IMF Executive Board Concludes 2023 Article IV Consultation with Malaysia

June 1, 2023

Washington, DC – June 1, 2023[1]: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [2] with Malaysia on a lapse-of-time basis. [3]

Malaysia registered a strong post-pandemic recovery in 2022. Its strong macroeconomic policy frameworks, including a track record of fiscal prudence and a credible monetary policy framework, have served the country well. Growth reached 8.7 percent in 2022 driven by pent-up domestic demand following the reopening of the economy in April 2022 and strong export performance. However, the recovery remains uneven, with agriculture, mining, and particularly construction sectors remaining below pre-pandemic levels, and inequality has risen during COVID-19. While costly and untargeted spending on subsidies, the highest in Malaysia’s history, helped suppress inflationary pressures, inflation remained broad-based and elevated at 3.4 percent for the year, despite recent signs of moderation. Inflation expectations, however, remained well anchored.

Macro policies appropriately transitioned to the post-pandemic tightening cycle in 2022. The Bank Negara Malaysia (BNM) increased the overnight policy rate (OPR) four times since May 2022 by a total of 100 bps to 2.75 percent and paused the tightening thus far in 2023 to allow for an assessment of the impact of past rate hikes. The 2023 Budget is appropriately contractionary, targeting a decline in the overall deficit from 5.6 percent of GDP in 2022 to 5.0 percent in 2023, and down to 3.2 percent of GDP by 2025.

Lower growth and elevated inflation define the near-term outlook. Growth is projected to moderate to 4.5 percent in 2023 reflecting largely the global external headwinds. Inflation is projected to remain elevated at 3.3 percent in 2023, with likely persistence in core inflation, amid a positive output gap, and evidence of a build-up of demand-side pressures. Over the medium term, the current account surplus is projected to widen as the pandemic-related travel restrictions are lifted, leading to an improvement of the services balance, and as imports moderate.

Executive Board Assessment

In concluding the Article IV consultation with Malaysia, Executive Directors endorsed the staff’s appraisal as follows:

Malaysia registered a strong post-pandemic recovery in 2022. After a modest recovery in 2021, growth rebounded strongly in 2022 driven by pent-up domestic demand and resilient export performance, following the re-opening of the economy in April 2022. Malaysia’s 2022 external position is preliminarily assessed to be stronger than warranted by fundamentals and desired policies.

Downside risks, mostly external, cloud the near-term outlook. External risks include the possibility of an abrupt global slowdown or recession, with an associated spike in global risk premia, capital outflows and sudden stop risks. Geo-economic fragmentation and geopolitical tensions resulting in a reconfiguration of trade, supply disruptions, and rising input costs among other disturbances, could negatively affect Malaysia’s growth prospects. Staff urge the authorities to stand ready to manage downside risks and policy trade-offs, if and when warranted.

The gradual fiscal consolidation strategy set out in the 2023 Budget is appropriate, but it should be credibly underpinned by high-quality and durable measures. Staff advice on a path that involves a more significant consolidation over the medium term would put debt on a firm downward path. Staff welcome the progress made in finalizing the Fiscal Responsibility Act (FRA), a major reform expected to enhance governance and transparency and improve accountability and fiscal responsibility. Developing a medium-term revenue strategy remains an urgent priority for Malaysia, especially in light of Malaysia’s significant spending needs under the 12MP and should be the cornerstone of the medium-term consolidation strategy. Phased and transparently communicated subsidy reform is overdue, alongside social safety nets reforms, which would help enhance external rebalancing.

Monetary policy should tighten further to bring the stance to a neutral position and BNM should continue to clearly communicate the rationale for its policy decisions, given the rapidly evolving landscape and high uncertainty. Tighter monetary policy will ensure inflation expectations remain well-anchored, while also creating space for monetary policy to respond to downside risks. The flexible exchange rate regime has served Malaysia well, and the authorities’ continued commitment to exchange rate flexibility is welcome.

The authorities’ commitment to safeguarding the stability of the financial sector is also welcome considering emerging risks. Enhanced monitoring, especially of highly leveraged entities and non-bank financial institutions, is warranted given increased risks from rising interest rates, tighter financial conditions, exchange rate depreciation, and weaker expected growth. Expanding the macroprudential toolkit should support these efforts. The Malaysian financial sector is well-equipped to navigate any potential increase in volatility and global risk aversion and there are no broad-based stability concerns.

