## Public Information Notice: IMF Concludes Article IV Consultation with Malaysia

_IMF News, September 8, 1999_

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## Bibliographic details
- Published: September 8, 1999

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### 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.*

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## References

- [Malaysia and the IMF](http://www.imf.org/external/country/MYS/index.htm)
- [Public Information Notices](https://www.imf.org/en/news/searchnews)
- [Article IV](https://www.imf.org/external/pubs/ft/aa/aa04.htm)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/pn9988_