IMF Executive Board Concludes 2023 Article IV Consultation with Malaysia

IMF News, June 2, 2023

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Growth reached 8.7 percent in 2022 driven by pent-up domestic demand following the reopening of the economy in April 2022 and strong export performance.
Recovery remains uneven: agriculture, mining, and particularly construction sectors remain below pre-pandemic levels.
Inequality has risen during COVID-19.
Near-term growth projection: Growth is projected to moderate to 4.5 percent in 2023 reflecting largely the global external headwinds.
Real GDP (percent change) series (selected):
- 2018: 4.8
- 2019: 4.4
- 2020: -5.5
- 2021: 3.1
- 2022: 8.7
- 2023 (Proj.): 4.5
- 2024 (Proj.): 3.9

Inflation was broad-based and elevated at 3.4 percent for 2022, despite recent signs of moderation.
Inflation expectations remained well anchored.
Inflation projection: Inflation is projected to remain elevated at 3.3 percent in 2023, with likely persistence in core inflation amid a positive output gap and evidence of a build-up of demand-side pressures.
Bank Negara Malaysia (BNM) actions: BNM increased the overnight policy rate (OPR) four times since May 2022 by a total of 100 bps to 2.75 percent and paused the tightening thus far in 2023.
Executive Directors' view: Monetary policy should tighten further to bring the stance to a neutral position; BNM should continue to clearly communicate the rationale for its policy decisions.
Overnight policy rate (in percent) (selected history):
- 2018: 3.25
- 2019: 3.00
- 2020: 1.75
- 2022–2023: OPR increased to 2.75 percent (four hikes totaling 100 bps since May 2022)

2023 Budget stance: Appropriately contractionary, targeting a decline in the overall deficit from 5.6 percent of GDP in 2022 to 5.0 percent in 2023, and down to 3.2 percent of GDP by 2025.
Fiscal recommendation: Gradual fiscal consolidation is appropriate but should be credibly underpinned by high-quality and durable measures; staff advise a more significant consolidation over the medium term to put debt on a firm downward path.
Fiscal Responsibility Act (FRA): Progress in finalizing the FRA is welcomed as a major reform expected to enhance governance and transparency and improve accountability and fiscal responsibility.
Urgent priority: Developing a medium-term revenue strategy, especially given significant spending needs under the 12th Malaysia Plan (12MP).
Subsidies and safety nets: Phased and transparently communicated subsidy reform is overdue, alongside social safety nets reforms, to help enhance external rebalancing.
Fiscal sector (in percent of GDP) key figures:
- Federal government overall balance:
- 2018: -3.7
- 2019: -3.4
- 2020: -6.2
- 2021: -6.3
- 2022: -5.6
- 2023 (Est.): -4.6
- Revenue:
- 2018: 16.1
- 2019: 17.5
- 2020: 15.9
- 2021: 15.1
- 2022: 16.5
- 2023 (Est.): 14.2
- Expenditure and net lending (selected):
- 2018: 19.8
- 2019: 20.9
- 2020: 22.1
- 2021: 21.4
- 2022: 22.0
- 2023 (Est.): 20.1
- General government debt (selected):
- 2018: 55.6
- 2019: 57.1
- 2020: 67.7
- 2021: 69.3
- 2022: 65.7
- 2023 (Est.): 66.8

Current account: Over the medium term, the current account surplus is projected to widen as pandemic-related travel restrictions are lifted and as imports moderate.
External position: Malaysia’s 2022 external position is preliminarily assessed to be stronger than warranted by fundamentals and desired policies.
Balance of payments (in billions of U.S. dollars) — selected:
- Current account balance (US$ billions):
- 2018: 12.8
- 2019: 14.1
- 2020: 10.7
- 2021: 12.1
- 2022: 13.2
- 2023 (Proj.): 14.6
- 2024 (Proj.): 16.4
- 2025 (Proj.): 18.0
- Goods balance (US$ billions) (selected):
- 2021: 41.2
- 2022: 38.5
- 2023 (Proj.): 38.7
- Services balance and income balance show persistent deficits (details in staff tables).
Gross official reserves (US$ billions) (selected projections):
- 2022: 114.7
- 2023 (Proj.): 124.0
- 2024 (Proj.): 129.0
- 2025 (Proj.): 137.2
- 2026 (Proj.): 144.9
- 2027 (Proj.): 151.6
- 2028 (Proj.): 158.3
Total external debt (US$ billions) (selected):
- 2022: 259.2
- 2023 (Proj.): 276.5
- 2024 (Proj.): 290.5
- 2025 (Proj.): 307.5
- 2026 (Proj.): 324.3
- 2027 (Proj.): 338.4
- 2028 (Proj.): 352.4

Authorities’ commitment to safeguarding financial stability is welcome given emerging risks.
Enhanced monitoring recommended, especially of highly leveraged entities and non-bank financial institutions, given increased risks from rising interest rates, tighter financial conditions, exchange rate depreciation, and weaker expected growth.
Recommendation to expand the macroprudential toolkit to support financial stability efforts.
Assessment: The Malaysian financial sector is well-equipped to navigate potential increases in volatility and global risk aversion; there are no broad-based stability concerns.

Downside risks are mostly external and cloud the near-term outlook.
External risks highlighted:
- Possibility of an abrupt global slowdown or recession with a spike in global risk premia, capital outflows and sudden stop risks.
- Geo-economic fragmentation and geopolitical tensions that could reconfigure trade, disrupt supply chains, and raise input costs.
Staff urge authorities to stand ready to manage downside risks and policy trade-offs, if and when warranted.

The authorities’ intentions under the 12MP to credibly enhance economic resilience, move toward net zero greenhouse gas emissions, and promote inclusive growth are welcomed.
The start of the new government provides a timely opportunity to advance a concerted reform agenda.
Recommended governance and anti-corruption reforms: Implement strategies outlined in the National Anti-Corruption Plan to strengthen public finance management and improve public sector service delivery.

Nominal GDP (2022): US$407.9 billion
Population (2022): 32.7 million
GDP per capita (2022, current prices): US$12,493
Poverty rate (2019, national poverty line): 0.2 percent
Unemployment rate (2022, period average): 3.8 percent
Adult literacy rate (2019): 95.0 percent
Main domestic goods exports (share of total domestic exports, 2021):
- Machinery and Transport Equipment: 39.2 percent
- Miscellaneous Manufactured Articles: 16.6 percent
- Manufactured Goods: 10.8 percent

IMF Executive Board Concludes 2023 Article IV Consultation with Malaysia, June 1, 2023.