Fund commends resilience of national economy
AS far as mid-term reports go, the Article IV Consultation on Malaysia, which the International Monetary Fund (IMF) recently released, is an encouraging report card.
This suggests a studious student who is coping with external shocks and steadily managing the home front.
Indeed, the medium-term outlook is “steady as she goes” with the usual caveats of “continue the hard work” and “room for improvement” to head off potential external headwinds, and to sustain sound management and monitoring of internal challenges. All this is aimed at laying the platform for the coveted prize of Transformasi Nasional 2050 (TN50), the 30-year flagship of national development initiative of Prime Minister Datuk Seri Najib Razak which spans the period 2020-2050.
The TN50 policy document will only be published in early 2020, but consultations on the economic, social, cultural and environmental targets that Malaysia aims to achieve by 2050, thus transforming it into a higher income productivity-driven and knowledge-based economy, have already begun.
The IMF executive board of directors can be highly opinionated, intrinsically technocratic, top-down prescriptive and obsessively market-oriented almost at any cost, in the pursuit of its surveillance of its member country governments, especially in their stewardship of their respective economies and financial sectors.
This relationship, however, is oft tempered by the extent of financial and political clout (displayed through tantrums) of any given member country.
IMF directors commended the resilience of the Malaysian economy, “which reflects sound macro-economic policy responses in the face of significant headwinds and risks”.
“While Malaysia’s economic growth is expected to continue this year, weaker-than-expected growth in key advanced and emerging economies or a global retreat from cross-border integration could weigh on the domestic economy.”
While real gross domestic product (GDP) growth slowed down, Malaysia is still among the fastest-growing economies among peers.
Real GDP growth is projected at 4.5 per cent in 2017, rising to 4.7 per cent in 2018 and up to 5 per cent in the medium term.
IMF policies are not a panacea for solving the problems of its member countries, especially emerging countries.
If it were, then we would be living in a global economic nirvana, with IMF serving as the ultimate oracle of knowledge.
Indeed, IMF had it badly wrong on several occasions in the past — the 2008 financial crisis, the near collapse of the Eurozone, the Asian financial crisis of 1998, the structural adjustment programmes (SAPs), which the World Bank/IMF used to foist on hapless developing countries with the threat of no assistance if they refused to agree to them.
In the absence of any immediate alternatives (albeit one may be on the horizon in the form of the Asian Infrastructure Investment Bank, which was launched in 2014 and is already dubbed as Beijing’s attempt at creating a “new World Bank”, the IMF/World Bank has dominated as the gatekeeper/policeman of the global economy and financial order since its establishment in July 1944 from the ashes of World War II as the so-called Bretton Woods Institutions.
In response to the consultation and the observations of the IMF directors, the Malaysian authorities, while agreeing to many of the recommendations, reiterated that IMF has an important role to play, but called on it to be more flexible and diversified in its approach.
Asian countries remember the 1998 financial crisis was, in part, precipitated and exacerbated by the speculative activities of foreign fund managers including the likes of George Soros, which put local currencies under severe pressure.
Recent ringgit volatility, especially to the US dollar, remains a concern, and is expected to persist in the immediate future.
Bank Negara Malaysia’s policy is aimed at acting as a shock absorber, but Putrajaya has blamed this volatility partly on the speculative activity in the ringgit offshore non-deliverable forward (NDF) market which had a disproportionate and detrimental impact on the ringgit onshore market.
Not surprisingly, directors urged vigilance and continued efforts to strengthen policy buffers and boost long-term economic growth.
They agreed that Malaysia’s medium-term fiscal policy is well anchored on achieving a near-balanced federal budget by 2020, and noted that the banking sector is sound overall and that financial sector risks appear contained, while in the corporate sector, there are emerging vulnerabilities in some sectors.
Although the household debtto-GDP ratio is likely to decline, household debt remains high, with debt-servicing capacity growing only moderately.
They supported the emphasis on increasing female labour force participation, improving the quality of education and English proficiency, lowering skills mismatch, boosting productivity growth, encouraging research and innovation, and upholding high standards of governance.
Malaysia, said the IMF, led the world in Islamic finance.
The government has increased the use of Islamic debt instruments for funding purposes.
The total outstanding stock of government Islamic securities is approaching that of Malaysia government securities.
Sukuk issuance is driven by healthy demand and a desire to develop the market.
The inclusion of Islamic debt securities in some global bond indexes has provided a boost.
Cover ratios and yields of government Islamic securities are consistently holding their own compared with conventional equivalents.
One area of contention is GST (Goods and Services Tax). Directors would like Putrajaya to widen its tax base with GST collection expected to increase by 3.9 per cent to account for 18.2 per cent of total revenue this year.
The IMF’s recommendation that the six per cent GST be increased to the higher regional average and to decrease the number of exemptions, is a nonstarter and has been rejected, especially this side of a general election.
Malaysia is still among the fastest-growing economies among peers, say the International Monetary Fund directors.