Public Information Notice: IMF Concludes Article IV Consultation with Malaysia

IMF News, September 8, 1999

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Public Information Notice: IMF Concludes Article IV Consultation with Malaysia

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Bibliographic details

• Published: September 8, 1999

Background

• Since early 1997 the Malaysian economy was caught up in the regional financial crisis, initially reflected in sharp falls in Malaysian share prices and the external value of the ringgit.
• By the end of 1997:
  • the ringgit had depreciated 35 percent from its year-earlier level.
  • the Kuala Lumpur Stock Exchange composite index was down 52 percent.
• The financial crisis led to:
  • sharp declines in business and consumer confidence;
  • falls in asset prices (including property prices);
  • a pronounced contraction of consumer and investment spending by early 1998.
• Domestic absorption fell by 26 percent in real terms in 1998.
• Malaysia's external current account balance turned from a deficit of around 5 percent of GDP in 1997 to a surplus of 13 percent of GDP in 1998.
• Overall, real GDP declined by 6.7 percent in 1998.
• CPI inflation:
  • rose from a little over 2 percent prior to the crisis to a peak of 6.2 percent in mid-1998;
  • declined to 5.3 percent by the end of 1998.
• Policy responses and developments:
  • March–August 1998: partial reversal of earlier cuts in government expenditure, interest rate reductions, establishment of entities to restore financial system health through recapitalization and purchase of nonperforming loans.
  • September 1998: introduction of capital controls and pegging of the ringgit to the dollar to insulate domestic interest rates from FX market volatility; followed by interest rate reductions and measures to stimulate credit growth, an expansionary government budget, and accelerated financial and corporate restructuring.
  • February 1999: modification of capital controls by replacing the one-year holding period restriction on portfolio capital flows with a system of exit levies.
• 1999 developments:
  • signs of an economic pickup, stabilizing property prices, and a significant recovery in equity market prices.
  • inflation fell to a little under 3 percent.
  • progress in restructuring the financial sector was significant.
  • external current account position remained in substantial surplus.
  • foreign exchange reserves strengthened to over $30 billion, equivalent to approximately seven months of imports of goods and services.
• Contact information included in the notice:
  • IMF EXTERNAL RELATIONS DEPARTMENT, Public Affairs, Media Relations
  • E-mail: publicaffairs@imf.org, media@imf.org
  • Fax: 202-623-6278
  • Phone: 202-623-7100

Executive Board Assessment

• Overall view:
  • Executive Directors noted Malaysia was severely affected by the regional crisis but retained traditional strengths: limited external debt, a strong fiscal position, a well-developed financial regulatory framework, and a history of low inflation—factors that helped avoid more extreme financial difficulties and should facilitate a sustainable recovery.
• Views on September 1998 measures (capital controls and exchange rate peg):
  • Directors recalled initial international skepticism and concerns that the breathing space might delay addressing financial and corporate sector problems.
  • Directors commended the authorities for using the breathing space to implement a well-designed and effectively implemented financial sector restructuring strategy.
  • Recommendation to move to the next stage of restructuring in banking and corporate sectors to sustain market confidence.
• Macroeconomic policy stance:
  • Directors supported the authorities' adoption of an expansionary stance as appropriate to reverse the sharp contraction of economic activity, given the absence of inflation pressures.
• Fiscal policy (short term):
  • If output recovery falters, Directors recommended preparedness to implement additional budgetary measures.
  • If tax revenues are stronger than anticipated, some Directors suggested considering temporary tax relief or higher operating expenditure to meet the deficit target.
  • Welcomed measures to speed up budgetary allocations and project implementation; a few Directors cautioned against overreliance on large projects with long gestation periods.
  • Encouraged continued high priority for enhancing social expenditures to mitigate adjustment impacts on vulnerable groups.
• Fiscal policy (medium term):
  • Most Directors emphasized introducing greater fiscal flexibility to respond rapidly to economic changes.
  • Suggested pursuing operating surpluses over the course of the business cycle rather than on an annual basis.
  • Recommended introducing a value-added tax to improve tax system efficiency.
  • Stressed incorporating off-budget and quasi-fiscal activities in fiscal transparency, including public sector assistance for financial restructuring.
• Monetary policy and interest rates:
  • Most Directors recommended modifying administered interest rate structure to make rates more responsive to market-determined rates and financial institutions' risk assessments.
  • Recommended avoidance of bank-by-bank credit targets and using more responsive, market-based monetary policy instruments.
  • A few Directors considered it too early to judge whether the interest rate structure constrained private sector growth.
• Exchange rate regime:
  • Directors noted pegging to the U.S. dollar had been positive so far, but undervaluation implications for medium-term inflation were observed.
  • Some Directors favored the peg as a clearer nominal anchor for inflation expectations.
  • Many other Directors recommended serious consideration of developing monetary policy conducive to sustained low inflation combined with a more flexible exchange rate regime to help insulate the economy from external shocks.
• Capital controls:
  • Directors broadly agreed the temporary capital controls produced more positive results than many had expected.
  • Welcomed pragmatic and flexible implementation, notably replacing quantitative repatriation restrictions with an exit levy in February 1999.
  • Some Directors supported maintaining control measures while preparing for an orderly exit.
  • Other Directors were skeptical, recommending removal of the exit levy on profits from portfolio investments and arguing that an early exit could boost investor confidence and attract long-term capital.
• Financial and corporate sector reforms:
  • Crisis exposed vulnerabilities and a need for greater policy flexibility.
  • Directors commended improvements in prudential and supervisory frameworks and stressed continuation of financial system reforms and corporate restructuring to support recovery.
  • Welcomed progress in relieving banks of nonperforming loans (NPLs) and providing capital to viable institutions.
  • Stressed the need to dispose quickly of acquired NPLs and consider sale of government stakes in recapitalized institutions.
  • Recommended more transparency in Corporate Debt Restructuring Committee debt workout guidelines, balanced creditor-borrower interests, and clearer linkage of debt workouts to operational restructuring.

