income grew at a relatively steady rate of 3¼ percent p.a. for the two wealthiest deciles over the whole period. - Growth rate of real income for the remaining 80 percent remained above T20 levels historically but slowed in the last two decades. - Absolute poverty: - Share of population living in absolute poverty declined from almost 50 percent at the beginning of the 1970s to 0.4 percent in 2016. - Poverty line income was revised from RM980 in 2016 to RM2,208 in 2019. - Under the revised poverty line, share of households living in absolute poverty increased to 5.6 percent (though it fell by 2 percentage points compared to 2016). - Hardcore poverty declined from 0.6 percent to 0.4 percent under the new methodology (DOS, 2019). - Share of population living below the World Bank’s poverty line of $1.90 a day at 2011 PPP levels stands at 0.01 percent in 2015. - Alternative poverty assessments: - Ravallion and Chen, 2018, estimate poverty line in similar-income countries at USD12 a day per person in 2011 PPP terms. - World Bank (2020) estimates USD12 per person per day would translate into RM20 per day or RM2,433 per month for a family of four, implying a 16 percent poverty rate in 2016. - Relative poverty: - OECD relative poverty measure (half or less of median income) shows almost 17 percent of Malaysian households in relative poverty in 2019. - Improvement since 1995 is smaller than for absolute poverty; relative poverty remains high compared to many OECD countries. ### C. Social Assistance: Broad Coverage but Limited Benefits - Structure and main programs: - Non-contributory social assistance is the first pillar and includes unconditional cash transfers and other benefits. - Bantuan Sara Hidup (BSH) replaces BR1M from 2018; targets households with income less than RM4,000 a month. - BSH assistance ranges from RM 500 to RM1,000 a year, paid in three installments, with amounts depending on monthly income, household type, and number of children (up to four). - BSH administered by the Inland Revenue Board of Malaysia (Ministry of Finance); additional benefits (children, elderly, disabled) by Department of Social Welfare (JSK). - Social assistance also includes programs supporting student education, fuel and other subsidies, zakat, and others. - Spending and composition: - In 2016, government spending on social assistance was around 0.8 percent of GDP. - Around ¾ of social assistance spending was used for unconditional cash transfers; around 20 percent on school feedings; remainder on other programs. - No social pension exists; elderly vulnerable Malaysians rely on cash transfers. - Coverage and adequacy: - Around ¾ of the Malaysian population is covered by various social assistance programs. - Coverage by quintile: almost universal in the lowest quintile, 93 percent in the second quintile, and 44 percent for the top 20 percent. - On average, social assistance benefits constitute 3 percent of income of beneficiaries. - Among the poor, social assistance constitutes 9 percent of their income. - Around 30 percent of all social assistance payments are received by the poorest 20 percent of the population. - Almost 10 percent of benefits payments are directed to the richest 20 percent. - Impact: - Social assistance is estimated to close less than 20 percent of the poverty gap and reduce the number of the poor by around 10 percent. - Decline in inequality due to social assistance programs is modest. ### D. Social Insurance - Overview: - Second pillar includes unemployment insurance, public and private pension schemes, and healthcare insurance. - Unemployment and related insurance: - Employment Insurance System (EIS) introduced in 2018, administered by SOCSO; participation mandatory for employees covered by social security; both workers and employers contribute monthly. - In 2017, Malaysia implemented Self-Employment Social Security Scheme through SOCSO providing protection against employment injuries but not unemployment benefits. - Unemployment insurance contributions total 0.2 percent of wages/payroll for employers/employees. - Benefits start at 80 percent replacement rate, taper off quickly, and last up to 6 months (compared to 8 to 11 months in Korea and Japan, and 2 years in China). - Scheme covers workers on “salaried” contracts only, leaving many without protection. - Informality and coverage gaps: - 2019 Malaysian Informal Sector Workforce Survey estimates around 8.3 percent of Malaysian workers in the informal sector (firms not registered and with fewer than ten workers). - Share of self-employed and unpaid family workers stood at 22 percent in 2019 (noting possible overestimation). - 2019 Informal Workforce Survey Report found share of informal workers in the Malaysian economy at 16.2 percent after adjustments. - Women increasingly concentrated in jobs without unemployment insurance due to a 5.5 percent increase in self-employed women over the last 10 years. - Share of employees not covered by work-related injury schemes is close to 40 percent. - Pension schemes: - Three main schemes: Employees Provident Fund (EPF) for private sector, Public Service Pension Fund (KWAP) for civil servants, and Armed Forces Board Fund (LTAT) for military. - EPF mandatory for private sector workers with standard contracts; contributions: 7 percent (minimum) and 12-13 percent, respectively (workers and employers). - EPF accounts: “Account I” (70 percent of contributions) withdrawable only at retirement (age 55); “Account II” (30 percent) withdrawable from age 50 for permitted outlays. All EPF withdrawals are lump-sum; no annuity option. - KWAP is funded by general tax revenues and operates as a defined benefit scheme. - LTAT operates as a defined contribution scheme, with members contributing 10 percent of salary and the government 15 percent. - Voluntary private retirement schemes available for both private and public sector workers. - Health insurance: - Malaysia has a public universal healthcare system funded by taxes and administered by the Ministry of Health, co-existing with a private system funded by out-of-pocket contributions. *Prepared by Emilia Jurzyk. The analysis is based on the World Bank ASPIRE database, and also draws on the WB (2020).