Washington, DC : On April 6, 2022, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]with Malaysia.
The recovery is strengthening but remains uneven. The severe Delta outbreak in the middle of 2021 prompted strict nationwide measures, which limited real GDP growth to about 3 percent, while inflation was contained at about 2½ percent (Table 1). The export-oriented manufacturing sector, which remained operative during shutdowns, underpinned growth, while the agricultural sector struggled with prolonged labor shortages due to a lower flow of migrant workers. Contact-intensive sectors, including tourism, were hard-hit.
A swift, substantial, and multi-pronged pandemic policy response supported the economy. Total COVID-related budget spending amounted to RM39 billion (about 2½ percent of GDP) in 2021, more than double the initially budgeted RM17 billion, and above the RM38 billion spent in 2020. As a result, the federal government deficit reached about 6½ percent of GDP in 2021, higher than the about 5½ deficit foreseen in the 2021 Budget. Federal government debt is estimated at 63 percent of GDP, below the domestic debt ceiling of 65 percent of GDP. BNM maintained an accommodative monetary policy stance, with its overnight policy rate unchanged at a record low of 1¾ percent through early 2022.
Growth is projected to be solid in the medium term, although risks of long-term economic scarring are real. Growth in 2022 is projected at about 5¾ percent driven by pent-up domestic demand against the backdrop of high vaccination rates and limited movement restrictions, as well as continued strong external demand. However, the pandemic could lead to permanent GDP losses and a drag on potential output. Inflation is projected to stabilize at about 2½ percent despite transitory supply-chain challenges. The current account surplus is expected to narrow gradually over the medium term, as consumption and capital-related imports recover, despite a gradual pick up in foreign tourism flows as the economy reopens.
Executive Board Assessment[2]
Executive Directors welcomed the gradual economic recovery supported by impressive vaccine rollout and swift and multi-pronged policy support. At the same time, Directors noted that the recovery remains uneven, with substantial downside risks, including from the ongoing pandemic and the war in Ukraine. In this context, Directors called on the authorities to calibrate macroeconomic policies to the pace of the recovery, with continued targeted policy support in the near term, while preserving policy space to respond to downside risks and accelerating structural reforms.
Directors called for continued targeted fiscal support focused on the vulnerable and hard-hit sectors as the output gap continues to close, followed by gradual fiscal consolidation. They welcomed in this regard the authorities’ commitment to fiscal sustainability backed by a medium-term revenue strategy and the Fiscal Responsibility Act.
Directors welcomed the accommodative monetary policy stance, as inflation expectations are well anchored and there is still slack in the economy. They agreed that monetary policy should remain data dependent and welcomed the authorities’ joint work with the Fund on the operationalization of the integrated policy framework (IPF). Directors noted that the authorities’ commitment to exchange rate flexibility will continue to serve the country well. They encouraged continued progress in addressing underlying vulnerabilities with a view to phasing out capital flow measures as market conditions allow.
Directors noted that the financial sector remains resilient. They welcomed the authorities’ judicious unwinding of forbearance measures and their progressively more targeted approach to financial support measures. Director were also encouraged by financial sector reforms focused on inclusion, economic transformation, and a sustainable economy.
Directors observed that implementation of the 12th Malaysia Plan focused on boosting labor productivity, enhancing the digital and green economies, and strengthening fiscal governance would help minimize pandemic-related economic scarring while promoting inclusive growth and job creation. They took note of the staff’s assessment that Malaysia’s external position is moderately stronger than warranted by economic fundamentals and desirable policies. Directors called for policies to strengthen social safety nets to support an inclusive recovery and facilitate external rebalancing. They commended the authorities for the adoption of climate policies that will increase Malaysia’s adaptive capacity and ambitiously bolster its role in global mitigation efforts. Robust governance and anti-corruption reforms, enhanced AML/CFT framework, and further trade liberalization are also important priorities.
[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.
[2]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:https://www.IMF.org/external/np/sec/misc/qualifiers.htm.
