Malaysia: 2016 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Malaysia

Abstract

IMF Executive Board Concludes 2016 Article IV Consultation with Malaysia On April 22, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation 1 with Malaysia. Malaysia's highly open and diversified economy was hit by a number of external and domestic shocks since late 2014, including sharply lower energy prices, spillovers from China, capital outflows and domestic political controversy. The economy has remained resilient, although growth moderated to 5 percent in 2015 from 6 percent in 2014, led by domestic demand in the face of weak external demand. Inflation remained subdued, close to 2 percent, despite the significant depreciation of the ringgit against the U.S. dollar and the implementation of the GST. The current account surplus narrowed to about 3 percent of GDP. The authorities have responded to the multiple shocks in a timely and decisive fashion and their policy agenda remains on track. Fiscal consolidation, including the introduction of GST in April 2015 and removal of costly and untargeted fuel and other subsidies starting in late 2014, have been effective in shielding the fiscal position from the effects of lower oil-related revenues and in diversifying the revenue base, with appropriate compensatory measures put in place to help offset the impact of fiscal consolidation on lower and middle income households. The medium-term fiscal strategy calls for further consolidation, balancing the budget and materially lowering the federal debt by 2020 while taking into account the economy's cyclical condition. Limited pass through of exchange rate changes to domestic prices and low prices of imports have helped to contain inflation closer to BNM's comfort range. Monetary policy remains accomodative, with cuts in the reserve requirements supporting domestic liquidity and growth. The authorities allowed the exchange rate to depreciate substantially, by about 25 percent against the U.S. dollar between July 2014 and December 2015, and also deployed US$36.5 billion of reserves over the same period, including reserves accumulated during the post-GFC inflow period, to cushion the effect of capital outflows on the economy and maintain orderly market