IMF Concludes Article IV Consultation With Malaysia

by Mike Godfrey, Tax-News.com, Washington

19 August 2009

The IMF has concluded an Article IV consultation with Malaysia. The IMF observed that Malaysia is well positioned to weather the severe impact of the global downturn. A strong external position, robust balance sheets of household and corporate sectors, and sound financial system should lessen the blow from adverse external shocks.

The IMF described the extent of the reversal of the budget consolidation since 2008 – the central government deficit rose to almost 5% of GDP and is set to reach nearly 8% of GDP in 2009. Two stimulus packages have been announced in late 2008 and early 2009, totaling about 10% of GDP, to be implemented over two years. The packages include an array of expenditure and revenue measures, as well as loan guarantees. The IMF agreed that the countercyclical fiscal response has been appropriately large, and should mitigate the impact of output contraction on households and businesses.

Although the IMF acknowledged some scope for additional stimulus if the downturn proves longer or deeper than expected, in view of the high prospective budget deficits and a rising debt to GDP ratio, the IMF strongly encouraged the authorities to cast any future fiscal decisions in a medium-term framework. The IMF pointed out the necessary steps to reduce medium-term fiscal risks: broadening the non oil tax base, moving ahead with subsidy reform, and putting fiscal policy on a credible consolidation path.

The IMF emphasized that a key medium-term challenge will be strengthening domestic demand as a source of growth, by encouraging a continued focus on promoting private investment and deepening reforms in labor and product markets. Further liberalization in selected sectors was welcome, but the IMF stressed that more remains to be done to enhance the business climate and remove long-standing structural impediments to investment.

Malaysia’s current exchange rate policy is broadly appropriate, according to a majority view, and the IMF supported the view that the ringgit appears to be weaker than its equilibrium level in real effective terms. Whilst pointing to the uncertainty about fundamentals and transitory factors related to Malaysia’s commodity exports and the global crisis, the IMF nevertheless upheld the Malaysian government view that the exchange rate policy is consistent with a return to a gradual trend appreciation of the currency once the crisis subsides.

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