Key Statistics and Selected Economic and Financial Indicators (values by year)

• Real economy (Change in percent)
  • Real GDP growth: 1994: 9.3; 1995: 9.4; 1996: 8.6; 1997: 7.7; 1998: -6.7
  • Real domestic demand: 1994: 13.9; 1995: 13.5; 1996: 5.3; 1997: 7.2; 1998: -25.5
  • CPI inflation (period average): 1994: 3.7; 1995: 3.4; 1996: 3.5; 1997: 2.7; 1998: (not listed for 1998 in table)
  • Unemployment rate (percent): 1994: 2.8; 1995: 2.5; 1996: 2.4
  • Gross national saving: 1994: 32.7; 1995: 33.6; 1996: 36.7; 1997: 37.3; 1998: 38.8
  • Gross domestic investment: 1994: 40.4; 1995: 43.5; 1996: 41.6; 1997: 42.5; 1998: 25.8
• Public finance (Percent of GDP)
  • Federal government balance: 1994: 1.4; 1995: 1.3; 1996: 1.1; 1997: 2.6; 1998: -1.5
  • Revenue: 1994: 24.8; 1995: 23.4; 1996: 23.7; 1997: 24; 1998: 20.4
  • Expenditure and net lending: 1994: 22.1; 1995: 22.6; 1996: 21.4; 1997: 21.9
  • Overall public sector balance: 1994: 0.9; 1995: 4.8; 1996: -1.1
• Money and credit (end of period)
  • M3: 1994: 15.8; 1995: 18.2; 1996: 20.2; 1997: -1.6
  • Domestic credit: 1994: 14.3; 1995: 27.7; 1996: 27.4; 1997: 24.1; 1998: -2.3
  • One-month interbank rate (period average, in percent): 1994: 5.0; 1995: 5.9; 1996: 7.9; 1997: 6.4
• Balance of payments (In billions of U.S. dollars)
  • Trade balance: 1994: 1.7; 1995: 0.0; 1996: 4.0; 1997: 17.7
  • Exports, f.o.b.: 1994: 56.6; 1995: 71.7; 1996: 76.8; 1997: 77.7; 1998: 71.9
  • Imports, f.o.b.: 1994: 54.9; 1995: 71.6; 1996: 72.7; 1997: 73.7; 1998: 54.2
  • Services account balance: 1994: -6.5; 1995: -7.7; 1996: -6.0
  • Current account balance: 1994: -5.6; 1995: -8.7; 1996: -4.9; 1997: -5.0; 1998: 9.2
  • (Additional current account rows with single-column values): -7.8; -10.0; -5.1; 12.9 (as printed in the table)
  • Capital account balance: 1994: -7.0; 1995: 7.4; 1996: 1.2; 1997: -4.7
  • Medium- and long-term: 1994: 4.4; 1995: 6.6; 1996: 5.4; 1997: 6.8; 1998: 3.6
  • Net foreign direct investment: 1994: 2.3; 1995: 3.3; 1996: 3.9; 1997: 2.2
  • Short-term: 1994: -3.2; 1995: 1.0; 1996: 4.1; 1997: -4.0; 1998: -5.5
  • Errors and omissions 1/: 1994: -0.7; 1995: -2.1; 1996: -2.8
  • Overall balance: 1994: -3.1; 1995: -1.8; 1996: -3.9; 1997: 4.5
  • Gross official reserves: 1994: 26.6; 1995: 25.1; 1996: 21.7; 1997: 26.2
  • (In months of imports of goods and services): 1994: 3.2; 1995: 4.3
• International trade
  • Export value: 1994: 24.5; 1995: 26.7; 1996: 7.1; 1997: -7.5
  • Import value 2/: 1994: 26.5; 1995: 30.5; 1996: 1.5; 1997: -26.4
• External debt
  • Total external debt (percent of GDP): 1994: 39.7; 1995: 38.3; 1996: 39.0; 1997: 46.6; 1998: 59.2
  • Short term external debt (percent of total): 1994: 19.3; 1995: 19.1; 1996: 25.7; 1997: 27.8; 1998: 17.8
  • Debt-service ratio (percent) 3/: 1994: 8.9; 1995: 7.3; 1996: 8.5; 1997: 6.5
• Exchange rates
  • Ringgit/US$ (end-period): 1994: 2.56; 1995: 2.54; 1996: 2.53; 1997: 3.88; 1998: 3.80
  • NEER (1990= 100, period average): 1994: 110.3; 1995: 113.7; 1996: 110.6; 1997: 84.8
  • REER (1990= 100, period average): 1994: 102.2; 1995: 102.7; 1996: 107.0; 1997: 104.5; 1998: 83.0
• Sources stated in the notice: Information provided by the Malaysian authorities; and IMF staff estimates.
• Footnotes from the notice:
  • 1/ Includes portfolio capital.
  • 2/ Excluding lumpy imports such as aircraft, ships, etc.
  • 3/ Percent of exports of goods and services.

Public Information Notice, IMF EXTERNAL RELATIONS DEPARTMENT, July 7, 1999 Executive Board conclusion of Article IV consultation with Malaysia.

References

• Malaysia and the IMF
• Public Information Notices
• Article IV
• https://www.imf.org/en/home