KUALA LUMPUR: Malaysia is on track to reach high income status in five years due to skillful economic management amidst an uneven global recovery, says the International Monetary Fund.
“Robust domestic demand supported by sound macro-financial policies is driving strong, non-inflationary growth in the face of uncertain external conditions and declining commodity prices,”it assessed, in its latest annual Article IV report.
Growth is expected to moderate to a still robust rate of 4.8 per cent in 2015, underpinned by private investments in the non-oil sector.
The Fund commended the authorities for taking advantage of its full employment, low inflation and falling energy prices to implement ambitious fiscal reforms.
“These reforms will have far-reaching and long-lasting benefits, helping to diversify Malaysia’s revenue system away from oil and gas and raising the efficiency and equity of public spending,” according to the staff report by the IMF mission to Malaysia, headed by Alex Mourmouras in November last year.
The staff report, which was released by the executive board, said structural reforms should continue under the 11th Malaysia Plan, addressing innovation, quality education, youth unemploymenet and female labour force participation.
The Fund has warned that the risks are tilted to the downside.
It viewed external risks as significant, slower growth recovery in advanced economies and emerging markets, falling fuel and commodity prices could slow growth through Malaysia’s trade channel with second round effects on domestic demand.
While Malaysia could be vulnerable to contagion and financial volatility, its export-oriented manufacturing sector is likely to benefit.
In the event global financial volatility were to lead to large capital outflows and a squeeze on liquidity, Bank Negara Malaysia should stand ready to provide liquidity to maintain orderly market conditions and prevent an excessive tightening in monetary conditions.
As for domestic risks, IMF has advised the policymakers to proceed with fiscal reforms and maintain the reform momentum in order to balance the books by 2020.
“The impact of lower global oil and gas prices on Malaysia could be larger, dampening growth through delayed investment plans and the impact of higher real interest rates while the current account surplus could narrow.”
Additional measures would be needed to meet the fiscal targets.
Although there are signs of cooling in the housing market and personal lending growth has been curtailed, it warned that financial vulnerabilities remain due to high household debt and elevated house prices.
On Malaysia’s fiscal policy, the Fund said the effectiveness of the Goods and Services Tax (GST)could be enhanced by gradually narrowing the list of exempt and zero-rated items as it would raise GST `buoyancy’.
It highlighted the need enhance protection for the poor through a stronger social safety net.
Untargetted fuel subsidies, it said were regressive referring to the households in the top two quintiles of per capita consumption received 60 per cent of the subsidies while only three per cent went to the bottom decile.
While financial sector vulnerabilities have moderated due to the macro-prudential measures taken to address rising household indebtedness and house prices, IMF suggested additional macro-prudential measures, such as LTV caps on second and first mortgages, may be needed.
It also suggested that the authorities would benefit from having a fiscal risks management framework, including publication of an annual fiscal risks statement.
