- The Malaysian economy continues to be resilient to external headwinds, with growth drivers having shifted to robust domestic demand. Inflation is steadily moderating.
- While the broadly neutral monetary policy stance remains appropriate at present, a tightening bias is recommended in the near term, given upside risks to inflation. The appropriate fiscal consolidation path charted in the 2024 Budget needs to be underpinned by well-identified and high-quality revenue measures.
- Implementation of the policy initiatives under the MADANI Economy framework, the mid-term review of the Twelfth Malaysia Plan, and the accompanying national strategic plans, should accelerate to support medium-term growth and achieve high-income status.
Washington D.C.: An International Monetary Fund (IMF) team, led by Mr. Lamin Leigh, conducted discussions for the 2023 Article IV Consultation with the Malaysian authorities and other stakeholders during December 5-14, 2023. At the conclusion of the discussions, Mr. Leigh issued the following statement:
"The Malaysian economy has weathered external headwinds well and is projected to grow at 4 percent in 2023. Private consumption remained the main driver of growth throughout the year, supported by a healthy labor market. Exports to major trading partners weakened markedly due to subdued external demand and the economic slowdown in China. Headline and core inflation have been moderating, the latter more gradually, with headline inflation projected at 2.9 percent in 2023. Inflation expectations remained well anchored.
"Growth is projected to pick up slightly to 4.3 percent in 2024, supported by resilient private consumption and investment and a rebound in public spending. Inflation is projected to moderate further to 2.7 percent in 2024, though uncertainties around the inflation outlook remain, including on account of subsidy reform.
"A fiscal consolidation path, as appropriately set out in the 2024 Budget, would rebuild buffers, put debt on a downward path, and reduce fiscal risks. It should however be credibly underpinned by high-quality and durable revenue measures. Those measures, chief amongst which could be implementing a carefully designed consumption tax, would create space for critical investment needs and for targeted transfers to low-income households. They will also help buttress market confidence in Malaysia's strong fundamentals. The authorities' commitment to fiscal reforms is welcome, including the historic tabling of the Fiscal Responsibility Act, the ongoing subsidy reform, and progress on developing a medium-term revenue strategy.
"Monetary policy should pursue a tightening bias in the near term in a data-dependent manner to keep inflation contained and expectations anchored. The tightening bias is warranted by still higher than desirable core inflation and ongoing, yet uncertain, subsidy reform. Enhanced monitoring of household and corporate balance sheets is needed in the current environment of high interest rates, weaker exchange rate, and lower growth. Exchange rate flexibility should continue to be the first line of defense against external shocks.
"Implementation of the concerted policy agenda set out in the MADANI Economy framework, the mid-term review of the Twelfth Malaysia Plan, and accompanying national strategic plans, should accelerate to support medium-term growth and achieve high-income status. The authorities' policy agenda is appropriately focused on addressing climate change, promoting digitalization, and enhancing governance and anti-corruption reforms. Reforms that would meaningfully lift wages across skill levels and ensure retirement income security should also be prioritized.
"The IMF team would like to thank the officials of the Government of Malaysia and Bank Negara Malaysia, other public institutions, as well as representatives from the private sector for the productive discussions."