* ### 16. Participation in the pension schemes is mandatory for qualified workers but a large ### 1mysea2021001 - 16. Participation in the pension schemes is mandatory for qualified workers but a large ### Coverage and gender gap - Contributions to the EPF are mandatory for private sector employees and public sector employees not covered by the public sector system, and are voluntary for the self-employed, household workers and foreign workers. - In 2018, the EPF and KWAP are estimated to have covered around 50 percent of Malaysian labor force. - While the share of men actively contributing to the pension insurance scheme remained stable over time, the share of women has declined, likely due to their increased take-up of non-standard jobs. - The share of contributing population is lower when computed against the number of working age population: only around a third of working age population are active members. - Given a much lower share of women than men in the Malaysian labor force, almost 70 percent of women of working age are not contributing to the insurance schemes compared to 64 percent of men. ### Adequacy of benefits and withdrawal rules - Workers participating in the EPF are eligible to withdraw their balances at the age of 50 (for Account I) and 55 (for Account II) – a significantly lower age than elsewhere, and below the minimum retirement age of 60. - A study by WB (2020) demonstrates that, given low balances accumulated, ¾ of contributors will only be eligible for a monthly benefit of RM1,050, just above Malaysia’s food Poverty income Line (PLI) of RM980. - Because benefits depend on accumulated balances, higher income groups receive a higher share of total payments, underscoring the precarious situation of poor citizens approaching retirement age. ### Demographic projections and fiscal impact - The UN projects that the old age dependency ratio will increase over 2.5 times between 2050 and 2050. - Calculations based on the methodology developed by Clements and others (2013) indicate that pension spending is projected to increase by 6.5 percent of GDP between now and 2050. - These estimates are likely conservative given that they do not incorporate the impact of aging on economic activity. ### Policy measures considered to improve retirement outcomes - Higher minimum withdrawal age and extension of the EPF to categories of employment currently not covered by the scheme: - As estimated by WB (2020), increasing the minimum withdrawal age by 10 years, to the age of 65, would effectively double the replacement rate for those working since the age of 30 due to a longer period of contributions and investment dividends and a shorter payout period. - Broader mandatory enrollment and consideration of a social pension are noted as possible responses given the speed of population aging. - Measures to encourage households to replenish their EPF accounts once the recovery takes hold should be considered, especially for low income households that had low retirement savings before the pandemic and might have depleted them further. ### COVID-19 social protection response: scale and main components - Authorities introduced five policy packages between February and September 2020; enhanced social insurance and social protection measures included cash transfers, wage subsidies, reduced contributions and early withdrawals to/from the EPF/PRS without penalties, and hiring and training grants. - Total expenditure on subsidies and social assistance stood at RM20 billion, or around 1.4 percent of GDP. - Additional spending included in the 2021 budget brought total spending on subsidies and social assistance to 18.9 billion, or estimated 1.2 percent of GDP. - Direct cash transfers: - RM17bln or 1.2 percent of GDP were earmarked for new universal cash transfers. - Targeted cash transfers to vulnerable groups (medical personnel, taxi/bus/e-hauling drivers, students, gig economy workers, civil servants, government pensioners) cost around RM0.6bln or 0.04 percent of GDP. - Wage subsidies: - March package: RM600 for three months per employee earning less than RM4,000 a month for firms that experienced 50 percent decline in income; recipient firm had to pledge not to lay off workers or send them on unpaid leave for three months after the program. - Authorities estimated the subsidy will benefit up to 4.8 million workers. - 2021 budget extended the wage subsidy by another three months and raised the limit of employees per application from 200 to 500; a new subsidy targeted the tourism sector and is expected to benefit up to 0.9 million employees. - EPF-targeted measures to improve cash flow: - Households were allowed to reduce their EPF contribution rates from 11 percent to 7 percent between April and December 2020. - Households were allowed to withdraw RM500 a month from their Account II without tax penalties between April 2020 and March 2021. - Employers were given an option to defer or restructure their EPF payments. - Both measures aimed to improve cash flow at RM40bln and RM10bln, respectively, or 3.5 percent of GDP (total). - As a result, net contributions between April-July 2020 stood at around 60 percent of the 2019 levels. - Under the 2021 budget, households were allowed to withdraw up to RM500 per month for 12 months from Account I (a maximum of RM6,000), starting from January 2021. The authorities expect withdrawals from Account I to total RM4 billion. - Training, hiring, and unemployment benefits: - Initially doubled tax deductions for tourism-related training, then provided a training allowance of RM4,000 for workers not covered by EIS. - Grants to firms hiring the unemployed, with amounts increasing with age of jobseeker and length of unemployment spell. - Allocated RM2 billion in additional resources to the re-skilling and upskilling courses run by the Human Resources Development Fund. - 2021 budget allocations: RM3.7 billion to skills development and retraining programs, RM1 billion to reskilling and upskilling programs, and RM0.7 billion to short-term employment program. - Extended duration of unemployment benefits from 6 to 9 months, with allowance set at 80 percent of the employee’s monthly salary in the first month, 50 percent in months two to six, and 30 percent in the remaining three months. - Authorities allocated RM150 million for this benefit, expecting it to benefit up to 130,000 jobseekers. ### Policy implications and recommendations - Social assistance: reduce coverage of the rich, increase benefits for the poor — 9.5 percent of social assistance benefits are directed to households in the upper deciles of the income distribution; a more targeted approach is recommended to better allocate limited resources and achieve greater progress in reducing poverty and inequality. - Unemployment insurance: broaden coverage to align