The International Monetary Fund (IMF) recently gave their assessment of how Malaysia has fared throughout the pandemic. The bottom line of the Malaysian economy is that challenges remain, but they’e hopeful for a post-COVID rebound.

Malaysia’s economy entered the pandemic from a strong position but has nevertheless been hit very hard. GDP declined by an estimated 6 percent in 2020 as private investment and consumption, which had been the main drivers of growth in recent years, decelerated sharply. Unemployment reached a historic high in May 2020, and inflation has been subdued. The global risk-off episode in March 2020 triggered capital outflows from EMs such as Malaysia, but a swift and large global policy response helped stabilize markets, and inflows resumed starting late April. 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.

The Malaysian economy is set to recover in 2021, with growth projected at 6.5 percent, driven by a strong recovery in manufacturing and construction. The recovery is expected to be uneven across sectors, resting on an improvement in both domestic and external demand. Inflation would recover to 2 percent 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.

An intensification of the pandemic and materialization of other risks could derail the recovery. A protracted spread of the virus could prompt the authorities to tighten health and physical distancing measures, with negative impact on growth. Also on the downside, Malaysia’s open economy is vulnerable to escalating trade tensions and weaker-than-expected growth in trading partners. Domestic policy uncertainty could also dampen business confidence and investment, with negative impact on economy activity. On the upside, faster-than expected deployment of COVID-19 vaccines could raise growth.

The IMF’s Policy Views

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. Directors 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.

Directors welcomed the authorities’ commitment to fiscal reform and medium-term consolidation. They noted that spending rationalization and revenue-increasing measures will be necessary to help rebuild fiscal buffers once the recovery is fully cemented. Directors urged the authorities to initiate preparations for such measures and noted that adoption of the Fiscal Responsibility Act would help better anchor public finances. They also encouraged the authorities to improve efficiency and coverage of the social protection system.

Directors supported the accommodative monetary policy stance and welcomed Malaysia’s continued efforts to deepen domestic FX markets through expanded availability of hedging instruments and other initiatives. They encouraged the authorities to continue allowing the exchange rate to cushion shocks to the economy. Some Directors emphasized that existing capital flow measures should be phased out over time with due regard to market conditions.

Directors agreed that the banking system remains sound. Nevertheless, they encouraged the supervisory authorities to 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 moratoria are phased out. Directors welcomed the authorities’ enhancements to the debt resolution framework and their focus on inclusion and climate change in the context of financial-structural reforms.

Directors welcomed the authorities’ commitment to the structural reform agenda and its focus on the gaps highlighted by the COVID-19 crisis, including upgrading the digital infrastructure and greening the economy. They took note of the staff’s assessment that Malaysia’s external position is stronger than warranted by economic fundamentals and desirable policies. Directors called for policies to strengthen social safety nets and encourage private investment and productivity growth, which would also help with external rebalancing. Directors emphasized the need for further progress on governance reforms. They welcomed the authorities’ commitment to transparency, including regarding the COVID-19 related spending, and encouraged them to follow through on the initiatives outlined in the National Anti-Corruption Plan. Directors cautioned that reforms delayed by the pandemic and the change in government should resume, including inter alia legislative initiatives underpinning governance reforms.

Malaysia: Selected Economic and Financial Indicators, 2016–25

Nominal GDP (2019): US$364.7 billion 

Population (2019): 32.5 million

GDP per capita (2019, current prices): US$11,213 

Poverty rate (2019, national poverty line): 5.6 percent

Unemployment rate (2019): 3.3 percent 

Adult literacy rate (2018): 95.9 percent

Main goods exports (share in total, 2019, preliminary): electrical & electronics (37.8 percent), commodities (14.7 percent), and petroleum products (7.2 percent).