KUALA LUMPUR (March 21): The time is right for Malaysia to forge ahead with implementing the concerted policy agenda set out in the Twelfth Malaysia Plan (12MP) and Budget 2023, according to the International Monetary Fund (IMF).

In its 2023 Article IV Mission to Malaysia end of mission statement released on Monday (March 20), the IMF team led by Lamin Leigh said the plan is appropriately focused on enhancing broad-based productivity drivers, as well as inclusive growth, addressing climate change, promoting digitalisation, enhancing governance, and strengthening anti-corruption reforms.

The team said Malaysia’s growth is projected to moderate to about 4.5% in 2023, driven by external headwinds.

Meanwhile, inflation is projected to remain elevated at about 3.25%, with likely persistence in core inflation, amid a positive output gap, and evidence of a build-up of demand-side pressures.

The team said downside risks for Malaysia are mostly external, including an abrupt global slowdown and larger than envisaged monetary policy tightening by major central banks.

The IMF team said the Malaysian economy registered a strong recovery in 2022. Growth reached 8.7%, driven by pent-up domestic demand following the reopening of the economy in April 2022 and resilient export performance.

The staff estimated the output gap to have closed in 2022.

They said 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% for the year.

Inflation expectations remained well anchored.

Leigh said 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.

He said it should however be credibly underpinned by high quality and durable revenue measures.

Leigh said those measures would create space for critical investment needs and for targeted transfers to low-income households, and would 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, said Leigh.

Leigh said 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 defence against external shocks,” he said.