IMF Executive Board Concludes 2011 Article IV Consultation with Malaysia

Public Information Notice (PIN) No. 12/16
February 10, 2012

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2011 Article IV Consultation with Malaysia is also available.

On February 6, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Malaysia.1


Following a strong recovery in 2010, the Malaysian economy is moderating in the face of a challenging external environment. While growth remains supported by robust consumption and investment, export growth has slowed relatively to 2010. In the near term, external demand is expected to soften further, driving down domestic economic activity. GDP growth is projected to slow to 4 percent in 2012. Inflation rose through mid˗2011, but has since eased and remains contained.

Global financial market volatility has not spared Malaysia. While capital inflows remained strong through the first half of 2011, there was a significant retrenchment in the third quarter as global uncertainty increased, leading to a decline in equity markets, a depreciation of the exchange rate, and a pause in reserve accumulation.

The financial system, however, remains sound, with strong capital and liquidity positions and still declining nonperforming loans. Credit growth has accelerated in line with the economic recovery, but there are no signs of overheating or asset price excesses. Household debt, however, has continued to climb, with growth in unsecured personal lending particularly strong.

The fiscal deficit in 2011 is expected to be roughly in line with, or even below, budget projections. Higher petroleum prices and strong tax collections led to a better-than-budgeted revenue performance, more than offsetting the increase in energy-related subsidies.

Executive Board Assessment

Executive Directors commended the authorities for Malaysia’s strong macroeconomic performance in the aftermath of the global downturn. Underpinned by robust fundamentals and policy frameworks, Malaysia is well positioned to face the challenging external environment in the period ahead. Consolidating public finances remains a high priority, while structural reforms continue to be crucial to raise the economy’s growth potential and achieve a more balanced and inclusive growth.

Directors supported the current stance of monetary policy. They saw room for lowering the policy rate if growth prospects worsen significantly. Directors noted that letting the exchange rate move flexibly in line with fundamentals while limiting excessive volatility would allow the real exchange rate to appreciate over the medium term. This would support the structural reforms to rebalance the sources of growth and a reallocation of resources toward dynamic, high productivity industries.

Directors noted that Malaysia’s financial system remains sound, well capitalized, and resilient. In case downside risks materialize, extraordinary support measures similar to those deployed in 2008−09 could be reinstated. The significant increase in household indebtedness warrants close monitoring. In this context, Directors welcomed the prudential measures taken recently, including the introduction of guidelines to ensure that borrowers’ debt is in line with their incomes. They looked forward to the upcoming Financial Sector Assessment Program (FSAP) report.

Directors welcomed the authorities’ commitment to put debt on a downward trajectory. Given the projected slowdown in growth and the relatively high public debt, scope for discretionary fiscal support appears limited. Nonetheless, Directors encouraged the authorities to allow automatic stabilizers to operate, while anchoring any temporary stimulus around a medium term consolidation path. They also recommended further efforts to better target expenditure, broaden the tax base, and enhance fiscal transparency as recommended in the fiscal Report on the Observance of Standard and Codes (ROSCs).

Directors welcomed the ambitious reform agenda to boost potential growth, based on comprehensive diagnoses of the bottlenecks that hinder investment and productivity. In particular, they stressed the need to improve the business climate, enhance competition, upgrade workers’ skills, and create economic opportunities for all Malaysians. Reforms in these areas, combined with measures to enhance social safety nets, including a well designed minimum wage, would strengthen the foundations for more inclusive growth.

Malaysia: Selected Economic and Financial Indicators, 2007–12
  2007 2008 2009 2010 2011 2012

Growth (percent change)


Real GDP

6.5 4.8 -1.6 7.2 4.7 4.0

Total domestic demand

9.4 5.8 -2.4 12.4 5.9 4.5


9.7 9.0 1.3 5.2 6.3 3.8

Private consumption

10.5 8.7 0.7 6.5 6.0 3.7

Gross capital formation

8.4 -2.9 -13.8 38.3 4.8 6.6

Saving and investment (percent of GDP)


Gross domestic investment

21.6 19.3 14.4 21.4 21.8 21.8

Gross national saving

37.5 37.0 30.9 32.9 33.3 32.6

Fiscal sector (percent of GDP)


Federal government overall balance

-3.2 -4.8 -7.0 -5.6 -5.5 -5.1


21.8 21.5 23.3 20.8 22.2 21.3

Expenditure and net lending

25.0 26.3 30.3 26.5 27.7 26.4

Federal government non-oil primary balance

-9.2 -11.7 -14.5 -11.0 -11.1 -9.9

Consolidated public sector overall balance 1/

1.5 -5.6 -7.6 -2.1 -8.4 -8.8

General government gross debt

42.7 42.8 55.4 55.4 56.6 57.5

Inflation and unemployment (period average, percent)


CPI inflation

2.0 5.4 0.6 1.7 3.2 2.5

Unemployment rate

3.2 3.3 3.7 3.4 3.2 3.1

Money and credit (end of period, percentage change)


Broad money (M3)

7.9 10.5 7.7 7.3 14.4

Credit to private sector

7.9 12.9 6.2 9.7 12.2

Three-month interbank rate ( percent)

3.6 3.4 2.2 3.0 3.2

Balance of payments (US$ billions)


Trade balance

37.7 51.5 40.2 41.9 47.4 47.8

Exports, f.o.b.

176.3 199.2 157.3 198.8 226.9 241.7

Imports, f.o.b.

138.5 147.6 117.1 157.0 179.6 193.9

Services and income account

-3.3 -6.9 -2.8 -7.7 -9.0 -9.2

Current account balance

29.8 39.4 31.8 27.4 31.5 31.7

(In percent of GDP)

15.9 17.7 16.5 11.5 11.5 10.8

Capital and financial account balance

-11.3 -35.7 -22.8 -6.2 -19.1 -19.6

Overall balance

13.2 -5.5 3.9 9.7 12.5 12.1

Gross official reserves (US$ billions)

101.3 91.6 96.8 106.5 119.0 131.1

(In months of following year's imports)

6.8 7.6 6.1 6.0 6.2 6.4

(In percent of short-term debt) 2/

495.4 274.9 362.1 347.0 389.6 436.0

Total external debt (US$ billions)

56.7 68.2 68.0 73.7 73.3 72.2

(In percent of GDP)

30.3 30.6 35.2 31.0 26.6 24.6

Short-term external debt (percent of total) 2/

36.1 48.9 39.3 41.7 41.7 41.6

Debt-service ratio


(In percent of exports of goods and services)

3.6 2.8 6.6 2.7 2.7 2.6

Sources: Data provided by the authorities and IMF staff estimates.

1/ Capital expenditure in the budget includes foreign fixed assets and other items, such as purchase of shares and land, which are excluded from public investment in the national accounts.

2/ By remaining maturity.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:


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