Malaysia Expected to Continue Robust, Demand-Led Growth

Expansion led by strong domestic demand, particularly investment

Robust financial sector with high levels of capital, strong supervisory framework

Wide-ranging reforms should support higher, more inclusive growth

In their regular report on the health of the Malaysian economy, the IMF economists say that the country continued the strong recovery that began in 2010 following the global crisis.

Increasing reliance on domestic demand

This growth has been fueled by the country’s increasing reliance on domestic demand. Higher spending by households, firms, and government on consumer and capital goods has offset weak exports to Europe and the rest of the world, says the IMF report.

Consumption has been supported by low interest rates, a strong labor market, and fiscal transfers to households. The growing trade in consumer goods among countries from the Association of Southeast Asian Nations is also helping shield Malaysia’s economy from the downturn in many other parts of the world.

Private and public investments have been supported by low interest rates and the catalytic effect of projects under the government’s Economic Transformation Program, particularly in oil, gas, and infrastructure. The aim is to move Malaysia up the international value chain and turn it into a high-income nation by 2020.

The rebalancing of Malaysia’s economy toward greater domestic demand has led to a significant deterioration in Malaysia’s external current account balance—to a surplus of about 6 percent of GDP in 2012, compared to 11 percent in 2011.

Skillful macroeconomic management

The report underscores that skillful macroeconomic management has underpinned strong, noninflationary growth despite the unsettled global conditions.

Monetary policy by Bank Negara Malaysia—the country’s central bank—has been appropriately supportive of growth in an economy facing external headwinds. Federal government fiscal policy, on the other hand, has been moderately contractionary. This, say IMF economists, is a measured and welcome step toward medium-term fiscal consolidation, which is needed to reverse the increase in federal government debt in recent years.

The report emphasizes that fiscal consolidation needs to be supported by structural fiscal reforms and by a move away from volatile and procyclical oil- and gas-related revenues. It welcomed the authorities’ plans to introduce a goods and services tax, and to gradually phase out costly universal fuel subsidies, replacing...