KUALA LUMPUR — March 8, 2018: The International Monetary Fund has commended Malaysia for its strong and resilient economic performance, underpinned by accommodative monetary policy and gradual fiscal consolidation.
In recent years, the economy has shown resilience and continued to perform well despite external shocks, while fiscal consolidation proceeded. Progress was made towards achieving high-income status and improving inclusion,” it said.
After surprising on the upside in 2017, real Gross Domestic Product growth is projected to remain above potential at 5.3 per cent in 2018. In 2017, the economy expanded 5.9 per cent.
“Growth will likely remain above potential in 2018, inflationary pressures appear to be contained and risks to the outlook are balanced,” IMF said in a statement titled “IMF Executive Board Concludes 2018 Article IV Consultation with Malaysia”, released in Washington yesterday.
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. The staff then prepares a report, which forms the basis for discussion by the executive board.
The average headline inflation was 3.8 per cent in 2017 versus 2.1 per cent in 2016, with the increase mainly due to the impact of higher oil prices.
Moving forward, the IMF emphasised the importance of supporting economic growth while maintaining stability, as well as raising productivity through structural reform.
“The executive directors agreed with the planned pace of fiscal consolidation in 2018, noting that it will help build buffers while maintaining financial market confidence.
“Going forward, they supported a gradual consolidation path consistent with the authorities’ fiscal anchor, which would help build additional fiscal space,” it said.
The 2017 federal budget deficit edged lower to 3.0 per cent of GDP against 3.1 per cent in 2016, in line with budget plans and it is expected to further fall to 2.8 per cent this year.
The IMF recommended that fiscal consolidation should prioritise higher revenue and facilitate the adoption of fiscal measures to support external rebalancing.
“The directors encouraged further progress on the fiscal structural agenda, including efforts to strengthen fiscal transparency and risk management,” it said.
The IMF also supported Malaysia’s January increase in the monetary policy rate and agreed that the current policy stance was appropriately biased towards less accommodation, while remaining supportive of demand.
“Noting that Bank Negara Malaysia’s monetary policy framework has served the country well, the directors recommended that monetary policy and exchange rate flexibility remain the first line of defence against shocks,” it said.
The fund also welcomed last year’s improvements to the depth and liquidity of onshore financial markets following BNM Financial Markets Committee’s (FMC) measures that liberalised and increased the flexibility of onshore hedging instruments, as well as a general rebound of capital inflows to emerging markets.
“The directors supported the consultative and inclusive approach adopted by the FMC in developing these measures, and encourage the authorities to build on these successes to address any further gaps in financial market development,” it said.
The IMF also agreed that financial sector risks appear contained, with sound bank profitability and liquidity, and low non-performing loans.
Nonetheless, it noted that vulnerabilities in household mortgages and the property development sector required vigilance, and recommended taking any necessary steps to mitigate risks, as well as to develop a rental real estate market.
The directors also urged Malaysia to take further actions to address deficiencies in the nation’s Anti-Money Laundering and Counter Financing of Terrorism framework.
Malaysian authorities were commended for its emphasis on raising productivity and investment and encouraged further labour market reforms.
“Priority should be given to measures that encourage female labour force participation, improve the quality of education, reduce skills mismatches, and bolster public infrastructure and the regulatory framework to further encourage private investment,” the IMF said. — Bernama