with labor market trends — significant share of workers not covered and share likely to increase given temporary/gig jobs and self-employment; scheme should ideally cover these workers and protect them from work-related injuries. - Pensions: address exclusion and adequacy — consider measures to encourage replenishment of EPF accounts, broader mandatory enrollment, higher minimum withdrawal age, and consider introducing a social pension given rapid population aging. - Coordination: unification, streamlining, and better coordination between agencies administering social protection should be considered; Malaysia Social Protection Council could lead this initiative. - Funding: reforming social protection to provide better cover will require additional fiscal spending; given limited fiscal space, additional revenue sources would be needed in the medium-term, putting greater weight on the importance of adopting a MTRS. *Source: 1mysea2021001 - 16. Participation in the pension schemes is mandatory for qualified workers but a large (IMF PDF chapter/section).* ### 1. Provident fund (account 1 for retirement, Account 2 can be accessed for other needs)2. Social insurance 3. Social as ### 1mysea2021001 - 1. Provident fund (account 1 for retirement, Account 2 can be accessed for other needs)2. Social insurance 3. Social as ### Types of social protection schemes (excerpted entries) - Provident fund (account 1 for retirement, Account 2 can be accessed for other needs) - Social insurance - Social assistance - Social pension for all residents - Mandatory occupational pension for all employees with earnings greater than A$450 a month. Voluntary coverage for self-employed. - Social pension and mandatory individual accounts for urban workers - Pension and individual accounts for rural workers and non-salaried urban residents (contributory and noncontributory) - Separate noncontributory pension system for employees in the government and public service units - Separate entries listing: Social assistance; Mandatory occupational pension; Provident fund; Social insurance; Provident Fund (four types of accounts: Ordinary Account (OA), Special Account (SA), Medisave Account (MA), Retirement Account (RA)). ### Coverage—who is covered - Private-sector employees, including apprentices, and certain public-sector employees not covered by a separate public-sector system. Voluntary for self-employed, household workers, foreign workers, and certain others. - Private-sector employees and certain public-sector employees not covered by a separate public-sector system. - Needy citizens - All residents - Employees (including legally employed foreigners and migrants, and part-time employees) in urban enterprises and urban institutions managed as enterprises; self-employed persons and small business owners with no employees; casual workers; and civil servants and certain public-sector employees. - Rural and nonsalaried urban residents aged 16 or older. - All residents; Employees under contract for at least 60 days (shorter periods for employees in the catering and construction industries) and most categories of self-employed persons. - Public- and private-sector employees. - Employed persons, including foreign workers who have worked at least six months in Indonesia. Voluntary coverage for self-employed persons. Special systems for public-sector employees and military and police personnel. - National pension program:: residents aged 20 to 59, voluntary for those aged 60-65 - Employees' pension insurance: Employed persons younger than age 70 in covered firms. Voluntary for those aged 70 and above. - Employed and self-employed persons, including farmers and fisherman. Special systems for civil servants, private-school employees, military personnel, and employees of the special post office. - Low-income citizens - Private sector employees, self employed persons, household workers. Voluntary coverage for citizens working abroad, persons who previously had mandatory coverage, and nonworking spouses of insured persons. Special systems for government employees and military personnel. - Needy citizens - Employed persons, including most public-sector employees; self-employed with annual net income greater than S$6,000 (MA account only). Voluntary for persons without mandatory coverage. - Needy elderly citizens ### Exclusions (selected entries) - Exclusions: self-employed, household workers, spouses of business owners, and foreign workers. - Students and persons covered under the basic pension insurance scheme. - Self-employed hawkers; household workers; persons covered by statutory pension plans or provident funds, incl. civil servants and teachers; members of occupational retirement plans who are granted exemption certificates; and foreign workers in HKG for less than 13 months or covered by another country's retirement system. - Self-employed - None - n.a. ### Source of funds (selected entries with exact rates and amounts) - Employees: 11% of monthly earnings for those younger than 60. Employers: 12-13 percent of monthly earnings, depending on employee's age - Employee and employer: 0.5% of monthly covered earnings, each - Government (for social pension) - Government for social pension. Mandatory occupational pension: employees’ contributions are voluntary and capped. Employers’ contribution at 9.5 percent of employees’ ordinary time earnings, set to increase by 0.5 percentage point annually, starting from 2021 and up to 12 percent by 2023. - System 1: Insured person: 8% monthly earnings for mandatory individual account. For rural residents: contribution depends on local government regulation. Self employed: 20% of gross average monthly earning for social insurance and mandatory individual account. Employer: up to 20 percent of payroll. - System 2 (contributory part), contribution from RMB100–500 (rural) and RMB100–1,000 (urban); government contribution of at least RMB30. - Government - Employees/self employed: at least 5% of monthly earnings/ income. Employers: at least 5% of monthly payroll - Insured person: 1% of gross monthly covered earnings. Employers: 2% of gross monthly covered payroll. - Insured person and self-employed: 2% of gross monthly covered earnings. Employers: 3.7% of gross monthly payroll. - Fixed contribution per month (16,340 yen in March 2019). Government: 50% of the cost of benefits and the total cost of administration. - 9.15% of monthly wage and bonus, paid by employer and employee each. Government: total cost of administration. - Employees: 4.5% of