KUALA LUMPUR (March 18): The Malaysian economy is set to recover in 2021, with growth projected at 6.5%, driven by a strong recovery in manufacturing and construction, according to the International Monetary Fund (IMF).
The recovery is expected to be uneven across sectors, resting on an improvement in both domestic and external demand.
Inflation would recover to 2% and the current account surplus is on course to decline as demand for pandemic-related products starts receding and the rebound in domestic demand raises imports.
In a statement yesterday, the IMF executive board said Malaysia’s economy entered the pandemic from a strong position but has nevertheless been hit very hard.
It said gross domestic product declined by an estimated 6% in 2020 as private investment and consumption, which had been the main drivers of growth in recent years, decelerated sharply.
Meanwhile, unemployment reached a historic high in May 2020, and inflation has been subdued.
The IMF said the global risk-off episode in March 2020 triggered capital outflows from emerging markets such as Malaysia, but a swift and large global policy response helped stabilise markets, and inflows resumed starting late April.
It said that in Malaysia, a strong fiscal, monetary and financial policy response has helped cushion the economic shock from the pandemic and ensure financial stability.
The current account registered a surplus due to both increased pandemic-related external demand for health-related and electronic equipment and weak imports, it said.
Assessing Malaysia, the executive directors welcomed the Malaysian authorities’ well-coordinated policy response to the pandemic which, together with sizable buffers, has helped mitigate the macro-financial impact of the crisis.
They observed that a strong recovery in 2021 remains subject to considerable downside risks and noted that macroeconomic policies should remain supportive until the recovery is fully entrenched.
The IMF welcomed the Malaysian authorities’ commitment to fiscal reform and medium-term consolidation, adding that spending rationalisation and revenue-increasing measures will be necessary to help rebuild fiscal buffers once the recovery is fully cemented.
Malaysia was urged to initiate preparations for such measures and noted that adoption of the Fiscal Responsibility Act would help better anchor public finances.
It was also encouraged to improve efficiency and coverage of the social protection system, as well as continue allowing the exchange rate to cushion shocks to the economy.
IMF stressed that existing capital flow measures should be phased out over time due to market conditions.
Commenting on the banking sector, IMF said Malaysia should remain alert to deterioration in banks’ asset quality in the near term and called for close monitoring of the high level of household debt as loan moratoriums are phased out.
It welcomed the enhancements to the debt resolution framework and the focus on inclusion and climate change in the context of financial-structural reforms.