Article

Country Briefs: Malaysia’s Economic Position is Strong, But Challenges Lie Ahead

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
June 2006
Share
  • ShareShare
Show Summary Details

Prudent macroeconomic policies and structural reforms underpinned Malaysia’s robust economic performance in 2005. Real GDP growth was estimated at 5.3 percent and is projected to rise to 5.5 percent in 2006, owing to strong private consumption and the ongoing recovery of fixed private investment, the IMF said in its annual review. Inflation rose to 3 percent, primarily as a result of adjustments in retail fuel prices, but core inflation remained subdued. The federal government deficit declined to 3.8 percent of GDP, while the surplus of the consolidated public sector is expected to have stabilized at 4 percent, aided by the impact of world oil prices on the national oil company. The external position remains strong, with reserves reaching $70.5 billion at end-2005, and the current account surplus widened to 15.2 percent of GDP. Corporate and financial sector soundness continued to strengthen.

The outlook is favorable, but policy challenges remain. Growth is projected to be strong—underpinned by robust domestic private demand and a favorable external environment—but high world oil prices and an avian flu pandemic are major downside risks. Key policy challenges include reducing the significant reliance on oil and gas revenues and anchoring inflation expectations through clear monetary policy communication.

Malaysia
Est.Proj.
2003200420052006
Real GDP (percent change)5.47.15.35.5
CPI inflation (period average)11.11.43.03.1
Gross official reserves (billion U.S. dollars)144.966.770.585.4
(percent of GDP)
Federal government overall balance–5.3–4.3–3.7–3.4
Federal government non-oil primary balance–6.6–7.0–6.9–7.9
Current account balance12.812.614.314.2

For 2005, actual outcomes as of end-December.

Data: Malaysian authorities and IMF staff estimates and projections.

For 2005, actual outcomes as of end-December.

Data: Malaysian authorities and IMF staff estimates and projections.

The IMF Executive Board commended the authorities for skillfully managing the economy and welcomed the favorable near-term outlook. Hailing the removal of the peg as a “vital first step,” Directors suggested that greater exchange rate flexibility can now be achieved by allowing the exchange rate to be determined by economic fundamentals. Directors also noted that increased exchange rate flexibility would facilitate smooth adjustment to structural changes and broader-based growth in Malaysia, contributing to an orderly resolution of global imbalances. With regard to the fiscal framework, it will be imperative to reduce the federal government deficit and tackle the reliance on oil and gas revenues, Directors said. They added that making the tax system more efficient and phasing out fuel subsidies in favor of well-targeted support for the poorest would be prudent.

Other Resources Citing This Publication