gross monthly covered earnings. Employer: 4.5% of gross monthly covered payroll. Self-employed: 9% of gross monthly covered earnings (with min and max levels). - Payments based on 31 wage classes collected from workers, self employed, and employers. Government finances any deficit. - Employees: 20% of monthly earnings of at least S$750 if younger than age 56, tapering off for older citizens. Self-employed: 4% to 10.5% of annual net trade income (MA only). Employers: 17% of monthly payroll for employees younger than 56, tapers off for older employees. Government: subsidizes payments for certain low income employees. ### Qualifying conditions (selected entries with exact ages, years, tests) - Age 55 (different age for qualified withdrawals from Account 2) - Payable in case of permanent disability, as survivor pension, and funeral grant - Age 60 if no support of family members, means-tested - SS pension: Age 66, set to increase to 67 by July 2023. Residence rules apply. - Age 60 (men and professional women), age 55 (nonprofessional salaried women), or age 50 (other categories of women), with at least 15 years of contributions. Rural residents: Age 60 and not entitled to a social insurance old-age pension under the basic pension insurance program. Min. 15 years of contributions - Age 65/70 depending on the scheme, with min. 7 years residency. Means/asset test - Age 56, gradually rising in the future, with at least 180 months of contributions. - Age 65 with at least 10 years paid or credited contributions - Age 63 (men) 61 (women), will rise in the future. Lower age for certain groups - Age 61, gradually rising in the future, with at least 20 years of coverage. Income test - Age 65, income test - Old-age pension: age 65 with at least 10 years of residence including at least five after age 50, and a resident on the date of application. No income test. Old-age assistance benefits for the needy available. - Age 60 with at least 120 months of contributions before the six-month period when the pension is first paid; early retirement for certain workers. For pensioners up to age 65, employment or self-employment must cease. - Age 55. Members with at least S$60,000 in the RA at age 65 are automatically enrolled in a life annuity program. - Age 65 and total CPF contributions of up to S$70,000 by age 55 and household per capita monthly income of up to S$1,100. ### Pension amounts and benefit formulas (selected exact figures and rules) - RM350 a month - Up to A$860.60 (if single) or A$648.70 (if partnered) is paid every two weeks. Means tested. Additional assistance available (pension and energy supplements). - System 1: Social pension: average monthly local wage in the previous year plus the average individual monthly wage used to calculate contributions, divided by two and multiplied by 1% for each year of contributions. The minimum combined social insurance and mandatory individual account pension is usually 40% to 60% of the average monthly local wage in the previous year, depending on the region. Individual account: total employee contributions plus accrued interest, divided by the actuarial month. if benefits exhausted, on indiv. account, benefits paid from local pooling fund. - System 2: flat pension plus annuity from funded defined contribution account. - HK$1,345 to HK$5,440 per month, depending on the scheme - The balance of total employee and employer contributions plus accrued interest is paid as a lump sum or periodic payments. - 1% of the insured's average adjusted annual earnings divided by 12 and multiplied by the number of years of contributions is paid, with min and max amounts. - A lump sum of total employee and employer provident fund contributions plus accrued interest is paid. Members with more than 50 million rupiah in their provident fund accounts may opt for a periodic payment. - 779,300 yen a year (full benefit) - Based on the insured's average monthly wage over the full career multiplied by a coefficient determined by the insured's date of birth multiplied by the number of months of coverage. Paid every two months. - 1.35 (coeff. decreasing in the future) times the sum of the national average indexed monthly wage in the three years immediately before the year in which the pension is first paid and the insured's average monthly wage over the total contribution period. An increment is paid for years of coverage exceeding 20 years. - Up to 209,960 won a month, depending on income - NZ$423.83 (if single and living alone), NZ$391.22 (single sharing accommodation), or NZ$326.02 (couple) a week. - The highest of: 300 pesos plus 20% of the insured's average monthly covered earnings and 2% of average monthly covered earnings for each credited year of service exceeding 10 years; 40% of the insured's average monthly covered earnings; 1,200 pesos with at least 10 but less than 20 credited years of service; or 2,400 pesos with at least 20 credited years of service. - 500 pesos a month - In addition to life annuity or monthly payout from the RA (until its depletion), a lump sum paid of the account balance exceeding the minimum required balance in the RA, or S$5,000, whichever is greater. - S$300 to S$750 a quarter is paid, depending on the beneficiary's place of residence. ### E-payments and the COVID-19 pandemic (Appendix VIII) — key findings and context - The COVID-19 pandemic is accelerating trends towards increased digital payment system solutions in many countries. In Malaysia, electronic payment (e-payment) via mobile and internet banking has increased sharply during the COVID-19 pandemic, supported by strong connectivity and robust payments infrastructures. - Cash-in-circulation appears resilient, potentially reflecting precautionary demand for a universally accepted store of value in the context of elevated macroeconomic uncertainty. - Increasing digitalization brings opportunities related to financial inclusion, but also challenges spanning consumer protection, market power and financial stability. - Digital innovation is changing how financial services are delivered in Malaysia. Cash use in Malaysia is relatively low in an international context. This partly reflects digital payment adaptation such as mobile banking accounts and e-money transactions, including the use of e-wallets. - The COVID-19 pandemic is accelerating a longer-term shift away from the use of physical cash in advanced and emerging market countries with alternative fintech payment methods emerging. - The strict movement control order (MCO) in Malaysia (from