Date of publication: Mar 17, 2014
Section heading: Business Times
Page number: 001
Byline / Author: By Rupa Damodaran
KUALA LUMPUR: The International Monetary Fund (IMF) expects the Malaysian economy to continue to grow at a healthy pace in 2014, supported by a long pipeline of investment projects, strong consumption and the gradually tightening financial conditions.
"Together with an improved external environment, these trends should offset mild headwinds from fiscal consolidation," said the IMF Executive Board in a statement on Friday.
Under Article IV, a team from the fund prepared a report based on the information and discussions with Malaysian officials following its visit to the country.
The board, headed by managing director Christine Lagarde, concluded the annual Article IV Consultation assessment with Malaysia for 2013 last week.
Growth moderated but registered a healthy 4.7 per cent in 2013 while inflation remained low, the board said, adding that the Malaysian economy is estimated to grow by five per cent in 2014.
While near-term growth prospects are favourable, the economy is exposed to risks from tighter global financial conditions and slower growth in major trading partners, the board added.
Malaysia is well-positioned to cope with the uncertain external environment, it said, noting the skillful management during past periods of market turbulence, healthy reserves, the flexible exchange rate regime and deep capital markets.
While the board welcomed the high-level Fiscal Policy Committee and the plan to reduce subsidies gradually, it also recommended a "credible concrete plan" with a debt target for 2020 to anchor consolidation efforts and reduce dependence on oil revenues.
Describing the current monetary policy stance by Bank Negara Malaysia as appropriately accommodative, it, however, said the central bank should remain vigilant to inflationary pressures and stand ready to adjust policy rates should subsidy rationalisation and the introduction of the goods and services tax (GST) lead to higher headline inflation.
Malaysia's financial system remains sound, well-capitalised and resilient, thanks to a strengthened regulatory and supervisory framework.
The board acknowledged the significant progress made in implementing the recommendations of the Financial Sector Assessment Programme.
"Ongoing global volatility, high household debt and banks' exposure to real estate sector warrant continued vigilance, and may require additional macro-prudential measures.
"The potential for 'risk on-risk off' cycles together with high household debt and rising house prices all require vigilance," it said.
The IMF supported the shift in the fiscal policy aimed at reducing federal debt and rebuilding buffers.
"The improvements in targeting social transfers, restraining wage growth and broadening the tax base, including through the planned GST and greater reliance on property taxes, should help secure the sustainability of Malaysia's public finances while promoting efficiency, equity, and growth objectives."
The fund agreed that increased social spending related to population ageing, and structural reforms to strengthen social safety nets and boost investment, combined with continued exchange rate flexibility, would help facilitate further external rebalancing.
The board also commended the government for the ambitious reform agenda that aims to transform the country into a high income economy, and the initiatives to upgrade human capital and promote inclusiveness.
Priority should remain on improving education level and labour skills, it said.