KUALA LUMPUR: Malaysia needs to overcome the dip in economic growth in order to prepare itself for becoming a high-income nation by 2020, according to International Monetary Fund (IMF) first deputy managing director David Lipton.

The government had forecast the country’s economy to grow between 4.5% and 5.5% this year due to the decline in oil prices, compared with its earlier growth forecast of between 5% and 6%.

“The biggest challenge for Malaysia is to overcome its dip in economic growth, and to restore it to [past levels] and sustain it.

“Through its 2020 economic convergence ambition, Malaysia plans to grow from a middle-income country to a high-income country with a per capita gross domestic product (GDP) rising to about US$15,000 (RM55,088) and that is [also] a challenge that the Malaysian government needs to take on,” he told The Edge Financial Daily in an interview.

He emphasised that sound macroeconomic policies are just the foundation for economic growth, beyond that there is a need for a highly educated population, as well as infrastructure and research and development that will drive Malaysia to become a technology powerhouse as it aims to become a high-income nation.

Lipton, who was in town for the recently-concluded 19th Asean Finance Ministers’ Meeting, had earlier said in his keynote address at a dinner organised by Bank Negara Malaysia (BNM) that with sustained efforts to pursue further reforms, Malaysia’s income level in 2040 could reach that of the United Kingdom.

Lipton commended the Malaysian government, in particular BNM, for maintaining the resilience of the Malaysian economy amid falling crude oil prices.

“The decline in oil prices is something that does negatively affect the Malaysian economy as it provides about 20% of export proceeds, and the government has taken action to protect the budget through a combination of fuel subsidies and the proposed goods and services tax, which help ensure that the budget is not impaired by the decline in oil prices,” he said.

On the issue of deflation, which in broader terms refers to a general decline in prices often caused by a reduction in the supply of money or credit, Lipton said that it will not be a threat as the debt levels in the country are not as high in comparison with other countries.

Malaysia’s inflation, as measured by the consumer price index, increased at a slower growth rate of 0.1% in February from a year earlier.

Lipton said that deflation is dangerous in some places of the world, such as countries in the eurozone that have reached high levels of indebtedness. “In those places, having deflation is problematic because it means real interest rates are high and growth is low, and debt may grow faster than the income of the people, but in countries that are growing rapidly and where debt is not so large, like Malaysia, deflation is not a dangerous phenomenon,” he said.

He said that BNM plays a vital role in monitoring deflation via its monetary policy and other mandates with regards to economic growth and employment opportunities.

On threats to the global economy that may impact Malaysia, Lipton said that geopolitical risks, such as the political tension between Russia and Ukraine, as well as the unrest in the Middle East may have an impact on the business sentiment in the country.  

“There are also a lot of large corporations that have done a lot of borrowing that may have some trouble repaying those debts, especially those in the energy sector, due to the falling oil prices.”

“[Malaysia] should keep an eye out for this kind of global indebtedness, but [as I mentioned] having a flexible exchange rate serves as a shock absorber to these kind of risks,” he said.

He said that the global indebtedness is not a risk for Malaysia, but affects countries where government debt to GDP is high, and which need IMF programmes such as Greece, Ireland and Portugal.

“High indebtedness can be a drag on growth, taking Greece for example, although they have just changed their government and have lowered their budget deficit, they still face the issue of how to cope with low growth and high debt, which may take them a few years to resolve,” said Lipton.

This article first appeared in The Edge Financial Daily, on March 27, 2015.