IMF says developing a medium-term revenue strategy remains a priority for Malaysia

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KUALA LUMPUR: The Executive Board of the International Monetary Fund (IMF) said Malaysia registered a strong post-pandemic recovery in 2022, driven by pent-up domestic demand and resilient export performance.


It said its strong macroeconomic policy frameworks, including a track record of fiscal prudence and a credible monetary policy framework, have served the country well.

“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,” it said following the conclusion of the Article IV consultation with Malaysia on a lapse-of-time basis.

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year.

The IMF will prepare a report based on these discussions, which forms the basis for discussion by the Executive Board of the IMF.

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

On its assessment, the United Nations economic agency said Malaysia’s 2022 external position is preliminarily assessed to be stronger than warranted by fundamentals and desired policies.

However, the IMF has noted also that downside risks, mostly external, cloud the near-term outlook.

According to the IMF, external risks to Malaysia’s outlook 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,” it said.

The agency said Malaysia’s gradual fiscal consolidation strategy as set out in Budget 2023 is appropriate, but it should be credibly underpinned by high-quality and durable measures.

It said it advices more significant consolidation over the medium term, which would put debt on a firm downward path.


“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,” it said.

The IMF welcomed the progress made in finalising the Fiscal Responsibility Act (FRA), which is a major reform expected to enhance governance and transparency and improve accountability and fiscal responsibility.

On monetary policy, the IMF said there should be further tightening to bring the stance to a neutral position.

It noted that Bank Negara should continue to clearly communicate the rational for its policy decision 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,” it said.

The IMF was positive on the Malaysian authorities’ commitment to safeguarding the stability of the financial sector considering the merging risks.

It said 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.

It added that 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 IMF also welcomed 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,” it said.

– The Star

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