March 18, 2020 to May 3, 2020) prevented many customers from physically visiting stores, shifting activity to online channels while using cash to make purchases remotely became relatively more difficult. - Well-developed internet connectivity has enabled the growth of digital solutions. Digital consumers are set to increase to 21 million in 2020 from 13 million in 2017. As a share of the adult population, digital customers would rise to 83 percent in 2020 from 54 percent in 2017 according to Facebook and Bain. - Malaysia has good access to digital financial services. Around 85 percent of Malaysia’s adult population had an account with a financial institution as of 2017 according to World Bank data. - Internet banking penetration rose to almost 100 percent in 2019 from below 30 percent in 2009. Mobile banking penetration exceeded 50 percent in 2019 compared to about 2 percent in 2009. - Over 10 percent of Malaysia’s adult population had access to mobile money accounts in 2017, up from around 3 percent in 2014. This was the highest among the ASEAN-6 countries and recent information suggests that this share may have more than quadrupled by end-2020. - Authorities report that, in the context of the Malaysian Government’s ePENJANA initiative, 11.4 million unique e-wallet subscribers (adults aged 18 and above) were registered to receive a RM50 credit. This accounted for about (text truncated in source). *Source: International Social Security Association data; Appendix VIII prepared by Dan Nyberg and Han Teng Chua; IMF staff text (excerpts).* ### 45.3 percent of the 25.1 million adult population in Malaysia aged 15 and above (Ministry of Finance, 2020). ### 1mysea2021001 - 45.3 percent of the 25.1 million adult population in Malaysia aged 15 and above (Ministry of Finance, 2020) ### Payment access and usage in Malaysia (pre‑ and end‑2019) - 45.3 percent of the 25.1 million adult population in Malaysia aged 15 and above (Ministry of Finance, 2020). - ASEAN Digital Consumers (Percent of Population Aged 15+), selected country card and account ownership figures (sources: Facebook, Bain & Company): - Indonesia: Credit card ownership 2.44, Debit card ownership 30.81, Financial institution account 48.39 - Malaysia: Credit card ownership 21.31, Debit card ownership 73.76, Financial institution account 85.13 - Philippines: Credit card ownership 1.94, Debit card ownership 21.01, Financial institution account 31.80 - Thailand: Credit card ownership 9.80, Debit card ownership 59.85, Financial institution account 80.96 - Singapore: Credit card ownership 48.90, Debit card ownership 91.85, Financial institution account 97.81 - Vietnam: Credit card ownership 4.12, Debit card ownership 26.74, Financial institution account 30.02 - ASEAN Average (excluding Malaysia): Credit card ownership 13.44, Debit card ownership 46.05, Financial institution account 57.80 - EM Average (excluding Malaysia): Credit card ownership 13.36, Debit card ownership 42.76, Financial institution account 58.26 - Payment instrument value and volume shares (end‑2019): - Credit cards represented 61 percent of the value of transactions. - E-money stood at 10 percent of total value transacted. - In volumes, E-money constituted around 2/3 of transactions. - Credit and debit cards stood at 1/3 of total transactions. ### COVID‑19 pandemic effects on payment channels (usage and cash) - Online/mobile banking and internet banking: - Mobile banking usage increased during the MCO. - Internet banking usage in terms of volume rose even though value declined; value recovered to pre‑COVID levels as Malaysia exited the MCO. - ATM transactions: - ATM transactions plunged in both volume and value and have yet to return to pre‑COVID levels as economy recovered from the MCO exit. - Bank digital platform performance (reported by banks): - Maybank: transaction volume expanded 2 percent q/q 2020Q3 under Maybank2u and 3 percent q/q under the mobile app. - Maybank: in value terms, digital transactions expanded 30 percent q/q under Maybank2u and 40 percent q/q under the mobile app. - CIMB / Touch ‘n Go Digital: registered users grew to 10.9 million, with 200,000 merchants as at June 2020. - Card and e‑money usage during MCO and recovery: - Credit and debit cards and e‑money usage fell significantly during the MCO. - Since MCO ended, debit card and e‑money usage in both volume and value partly recovered. - Recovery of credit and charge cards has been slower. - Average ticket sizes (January–September 2020): - Credit card average ticket size about RM260. - Charge card average ticket size about RM3,200. - Debit card average ticket size about RM120. - E‑wallet average ticket size about RM30. - Cash demand and currency in circulation: - Currency in circulation as a share of GDP in Malaysia has risen by 17 percent compared to pre‑COVID levels (second highest among ASEAN‑5). - Demand for RM100 bills has been relatively high in 2020; index presented with January = 100. ### Policy initiatives and adoption measures during the pandemic - Bank Negara Malaysia (BNM) and Financial Sector Blueprint (2011 – 2020): - FSB proposed five recommendations to foster migration to e‑payments, including enhancements to payment infrastructure, mobile banking adoption, widening payment card infrastructure (target: increase use of debit cards from 0.6 transactions per capita in 2010 to 30 transactions per capita by 2020), promoting a conducive pricing structure to reduce cheque use (target: reduce cheques from 207 million in 2010 to 100 million by 2020), and enhancing awareness and user confidence in e‑payments. - BNM aims to publish the next financial sector blueprint in 2021. - Pandemic stimulus and e‑payments promotion: - Eligible recipients were given RM50 worth of e‑wallet credits and additional RM50 through vouchers, cashback and discounts via e‑wallets from July to September 2020 under the national economic recovery plan (PENJANA). - “Shop Malaysia Online” to boost online spending and Micro and SME e‑Commerce Campaign: - Over 45,000 enterprises registered through e‑commerce platforms, generating total sales of more than RM332 million. - Shop Malaysia Online used by 213,000 local sellers and generated sales of RM896 million. - eBelia Programme under Budget 2021 to disburse aid via e‑wallets to encourage e‑payments usage among youths. - Digital banks: - BNM announced plans for licensing up to five digital banks. - BNM released a policy document on the licensing framework for digital banks on December 31, 2020 and invited applications