Table 1. Malaysia: Selected Economic and Financial Indicators, 2017-27 | |||||||||||||
Nominal GDP (2021): US$372.8 billion | Population (2020): 32.6 million | ||||||||||||
GDP per capita (2021, current prices): US$10,350 | Poverty rate (2019, national poverty line): 0.2 percent | ||||||||||||
Unemployment rate (2021, end-of-period): 4.2 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), and Manufactured Goods (10.8 percent). | |||||||||||||
Est. | Proj. | ||||||||||||
2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | |||
Real GDP (percent change) | 5.8 | 4.8 | 4.4 | -5.6 | 3.1 | 5.7 | 5.7 | 5.0 | 4.5 | 4.5 | 4.0 | ||
Total domestic demand | 6.6 | 4.7 | 4.0 | -5.1 | 3.8 | 8.1 | 5.6 | 5.6 | 5.0 | 4.8 | 4.2 | ||
Consumption | 6.7 | 7.1 | 6.6 | -2.9 | 2.7 | 10.3 | 4.1 | 5.2 | 4.8 | 4.6 | 3.7 | ||
Private consumption | 6.9 | 8.0 | 7.7 | -4.3 | 1.9 | 13.9 | 5.7 | 5.3 | 5.4 | 5.3 | 4.2 | ||
Public consumption | 5.7 | 3.4 | 1.8 | 3.9 | 6.6 | -5.3 | -4.5 | 4.7 | 1.0 | 0.7 | 0.6 | ||
Private investment | 9.0 | 4.3 | 1.6 | -11.9 | 2.6 | 10.0 | 8.2 | 7.5 | 6.5 | 6.0 | 5.8 | ||
Public gross fixed capital formation | 0.3 | -5.0 | -10.7 | -21.3 | -11.4 | 6.1 | 6.1 | 5.0 | 4.8 | 4.2 | 4.2 | ||
Net exports (contribution to growth, percentage points) | -0.3 | 0.4 | 0.7 | -0.9 | -0.4 | -1.9 | 0.3 | -0.4 | -0.3 | -0.2 | 0.0 | ||
Saving and investment (in percent of GDP) | |||||||||||||
Gross domestic investment | 25.5 | 23.9 | 21.0 | 19.7 | 22.3 | 16.9 | 19.3 | 20.1 | 21.0 | 21.8 | 22.7 | ||
Gross national saving | 28.3 | 26.1 | 24.5 | 24.0 | 25.7 | 20.3 | 22.6 | 23.3 | 24.1 | 24.8 | 25.7 | ||
Fiscal sector (in percent of GDP) 1/ | |||||||||||||
Federal government overall balance | -2.9 | -3.7 | -3.4 | -6.2 | -6.4 | -6.1 | -4.6 | -4.4 | -4.3 | -4.2 | -4.2 | ||
Revenue | 16.1 | 16.1 | 17.5 | 15.9 | 14.3 | 14.1 | 13.6 | 13.6 | 13.5 | 13.5 | 13.5 | ||
Expenditure and net lending | 19.0 | 19.8 | 18.4 | 22.1 | 20.7 | 20.2 | 18.3 | 18.0 | 17.8 | 17.7 | 17.7 | ||
Tax refunds (Arrears) 2/ | 2.4 | ||||||||||||
Federal government non-oil primary balance | -3.4 | -5.3 | -6.7 | -7.6 | -6.6 | -5.9 | -4.0 | -3.6 | -3.3 | -3.0 | -2.9 | ||
Consolidated public sector overall balance 3/ | -3.6 | -2.9 | -3.4 | -7.0 | -8.2 | -8.6 | -7.1 | -6.8 | -6.4 | -6.2 | -6.2 | ||
General government debt 3/ | 54.4 | 55.6 | 57.1 | 67.8 | 69.0 | 70.6 | 69.9 | 69.9 | 69.8 | 69.6 | 69.5 | ||
Of which: federal government debt | 50.0 | 51.2 | 52.4 | 62.1 | 63.4 | 65.0 | 64.3 | 64.3 | 64.2 | 63.9 | 63.8 | ||
Inflation and unemployment (annual average, in percent) | |||||||||||||
CPI inflation | 3.7 | 1.0 | 0.7 | -1.1 | 2.5 | 2.5 | 2.0 | 2.0 | 2.0 | 2.0 | 2.0 | ||
CPI inflation (excluding food and energy) | 1.6 | 0.4 | 1.1 | 1.0 | 0.7 | 0.8 | 1.0 | 1.1 | 1.1 | 1.1 | 1.1 | ||
