A gradual fiscal consolidation strategy, as set out in Malaysia’s 2023 Budget, needed to rebuild buffers, reduce debt, fiscal risks – IMF

Highlights of an IMF staff preliminary report: After a strong recovery in 2022, growth is projected to moderate in 2023 due to external headwinds, and inflation to remain elevated. A gradual and credible fiscal consolidation strategy is needed to rebuild buffers while tightening monetary policy remains appropriate to contain inflation.· Coordinated implementation of structural reform policies set out in the Twelfth Malaysia Plan and the 2023 Budget is needed to achieve inclusive growth, enhance digitalization, reduce governance and corruption vulnerabilities, and address climate change.

An International Monetary Fund (IMF) team, led by Lamin Leigh, was in Kuala Lumpur for discussions as part of the 2023 Article IV Consultation with Malaysian authorities and other stakeholders from March 8-20, 2023. The following is a press statement issued by the IMF staff in Washington following the preliminary findings of the team’s visit.

WASHINGTON, DC, March 21 – “The Malaysian economy registered a strong recovery in 2022. Growth reached 8.7 percent driven by pent-up domestic demand following the reopening of the economy in April 2022 and resilient export performance. Staff estimates the output gap to have closed in 2022. The recovery remains uneven with agriculture, mining, and particularly construction sectors remaining below pre-pandemic levels. With record spending on subsidies, headline inflation did not surge in tandem with global food and commodity prices but was still on the rise for most of 2022, reaching 3.3 percent for the year. Inflation expectations remained well anchored.

“Growth is projected to moderate to about 4½ percent in 2023, driven by external headwinds. Inflation is projected to remain elevated at about 3¼ percent, with likely persistence in core inflation, amid a positive output gap, and evidence of a build-up of demand-side pressures. Downside risks are mostly external, including an abrupt global slowdown and larger than envisaged monetary policy tightening by major central banks.

“A gradual fiscal consolidation strategy, as appropriately set out in the 2023 Budget, is needed to rebuild buffers, put debt on a downward path, and reduce fiscal risks. It should however be credibly underpinned by high-quality and durable revenue measures. Those measures would create space for critical investment needs and for targeted transfers to low-income households and help buttress market confidence in Malaysia’s strong fundamentals. The authorities’ commitment to fiscal reforms is welcome, including the upcoming tabling of the Fiscal Responsibility Act, the planned subsidy reform, and plans to develop a medium-term revenue strategy.

“Monetary policy should tighten further to bring the currently accommodative stance to neutral to keep inflation contained and expectations anchored. Continued clear communication of the rationale for the Bank Negara Malaysia policy decisions is critical in a rapidly evolving and highly uncertain environment. Enhanced monitoring of household and corporate balance sheets is needed in the current environment of higher interest rates and weaker growth momentum. Expanding the macroprudential toolkit should help support these efforts. Exchange rate flexibility should be the first line of defense against external shocks.

“The time is right to forge ahead with implementing the concerted policy agenda set out in the Twelfth Malaysia Plan and the 2023 Budget. The plan is appropriately focused on enhancing broad-based productivity drivers as well as inclusive growth, addressing climate change, promoting digitalization, enhancing governance, and strengthening anti-corruption reforms.

“The IMF team would like to thank the officials of the Government of Malaysia and Bank Negara Malaysia, other public institutions, as well as representatives from the private sector, and civil society for productive discussions.”