by June 30, 2021. ### Opportunities and risks from e‑payments and digitalization - Opportunities: - Enhance financial inclusion, governance and transparency. - Promote fintech innovation to serve financially underserved segments such as B40 and SMEs. - Improve control and targeting of budget spending and efficiency of tax collection. - Potential to enhance monetary policy implementation via digitalization and Central Bank Digital Currencies (CBDC). - Risks and required safeguards: - Merchant acceptance of cash may decline; efforts needed to reach under‑served populations including older and low‑income groups. - Consumer protection and integrity risks: - Data privacy risks if transaction data is mined or paired with social media. - Need for appropriate know‑your‑customer and AML/CFT procedures. - In Malaysia, banks and non‑bank payment service providers are subject to data protection and AML/CFT requirements. - Financial stability risks: - Erosion and volatility of bank deposit bases if innovative savings and payments products from fintech firms grow. - Potential runs on e‑money as digital forms of lending and payments scale. - Guidelines on Electronic Money (E‑money) require e‑money balances to be placed in a trust fund or a dedicated bank account with licensed banks in Malaysia and prohibit EMIs from using e‑money balances for lending purposes. - Monetary policy implementation risks: - Widespread e‑money substitution could lead to loss of monetary policy control, especially with high concentration of e‑money providers. - In Malaysia, risks mitigated because e‑money for domestic payments must be denominated in Malaysian ringgit and balances must be held in trust or dedicated bank accounts with licensed banks, but continued monitoring and regulation are required. *International Monetary Fund — Malaysia country chapter content (excerpt).* ### References ### References ### Citations on digital payments, cash, and CBDC - Auer, R., G. Cornelli, and J. Frost (2020), “Covid-19, Cash, and the Future of Payments”, BIS Bulletin No. 3, April. - Bech, M., U. Furuqui, F. Ougaard, and C. Picillo (2018), “Payments are a-changin’ but Cash Still Rules”, BIS Quarterly Review, March. - Caswell, E. M. Smith, D. Learmonth, G. Pearce (2020), “Cash in times of Covid,” Bank of England Quarterly Review, Q4. - He, D. (2018) “Monetary Policy in the Digital Age.” Finance and Development, International Monetary Fund, June. - Mancini-Griffoli, T., M. Martinez Peria, I. Agur, A. Ari, J. Kiff, A. Popescu, and C. Rochon (2018), “Casting Light on Central Bank Digital Currency,” IMF Staff Discussion Note, November. - Williams, J and C Wang (2017), “Reports of the death of cash are greatly exaggerated”, San Francisco Fed blog, November 2017 ### Financial sector, stability, and supervisory references - Bank Negara Malaysia (2020a), “Bank Negara Malaysia Financial Stability Review for First Half 2020.” - Bank Negara Malaysia (2020b), “BNM Annual Report 2019.” - Bank Negara Malaysia (2018), “Financial Stability and Payment Systems Report”. - Bank Negara Malaysia (2011), “Financial Sector Blueprint 2011 – 2020.” - Financial Stability Board (2020a), “Addressing the regulatory, supervisory and oversight challenges raised by “global stablecoin” arrangements: Consultative document” April. https://www.fsb.org/2020/04/addressing-the-regulatory-supervisory-and-oversight-challenges-raised-by-global-stablecoin-arrangements-consultative-document/ - Financial Stability Board (2020b), “Regulation, Supervision and Oversight of “Global Stablecoin” Arrangements, October. https://www.fsb.org/2020/10/regulation-supervision-and-oversight-of-global-stablecoin-arrangements/ - Caswell, E. M. Smith, D. Learmonth, G. Pearce (2020), “Cash in times of Covid,” Bank of England Quarterly Review, Q4. ### National and industry reports, data sources, and presentations - CIMB (2020), “Analyst Presentation 1H2020”, https://www.cimb.com/content/dam/cimb/group/documents/investor-relations/financial-information/cimb-group/2020/30-june-2020/2Q20CIMBGroupAnalystPresentation.pdf - Maybank (2020) “Analyst Presentation 2Q & 1H FY2020” Available at https://www.maybank.com/iwov-resources/corporate_new/document/my/en/pdf/presentations-and-webcasts/2020/Maybank_1HFY20_Analyst_Presentation.pdf - Malaysian Communications and Multimedia Commission (2020), “1Q2020 Communications and Multimedia Facts & Figures.” Malaysian Communications and Multimedia Commission. - Malaysian Communications and Multimedia Commission (2020) “National Digital Infrastructure Lab Report.” Available at https://www.mcmc.gov.my/skmmgovmy/media/General/pdf/NDIL-Report.pdf - Department of Statistics Malaysia (2018), “Usage of IT and E-Commerce by Establishment 2018.” - Ministry of Finance (2020), 26th LAKSANA report, October 21, 2020 ### IMF, World Bank, UNCTAD and other multilateral sources - International Monetary Fund (2020), IMF Country Report No. 20/58: Selected Issues - International Monetary Fund (2020b), “Digital Money Across Borders: Macrofinancial Implications. “ - World Bank (2017), Findex Database on Financial Inclusion. - UNCTAD (2020), “Measuring E- Commerce and Digital Economy” United Nations Conference on Trade and Development. *Source: 1mysea2021001 - References (PDF)* ### Introduction ### Introduction ### Authorities' overall view and priorities - Authorities thanked staff for their constructive 2021 AIV consultation and the comprehensive report. - Emphasis on continuous engagement by staff given difficult circumstances. - Authorities noted Malaysia entered the pandemic amid robust growth and a low rate of unemployment, benefiting from structural reforms that contributed to sound macroeconomic fundamentals, a more developed financial system and greater policy efficacy and flexibility. - Pandemic caused exceptional disruptions to individuals and businesses, especially SMEs and lower income earners. - Strict containment measures and swift, comprehensive policy packages allowed faster re-opening of many sectors and gradual resumption of economic activity, minimizing permanent dislocation while protecting livelihoods. - Recent containment measures expected to have a less severe economic impact than 2020 since most sectors operate under specific SOPs and households and businesses adjust more quickly; inclination is towards more targeted containment measures to preserve both lives and livelihoods. - Authorities largely agree with staff’s key findings and recommendations, particularly on need for continuous support until recovery