Business
THE Executive Board of the International Monetary Fund, IMF, concluded the Article IV consultation with Malaysia and endorsed the staff appraisal without a meeting on a lapse-of-time basis.
Malaysia’s economic performance has improved significantly in 2024. The economy grew by 5.2 per cent (y/y) in the first three quarters of 2024, supported by strong private consumption, buoyant investment, improvements in external demand for electrical and electronic products, and a recovery in tourism. Labor market conditions have been strong, with the unemployment rate low at 3.2 per cent in 2024Q3.
Meanwhile, inflation has been stable around 2 per cent, and the ringgit appreciated against the U.S. dollar by 2.6 per cent in 2024.
Current policies are focused on rebuilding fiscal buffers, augmenting growth potential, and strengthening social protection while preserving macroeconomic and financial stability.
The landmark Public Finance and Fiscal Responsibility Act (FRA), enacted in 2023, aims to strengthen fiscal management and governance. Fiscal consolidation continued in 2024, with the overall fiscal deficit estimated to have declined from 5.0 per cent of GDP in 2023 to the budget target of 4.3 per cent of GDP in 2024, supported by subsidy reforms and strengthening of the sales and service tax.
Bank Negara Malaysia, BNM, has kept the Overnight Policy Rate, OPR, unchanged at 3.0 per cent since May 2023. Under the Economy MADANI Framework, the authorities have developed a set of concerted policy frameworks that focus on increasing incomes, addressing climate change, promoting digitalization, and enhancing governance.
Executive Board Assessment
In concluding the Article IV consultation with Malaysia, Executive Directors endorsed the staff’s appraisal as follows:
Malaysia’s favorable economic conditions provide a window of opportunity to build macroeconomic policy buffers and accelerate structural reforms. Malaysia’s strong growth momentum is expected to be sustained in the near term, with growth projected at 4.7 per cent in 2025. Inflation, which eased to 1.8 per cent in 2024, is projected to increase to 2.6 per cent in 2025 on account of the anticipated implementation of gasoline subsidy reforms, before moderating to 2.3 per cent in 2026.
Malaysia’s external position in 2024 is preliminarily assessed to be stronger than the level implied by medium-term fundamentals and desirable policies.
Risks to growth, mostly external, are tilted to the downside, while inflation risks are tilted to the upside. Downside external risks include deepening geoeconomic fragmentation, a growth slowdown in major trading partners, and intensification of geopolitical conflicts, while upside growth risks include faster implementation of investment projects.
The upside risks to the inflation outlook stem from global commodity price shocks and potential wage pressures from increases in minimum wage and civil servants’ pay.
Fiscal consolidation should continue to rebuild buffers and achieve the medium-term targets set under the FRA. Staff recommends achieving a small structural primary balance by 2027. Building on successful subsidy reforms, including for electricity and diesel, staff recommends gradually phasing out remaining fuel subsidies.
Revenue mobilization efforts toward a more broad-based and efficient tax system are warranted. Reintroducing the GST could help achieve this goal. The associated impact of fiscal reforms on vulnerable households should be mitigated by well-targeted cash transfers. Staff welcomes the historic enactment of the FRA and recommends its swift and thorough implementation.
The current neutral monetary policy stance is appropriate. Going forward, monetary policy should remain data dependent. BNM should stand ready to tighten monetary policy if upside inflation risks materialize. Maintaining exchange rate flexibility is essential.
Financial systemic risks appear contained, and the financial sector remains sound. Banks’ capital and liquidity positions are robust. Credit growth, corporate and household balance sheets, and real estate markets do not pose systemic risks at this juncture.
Continued vigilance is warranted against pockets of more highly leveraged borrowers, interlinkages between banks and non-bank financial institutions, and climate and cyber risks—although spillover risks from these areas remain contained. Given the strong growth and accommodative financial conditions, pre-emptive broadening of the macroprudential policy toolkit could be considered.
Staff encourages swift implementation of the structural reform initiatives to enhance productivity and inclusive growth. The ongoing development of the PADU digital registry can help strengthen social safety nets and public service delivery. Investment incentives to promote high-growth and high-value industries should be well-targeted and ring-fenced.
Further efforts are warranted toward Malaysia’s transition to net-zero emissions and readiness for Artificial Intelligence. Staff welcomes the authorities’ efforts to strengthen governance and the anti-corruption framework.
A.I
March 4, 2025
Tags: Economy MADANI Framework IMF International Monetary Fund
