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In the news: Malaysia’s impressive recovery provides basis for high growth

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
April 2005
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In recent years, economic growth in Malaysia took off significantly. Initially, strong exports led the expansion, but then robust private domestic demand drove the recovery from the 2001 slump, backed by rising consumer borrowing, higher proceeds from commodity exports, low unemployment, and strengthened confidence. This is among the findings of the IMF’s latest annual economic review. Inflation has generally been subdued, but nudged up in late 2004, partly reflecting higher petroleum product prices and tobacco and alcohol taxes. The IMF Executive Board praised the authorities’ pragmatic macroeconomic management and decisive efforts to deepen structural reform.

Fiscal consolidation is proceeding but at an adjusted pace. Although lower than in 2003, the 2004 federal government deficit is estimated to have been higher than originally budgeted. The Board welcomed the government’s commitment to fiscal consolidation and its plans to introduce a broad-based value-added tax by 2007, streamline tax incentives, and further strengthen revenue administration. The Board also supported additional measures, including tightened current expenditures, more efficient public investment, and better financial results of government-linked companies. The consolidated public sector deficit, meanwhile, is estimated to have declined in 2004 and is projected to turn into a surplus in 2005. Total public debt has remained high but is manageable. The trade and current account surpluses have remained large.

Bank Negara Malaysia’s prudent monetary policies have bolstered the credibility of the currency peg, although most Directors noted that over time, a well-prepared move to greater exchange rate flexibility would benefit Malaysia. On structural reforms, progress has been made to improve financial and corporate sector soundness as well as the business climate. Capital adequacy of banks is strong; the ratio of nonperforming loans is declining further; and capital markets remain relatively deep by regional standards.

Malaysia2001200220032004

Prel. Est.
2005

Projections
(percent change)
Real GDP0.34.15.37.06.0
Real domestic demand0.06.13.79.35.9
(percent of GDP)
Federal government
overall balance-5.5-5.6-5.3-4.5-3.7
Total public sector debt169.169.469.068.362.9
Data: IMF Public Information Notice No. 05/33.

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