Unemployment rate | 3.4 | 3.3 | 3.3 | 4.5 | 4.7 | 4.5 | 4.3 | 4.2 | 4.2 | 4.2 | 4.2 | ||
Macrofinancial variables (end of period) | |||||||||||||
Broad money (percentage change) 4/ | 4.8 | 7.7 | 2.7 | 4.9 | 5.6 | 7.5 | 8.9 | 7.4 | 7.3 | 7.4 | 7.1 | ||
Credit to private sector (percentage change) 4/ | 5.4 | 8.3 | 4.9 | 4.0 | 3.8 | 6.9 | 8.9 | 7.4 | 7.3 | 7.4 | 7.1 | ||
Credit-to-GDP ratio (in percent) 5/ 6/ | 126.6 | 130.0 | 130.4 | 144.9 | 138.0 | 137.2 | 137.2 | 137.2 | 137.2 | 137.2 | 137.2 | ||
Overnight policy rate (in percent) | 3.00 | 3.25 | 3.00 | 1.75 | 1.75 | … | … | … | … | … | … | ||
Three-month interbank rate (in percent) | 3.5 | 3.6 | 3.3 | 1.9 | 2.0 | … | … | … | … | … | … | ||
Nonfinancial corporate sector debt (in percent of GDP) 7/ | 101.3 | 102.6 | 99.1 | 109.8 | 108.0 | … | … | … | … | … | … | ||
Nonfinancial corporate sector debt issuance (in percent of GDP) | 3.3 | 2.0 | 1.8 | 2.3 | 2.6 | … | … | … | … | … | … | ||
Household debt (in percent of GDP) 7/ | 82.6 | 82.0 | 82.7 | 93.2 | … | … | … | … | … | … | … | ||
Household financial assets (in percent of GDP) 7/ | 176.4 | 175.7 | 179.0 | 205.0 | … | … | … | … | … | … | … | ||
House prices (percentage change) | 6.1 | 2.5 | 1.8 | 1.2 | … | … | … | … | … | … | … | ||
Exchange rates (period average) | |||||||||||||
Malaysian ringgit/U.S. dollar | 4.30 | 4.03 | 4.14 | 4.19 | 4.14 | … | … | … | … | … | … | ||
Real effective exchange rate (percentage change) | -1.6 | 4.1 | -1.3 | -3.6 | -0.3 | … | … | … | … | … | … | ||
Balance of payments (in billions of U.S. dollars) 5/ | |||||||||||||
Current account balance | 8.9 | 8.0 | 12.8 | 14.3 | 12.9 | 13.8 | 14.9 | 15.4 | 16.3 | 16.9 | 18.4 | ||
(In percent of GDP) | 2.8 | 2.2 | 3.5 | 4.2 | 3.5 | 3.4 | 3.3 | 3.2 | 3.1 | 3.0 | 3.0 | ||
Goods balance | 27.2 | 28.4 | 30.1 | 33.0 | 41.1 | 49.4 | 52.0 | 53.3 | 55.1 | 59.0 | 69.1 | ||
Services balance | -5.3 | -4.3 | -2.6 | -11.3 | -14.7 | -16.7 | -18.4 | -20.3 | -22.8 | -26.1 | -33.8 | ||
Income balance | -13.0 | -16.1 | -14.7 | -7.4 | -13.4 | -18.9 | -18.7 | -17.5 | -16.0 | -16.0 | -16.8 | ||
Capital and financial account balance | -1.1 | 2.8 | -9.1 | -18.2 | 7.0 | -4.1 | -11.2 | -13.9 | -15.8 | -15.6 | -17.0 | ||
Of which: Direct investment | 3.8 | 2.5 | 1.6 | 0.7 | 7.9 | 6.9 | 7.2 | 7.3 | 7.4 | 7.6 | 8.0 | ||
Errors and omissions | -4.0 | -8.9 | -1.7 | -0.6 | -8.9 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||
Overall balance | 3.8 | 1.9 | 2.0 | -4.6 | 11.0 | 9.7 | 3.6 | 1.5 | 0.5 | 1.3 | 1.5 | ||
Gross official reserves (US$ billions) 5/ 8/ | 102.4 | 101.4 | 103.6 | 107.6 | 116.9 | 126.6 | 130.2 | 131.7 | 132.2 | 133.5 | 135.0 | ||
(In months of following year’s imports of goods and nonfactor services) | 5.5 | 5.8 | 6.7 | 5.6 | 5.4 | 5.7 | 5.7 | 5.6 | 6.2 | 6.7 | 7.3 | ||