The authorities’ intentions under the 12MP to credibly enhance economic resilience, move toward net zero greenhouse gas emissions, and promote inclusive growth, is welcome. The start of the new government provides a timely opportunity to forge ahead with a concerted reform agenda. Robust governance and anti-corruption reforms, including the implementation of the strategies outlined in the National Anti-Corruption Plan, would strengthen the management of the public finances, and improve public sector service delivery.

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[1] Data used in this report for staff analyses are as of March 21, 2023.

[2] 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.

[3] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.


Malaysia: Selected Economic and Financial Indicators, 2018–28

Nominal GDP (2022): US$407.9 billion

Population (2022): 32.7 million

GDP per capita (2022, current prices): US$12,493

Poverty rate (2019, national poverty line): 0.2 percent

Unemployment rate (2022, period average): 3.8 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.

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

Real GDP (percent change)

4.8

4.4

-5.5

3.1

8.7

4.5

4.5

4.4

4.4

3.9

3.9

Total domestic demand

4.7

3.9

-4.9

3.6

9.4

3.7

5.1

4.5

4.4

4.0

3.9

Consumption

7.1

6.6

-2.6

2.5

9.9

4.1

5.6

4.2

4.2

3.7

3.6

Private consumption

8.0

7.7

-4.2

1.9

11.3

4.6

4.5

5.1

5.0

4.1

4.1

Public consumption

3.4

1.5

5.0

5.3

3.9

-9.3

5.8

1.8

1.1

0.5

-0.4

Private investment

4.3

1.6

-11.9

2.6

7.2

7.1

6.4

6.0

5.8

5.7

5.7

Public gross fixed capital formation

-5.0

-10.7

-21.2

-11.3

5.3

-10.0

8.6

4.5

3.5

2.9

3.0

Net exports (contribution to growth, percentage points)

0.4

0.7

-1.0

-0.3

-0.1

1.0

-0.2

0.1

0.2

0.2

0.2

Saving and investment (in percent of GDP)

Gross domestic investment

23.9

21.0

19.7

22.3

23.9

24.3

24.3

24.9

25.1

25.1

25.2

Gross national saving

26.1

24.5

23.9

26.1

26.5

27.0

27.0

27.7

28.1

28.1

28.2

Fiscal sector (in percent of GDP) 1/

Federal government overall balance

-3.7

-3.4

-6.2

-6.3

-5.6

-5.0

-4.6

-4.6

-4.6

-4.5

-4.4

Revenue

16.1

17.5

15.9

15.1

16.5

15.1

14.2

13.9

13.9

13.9

14.0

Expenditure and net lending

19.8

20.9

22.1

21.4

22.0

20.1

18.9

18.6

18.5

18.5

18.3

Tax refunds (Arrears) 2/

2.4

Federal government non-oil primary balance

-5.3

-6.7

-7.5

-6.6

-7.8

-6.0

-4.8

-4.4

-4.1

-3.8

-3.4

Consolidated public sector overall balance 3/

-2.9

-3.4

-7.3

-4.3

-4.4

-6.9

-6.9

-6.7

-6.5

-6.5

-6.3

General government debt 3/

55.6

57.1

67.7

69.3

65.7

66.8

66.8

67.2

67.7

68.7

69.3

Of which: federal government debt

51.2

52.4

62.0

63.4

60.4

60.9

60.9

61.3

61.8

62.8

63.4

Inflation and unemployment (annual average, in percent)

CPI inflation

1.0

0.7

-1.1

2.5

3.4

3.3

3.1

2.4

2.4

2.4

2.4

CPI inflation (excluding food and energy)

0.4

3.4

1.1

0.7

3.0

3.4

3.0

2.0

1.7

1.7

1.7

Unemployment rate

3.3

3.3

4.5

4.7

3.8

3.6

3.5

3.5

3.5

3.5

3.5

Macrofinancial variables (end of period)

Broad money (percentage change) 4/

7.7

2.7

4.9

5.6

15.7

8.0

8.2

7.5

7.1

6.1

6.2

Credit to private sector (percentage change) 4/

8.3

4.9

4.0

3.8

4.4

8.0

8.2

7.5

7.1

6.1

6.2

Credit-to-GDP ratio (in percent) 5/ 6/

130.0

130.5

144.8

138.0

124.5

137.1

137.1

137.1

137.1

137.1

137.1

Overnight policy rate (in percent)