is fully entrenched. - Authorities underscore commitment to resume sustainable fiscal consolidation and restore fiscal space once recovery is firm, strengthen governance reforms, and pursue structural policies for a green, resilient, and equitable recovery. ### Latest economic developments and outlook - 4Q 2020 growth affected by resurgence in COVID-19 cases and targeted containment measures in mid-October: 4Q 2020 GDP -3.4%; 3Q 2020: -2.6%. - 4Q 2020 GDP update announced on February 11, 2021 brought full-year contraction to 5.6%, broadly within authorities’ earlier projection and staff’s growth estimate of -6%. - Headline inflation averaged -1.2% in 2020, due mainly to substantially lower global oil prices; core inflation averaged 1.1%. - Unemployment rate remained elevated at 4.8% in 4Q 2020, but lower than the peak seen in 2Q 2020 (5.1%). - Growth in 2021 expected to improve from the second quarter onwards, supported by recovery in global demand and normalization in domestic activities. - Additional growth drivers: ramp up in existing and new production facilities in the E&E and commodity-related sectors, implementation of major infrastructure projects, continued policy support including accommodative monetary conditions and other stimulus packages, and launch of vaccination program. - Authorities will continue to assess and refine the 2021 growth forecast and provide latest growth projection during BNM’s Economic & Monetary Review in March. - Headline inflation projected to average higher in 2021, primarily due to higher global oil prices; underlying inflation expected to remain subdued amid continued spare capacity. - Labor market conditions expected to gradually improve from 2Q onwards; recovery pace expected to be uneven across sectors, particularly high-touch segments such as consumer and tourism services. - Growth outlook subject to downside risks (pandemic uncertainties, challenges to effective vaccine roll-out domestically and globally) and upside risks (higher-than-anticipated improvement in sentiments from vaccine roll-out, better-than-expected recovery in external demand, faster progress in infrastructure projects). ### Crisis management response - Decisive containment measures effective at curbing spread during 1H 2020; targeted restrictions on mobility and certain economic activities implemented between October 2020 and January 2021. - Economic Action Council set up in March 2020; Government unveiled over 4 Economic Stimulus Packages (PRIHATIN, PRIHATIN SME Plus, PENJANA and Kita PRIHATIN) aimed at protecting lives, supporting businesses, saving and creating jobs, and stimulating the economy. - Sizeable allocations under packages for Bantuan Prihatin Nasional (BPN) and Wage Subsidy Programmes. - 2021 Budget is the biggest in history at RM322.5 billion, aimed at facilitating recovery and charting growth towards a stronger trajectory. - COVID-19 Fund established under the Temporary Measures for Government Financing (COVID-19) Bill 2020 to allow larger expenditures via borrowing and provide flexibility to borrow if further support is needed. - PERMAI Assistance Package announced on January 18, 2021 to support vulnerable groups affected by the MCO; financed through recalibration of existing allocations in the 2021 Budget while prioritising spending with higher multiplier impact. - Government fiscal deficit target for 2021 remains at -5.4% of GDP. - Implementation of policy packages coordinated and monitored by Implementation and Coordination Unit between National Agencies (LAKSANA); a publicly available microsite under the Ministry of Finance was created to report implementation by LAKSANA on a weekly basis. - Expenditure under the COVID-19 Fund will be audited independently by the National Audit Department of Malaysia; compliance audit findings will be tabled in Parliament and published in the Annual Auditor General Audit Report. ### Fiscal policy stance and reforms - Crisis responses required substantial mobilization of direct fiscal injections. - Gradual fiscal consolidation since the Global Financial Crisis enabled authorities to maintain a manageable level of public debt. - Temporary increase in domestic debt limit created sufficient fiscal space to respond to the pandemic. - Authorities committed to maintain adequate fiscal support until recovery is firmly established; concur with staff that fiscal consolidation should remain gradual once the economy recovers. - Temporary Measures for Government Financing (Coronavirus Disease 2019 (COVID-19)) Bill 2020 provides sufficient fiscal space if further support is needed. - Authorities will expedite resumption of the MTRS to enhance revenue mobilization, incorporating Tax Reform Committee findings and IMF technical assistance. - Authorities will explore further spending rationalization and enhance government procurement rules and procedures. - Ongoing reforms to improve fiscal governance and efficiency and debt management, including a new Fiscal Responsibility Act and well-resourced Debt Management Office. - Authorities will remain vigilant and monitor debt developments closely to ensure sustainability over the medium term; concur with staff that debt would remain sustainable over the medium-term. - Authorities considering various options to broaden and diversify the revenue base to ensure long-term fiscal sustainability and lower debt below the previous limit of 55 percent of GDP. ### Monetary, exchange rate, and financial market policies - Substantial support by Bank Negara Malaysia (BNM) crucial in cushioning impact and maintaining orderly financial market conditions. - BNM lowered the OPR by a cumulative 125 basis points to 1.75% since the start of 2020. - Loan moratorium measures and policy rate cuts eased debt service burden and supported financing. - Reduction and flexibility in SRR in 2020 released approximately RM46 billion worth of liquidity into the banking system. - Liquidity injections via reverse repos and outright purchase of Government securities supported domestic bond market and calmed markets. - Regulatory flexibilities allowed banks to utilize financial buffers: banks could drawdown on the capital conservation buffer of 2.5%, operate below the minimum liquidity coverage ratio of 100%, and utilise regulatory reserves; Net Stable Funding Ratio implemented on 1 July 2020 with a lower minimum of 80%. - Complementary measures: special funds for SMEs, credit guarantees, and Special Relief Facility (SRF) to provide working capital financing at low lending