THE 2016 International Monetary Fund (IMF) Consultations with Malaysia has just produced a balanced though subtle report on the state of the Malaysian economy and its prospects. The IMF praised Malaysia for its good performance despite the unexpected external and domestic economic shocks, including lower energy prices, the adverse effects of the economic slowdown in China (our biggest trading partner), and the heavy capital outflows.
The IMF also singled out as our drawbacks what it described as our “domestic political controversy”, (underscoring) “the need to uphold high standards of governance”.
From an overall point of view, the IMF said the Malaysian economy has “strong fundamentals” and remained “resilient”.
It commended Malaysia for:
i) Economic growth at a robust growth rate of 4.4% this year;
ii) Inflation increase close to 3% (although Malaysians will tell you it’s much more);
iii) A strong financial system;
iv) Good economic outlook although we all share the view that global uncertainty persists;
v) Favourable fiscal consolidation with the introduction of GST and reduction in subsidies; and
vi) Allowing the ringgit to depreciate by about 25% against the US dollar between July 2014 and December 2015.
But why did the ringgit have to decline so much, depleting our reserves by US$36.5bil?
IMF’s serious caution
The IMF at the same time cautioned us seriously about:
i) The need to push ahead with structural reforms. This is obviously the need for less corruption, more efficient expenditure and greater meritocracy;
ii) Striving to balance the budget by 2020. This must mean we cannot afford to slacken the pace of fiscal discipline;
iii) Continuing with our exchange rate flexibility. This would imply the need to accept further exchange rate fluctuations, depending on our competitiveness and the extent of the world economic uncertainty and currency volatility. We have to brace ourselves for ringgit fluctuations and even some more decline;
iv) Our foreign exchange reserves which must be maintained at “adequate level”. This implies that we should not use our reserves to defend the ringgit from too much decline if it occurs; and
v) Our household and corporate debts are still high. We must reduce our debt and the new Governor of Bank Negara has a tough job to reign in the borrowers and insist that non-performing loans are more carefully scrutinised and not allowed to get out of control.
i) Malaysia must boost its low productivity to be able to move forward especially in the years leading to 2020. Thus, new policies must be devised to raise quality and competition. The IMF has advised that our participation in the Asean Economic Community and the Trans-Pacific Partnership should help raise our productivity. But the operative word is “should”. Can we take the challenge and become more productive? For this to happen, the New Economic Model (which the IMF has unfortunately not mentioned) has to be implemented with greater priority.
ii) The IMF Board of Directors in Washington also stressed the need to improve the quality of education as it is critical in achieving our higher income status. But how much can we do and how soon while other countries are moving faster ahead? We are still very slow in advancing the teaching of English in our schools and universities.
iii) Another major and new recommendation is for the Government to form a new agency to ensure higher standards of governance and efficiency of public enterprises and government-linked-companies (GLCs).
The IMF proposed the establishment of a new public investment management assessment agency. This is an excellent idea. It could help enhance good governance and higher fiscal and financial integrity and thus get Malaysia going forward faster.
The IMF report is most welcome and I hope it will be given the deepest consideration at the highest level of Government. If we do not take sufficient heed of the recommendations and really act on them, we will lose a lot while our competitors, rivals and adversaries will have much to gain. So let’s seize the challenges and opportunities to say with conviction “Malaysia Boleh!”
TAN SRI RAMON NAVARATNAM
Asli Center of Public Policy Studies