3.25

3.00

1.75

1.75

…

…

…

…

…

…

…

Three-month interbank rate (in percent)

3.6

3.3

1.9

2.0

…

…

…

…

…

…

…

Nonfinancial corporate sector debt (in percent of GDP) 7/

103.5

100.0

110.6

110.2

98.4

…

…

…

…

…

…

Nonfinancial corporate sector debt issuance (in percent of GDP)

2.0

1.8

2.3

2.6

…

…

…

…

…

…

…

Household debt (in percent of GDP) 7/

82.0

82.8

93.1

89.1

81.2

…

…

…

…

…

…

Household financial assets (in percent of GDP) 7/

176.0

179.3

204.6

192.3

167.9

…

…

…

…

…

…

House prices (percentage change)

2.5

1.8

1.2

1.9

…

…

…

…

…

…

…

Exchange rates (period average)

Malaysian ringgit/U.S. dollar

4.04

4.14

4.19

4.14

4.40

…

…

…

…

…

…

Real effective exchange rate (percentage change)

4.2

-1.3

-3.5

-1.3

-1.5

…

…

…

…

…

…

Balance of payments (in billions of U.S. dollars) 5/

Current account balance

8.0

12.8

14.1

14.2

10.7

12.1

13.2

14.6

16.4

18.0

19.1

(In percent of GDP)

2.2

3.5

4.2

3.8

2.6

2.7

2.7

2.8

2.9

3.0

3.0

Goods balance

28.4

30.1

32.7

41.2

38.5

38.7

41.1

43.2

46.1

48.4

51.6

Services balance

-4.3

-2.6

-11.2

-14.7

-10.3

-8.3

-10.7

-11.3

-11.6

-11.3

-12.4

Income balance

-16.1

-14.7

-7.4

-12.3

-17.4

-18.3

-17.2

-17.3

-18.2

-19.1

-20.1

Capital and financial account balance

2.8

-9.1

-18.5

3.0

3.3

-2.7

-8.2

-6.5

-8.6

-11.3

-12.4

Of which: Direct investment

2.5

1.6

0.7

6.9

3.6

3.1

3.9

4.1

4.3

4.5

4.7

Errors and omissions

-8.9

-1.7

-0.1

-6.1

-1.9

0.0

0.0

0.0

0.0

0.0

0.0

Overall balance

1.9

2.0

-4.6

11.0

12.1

9.4

5.0

8.1

7.7

6.7

6.7

Gross official reserves (US$ billions) 5/ 8/

101.4

103.6

107.6

116.9

114.7

124.0

129.0

137.2

144.9

151.6

158.3

(In months of following year's imports of goods and nonfactor services)

5.8

6.7

5.6

5.2

5.0

4.8

4.7

4.8

4.8

4.9

5.0

(In percent of short-term debt by original maturity)

103.7

108.9

117.6

120.3

105.0

106.0

105.9

106.2

106.4

108.2

110.2

(In percent of short-term debt by remaining maturity)

84.8

87.1

91.9

93.3

84.8

85.7

84.4

85.6

85.8

86.8

87.9

Total external debt (in billions of U.S. dollars) 5/ 8/

223.0

231.5

238.8

259.1

259.2

276.5

290.5

307.5

324.3

338.4

352.4

(In percent of GDP)

62.2

63.4

70.8

69.6

63.9

62.2

60.6

59.4

58.3

57.2

55.8

Of which:short-term (in percent of total, original maturity)

43.9

41.1

38.3

37.5

42.1

42.3

41.9

42.0

42.0

41.4

40.8

short-term (in percent of total, remaining maturity)

53.6

51.4

49.1

48.4

52.2

52.3

52.6

52.1

52.1

51.6

51.1

Debt service ratio 5/

(In percent of exports of goods and services) 9/

10.6

10.9

13.6

10.7

10.1

10.6

11.5

11.2

10.9

10.6

10.7

(In percent of exports of goods and nonfactor services)

11.2

11.6

14.4

11.7

10.8

11.3

12.2

11.9

11.6

11.3

11.3

Memorandum items:

Nominal GDP (in billions of ringgit)

1,448

1,513

1,418

1,545

1,788

1,931

2,090

2,246

2,405

2,552

2,712

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.

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