(In percent of short-term debt by original maturity) | 117.8 | 103.4 | 108.8 | 117.7 | 123.8 | 117.6 | 120.9 | 112.4 | 107.0 | 101.9 | 94.4 | ||
(In percent of short-term debt by remaining maturity) | 93.7 | 84.6 | 87.2 | 92.0 | 95.4 | 92.4 | 94.0 | 86.8 | 83.6 | 79.7 | 94.4 | ||
Total external debt (in billions of U.S. dollars) 5/ 8/ | 218.8 | 223.5 | 231.5 | 238.5 | 256.4 | 276.6 | 285.0 | 306.0 | 322.5 | 341.5 | 363.5 | ||
(In percent of GDP) | 68.5 | 62.3 | 63.4 | 70.7 | 68.9 | 68.1 | 63.4 | 63.1 | 61.5 | 60.4 | 59.8 | ||
Of which: short-term (in percent of total, original maturity) | 39.7 | 43.9 | 41.1 | 38.4 | 36.8 | 38.9 | 37.8 | 38.3 | 38.3 | 38.4 | 39.4 | ||
short-term (in percent of total, remaining maturity) | 50.0 | 53.6 | 51.3 | 49.1 | 47.8 | 49.5 | 48.6 | 49.6 | 49.0 | 49.1 | 39.4 | ||
Debt service ratio 5/ | |||||||||||||
(In percent of exports of goods and services) 9/ | 14.0 | 10.6 | 10.9 | 13.6 | 10.8 | 10.3 | 10.5 | 11.3 | 12.0 | 12.4 | 12.6 | ||
(In percent of exports of goods and nonfactor services) | 14.8 | 11.2 | 11.6 | 14.5 | 11.7 | 11.1 | 11.3 | 12.2 | 13.1 | 13.5 | 13.7 | ||
Memorandum items: | |||||||||||||
Nominal GDP (in billions of ringgit) | 1,372 | 1,448 | 1,513 | 1,417 | 1,544 | 1,660 | 1,807 | 1,941 | 2,083 | 2,238 | 2,398 | ||
Sources: Data provided by the authorities; CEIC Data; World Bank; UNESCO; and IMF, Integrated Monetary Database, and staff estimates. | |||||||||||||
1/ Cash basis. The authorities are planning to adopt accrual basis. For 2019, overall and primary balance includes the payment of outstanding tax refund (arrears) amounting to RM37 billion. 2/ Tax refunds in 2019 are allocated for payment of outstanding tax refunds. 3/ Consolidated public sector includes general government and nonfinancial public enterprises (NFPEs). General government includes federal government, state and local governments, and statutory bodies. 4/ Based on data provided by the authorities, but follows compilation methodology used in IMF’s Integrated Monetary Database. Credit to private sector in 2018 onwards includes data for a newly licensed commercial bank from April 2018. The impact of this bank is excluded in the calculation of credit gap. 5/ IMF staff estimates. U.S. dollar values are estimated using official data published in national currency. 6/ Based on a broader measure of liquidity. Credit gap is estimated on quarterly data from 2000, using one-sided Hodrick-Prescott filter with a large parameter. 7/ Revisions in historical data reflect the change in base year for nominal GDP (from 2010=100 to 2015=100). 8/ The decrease in short-term debt by remaining maturity in 2017 was partly due to the implementation of an improved data compilation system that corrected previous overestimation. 9/ Includes receipts under the primary income account. | |||||||||||||