IMF Staff Completes 2021 Article IV Consultation Discussions with Malaysia

IMF News, December 18, 2020

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The shock from the COVID-19 pandemic is estimated to have caused the worst recession since the Asian Financial Crisis.
Real GDP is estimated to have declined by 5.8 percent in 2020.
A strong rebound is expected in 2021 with real GDP growth of 7 percent.
Inflation is expected to be negative 1.2 percent in 2020 and rise to around 2 percent in 2021 as electricity tariff rebates expire, fuel prices rise, and domestic demand recovers.
Unemployment peaked earlier in the year and has only partially recovered.

Real GDP: 5.8 percent decline in 2020; projected rebound of 7 percent in 2021.
Inflation: negative 1.2 percent in 2020; around 2 percent in 2021.
Exports were supported in 2020 by pandemic-related demand for personal protective equipment and electronic products and will continue to underpin growth.
The recovery will be uneven across sectors.

The 2021 federal budget aims to balance protecting the vulnerable, sustaining the economy, and initiating fiscal consolidation.
The authorities’ commitment to pursuing fiscal consolidation once the recovery is firmly entrenched is welcomed; such adjustment will be required to rebuild buffers.
Priority actions: identify specific revenue and spending measures and lay the groundwork for policy actions to reduce the deficit.
If the pandemic intensifies, the authorities should be ready to increase support to the economy.

Accommodative monetary and financial policies are appropriate and should continue until the recovery is securely underway.
Bank Negara Malaysia (BNM) has sufficient space to further ease monetary policy should downside risks materialize.
The flexible exchange rate would also help absorb shocks.
The financial sector’s buffers are helping weather the economic impact of the pandemic and are keeping macro-financial risks contained for now.
The authorities’ close monitoring of risks is welcome.

Downside risks: an intensification of the pandemic could derail the recovery.
External vulnerabilities: Malaysia’s highly open economy is vulnerable to escalating trade actions, weaker-than-expected trading partner growth, and global financial shocks.
Domestic policy uncertainty also poses risks to recovery.
Upside scenario: faster-than-expected availability of COVID-19 vaccines could accelerate the recovery.

Structural policies should be calibrated to support the economic transformation.
The authorities should stay the course on governance reforms and anchor them in legislation.
Articulating specific policies to foster a green, resilient, equitable recovery and productivity growth would support medium-term objectives and help Malaysia reach high-income status.

An IMF team, led by Nada Choueiri, conducted virtual Article IV Consultation discussions during November 30-December 15, 2020.
At the conclusion of the virtual discussions, Ms. Choueiri issued the statement summarizing staff’s preliminary findings.
The IMF team will prepare a report and expects to present it to the Executive Board of the IMF in February 2021.

Source: IMF Communications Department press release, December 18, 2020.