rates to affected SMEs; credit guarantees provided by Syarikat Jaminan Pembiayaan Perniagaan (SJPP) and Credit Guarantee Corporation Malaysia Berhad (CGC) with a guarantee coverage of 80% at a subsidised guarantee fee of 0.5% per annum. - On January 20, 2021, BNM’s MPC decided to maintain the Overnight Policy Rate. - Monetary policy stance will be determined by new data and implications for inflation and domestic growth; BNM committed to utilize policy levers as appropriate. - Exchange rate flexibility continues as first line of defense as a shock absorber; FX intervention directed solely at containing excessive volatility and disorderly market conditions. - Various hedging instruments, flexibilities, and new measures implemented at end-April 2020 to enhance FX market functioning and efficiency. - Authorities view existing FX market measures as necessary for onshore FX market development and to manage contagion risk from opaque offshore markets; will continue to assess measures' effectiveness and explore alternatives prior to phasing out. ### External sector assessment - Authorities concur with staff that the external sector position has been exceptional and that many new and one-off factors drove the current account (CA). - Authorities note limitations in the EBA model for Malaysia, citing weak explanatory power of the regression model even with new adjustments; urge staff to focus on explanations and nuances behind CA drivers rather than relying solely on model results. ### Financial sector resilience and safeguards - Authorities welcome staff recognition of proactive role of banking system in supporting borrowers. - Banking sector entered pandemic in strong position with strong buffers and good asset quality enabling large-scale automatic loan moratorium for households and SMEs. - As economic activity picked up, moratorium was recalibrated to target those who need it most. - As at December 2020, loan repayments for households are at 93% of levels seen in 1Q 2020 while loan repayments for SMEs have exceeded the levels seen in 1Q 2020. - Priority is to aid borrowers to prevent temporary hardships from becoming permanent defaults and limit economic scarring. - Impairments expected to rise, but banks continue to have strong capital and liquidity buffers. - Internal stress testing via macro solvency simulation and bottom-up approaches by banks affirm banking sector resilience. - Greater reliance on institution-specific stress tests by banks and supervisors to provide current, granular insights complementing macro stress tests. - Prudent provisioning practices give banks a strong starting position to weather expected rise in impairments. - Capacity of out-of-court debt resolution mechanisms enhanced: Credit Counselling and Debt Management Agency (Agensi Kaunseling dan Pengurusan Kredit, AKPK), Small Debt Resolution Scheme (SDRS), Corporate Debt Restructuring Committee (CDRC). - Banks actively engaged borrowers prior to lifting of 6-month automatic moratorium and provided revised repayment plans. - Authorities stand ready to deploy more resources as needed. - Low-income earner borrowers remain particularly vulnerable and warrant close monitoring; their exposure to overall bank lending remains small. - Authorities broadly agree on need for continued vigilance on the real estate sector; exposure to vulnerable commercial real estate segments account for less than 6% of total banking system and remain largely performing. - Business sector experiencing uneven recovery; sectors more affected have a higher share of rescheduled and restructured (R&R) loans reflecting close timely engagement between banks and borrowers. - For large corporate borrowers, explicit government credit guarantees on loans and bonds taken by viable government-related entities and coordinated efforts by financial institutions and the CDRC to assist viable borrowers with restructuring and rescheduling will help contain potential increases in distressed borrowers and bank losses. - Authorities’ internal estimates of corporate debt-at-risk are lower than staff research estimates; noted differing definitions and parameters across estimates. - Some corporations face greater default risk, but debt servicing capacity largely sustained due to diversified revenue streams, collateralized obligations, and various financing facilities from banks and Government. ### Governance and structural reforms - Implementation of National Anti-Corruption Plan 2019-2023 (NACP) has shown significant progress since 2019; some initiatives delayed by the pandemic but work continues at the technical level and will be expedited when feasible. - Efforts to strengthen safeguards against money laundering and terrorism financing, including digital asset regulation, remain a key priority. - All digital assets that fulfil certain conditions are prescribed as securities and subjected to securities laws. - Guideline on Digital Asset issued and came into force in October 2020; outlines regulatory requirements on Initial Exchange Offering and Digital Asset Custodians. - Government will table the 12th Malaysia Plan 2021-2025 (12MP) tentatively in 2021; strategies and initiatives aligned with Shared Prosperity Vision 2030 and Sustainable Development Goals (SDG). - 12MP will strengthen structural reform agenda and address gaps identified during COVID-19 crisis, including enhanced social safety nets, upgrading digital infrastructure, and greening the economy. - Growing momentum on climate risk recognition and green recovery efforts. - Securities Commission Malaysia expanded Green SRI Sukuk Grant Scheme (established in 2018) to encourage financing of green, social and sustainability projects through SRI sukuk and bond issuance. - Malaysian Investment Development Authority aims to attract higher investment in green technology and sustainability-led projects. - Financial industry committed to wider adoption of Task Force on Climate-related Financial Disclosures (TCFD) recommendations and advance actions towards industry adoption of disclosure standards. ### Final remarks - Malaysian authorities remain vigilant to adverse pandemic impacts on the economy and financial system. - Necessary post-pandemic structural reforms will be pursued to ensure sustainable recovery and inclusive growth. - Authorities commended continued Fund efforts to enhance surveillance processes and policy advice to member countries. *Source: Introduction (1mysea2021001)* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1mysea2021001.pdf_