Malaysia's deficit could dip below 3 per cent with fuel subsidy, says IMF

With fuel subsidy locking in the impact of lower oil prices, Malaysia's deficit could decline below three per cent of gross domestic product (GDP) in 2015, said the International Monetary Fund.

Its Mission Chief for Malaysia Alex Mourmouras said the overall fiscal strategy should bolster equality, with budgeted cash transfers tightly targeted at low-income groups.

"The mission welcomes the move toward performance-based budgeting, and the plans to introduce accrual accounting," he said in a statement today.

Mourmouras led the IMF team to Kuala Lumpur and Putrajaya on Nov 13-24, 2014 to conduct discussions for the 2014 Article IV Consultation with Malaysia.

Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with its members, usually every year.

Mourmouras said the current account surplus is projected to rise to about 5.0 percent of GDP in 2014, as import growth has slowed and supported by a modest recovery in external demand.

"The mission commends the authorities for taking significant steps to strengthen the resilience of the Malaysian economy, while maintaining macroeconomic stability," he added.

He said measures such as the removal of fuel subsidies and the introduction of a goods and services tax (GST) are decisive moves that should help ensure the sustainability of government finances.

Mourmouras added that the measures also allow more spending aimed at promoting sustainable and equitable medium-term growth.

He also noted that Bank Negara Malaysia's proactive policies, including a series of measured controls on bank lending and an increase in its policy rate last July, have helped contain inflationary pressures and address financial imbalances.

Malaysia’s near-term growth prospects also remain strong, with real GDP growth in 2014 projected at close to 6.0 per cent, while private domestic demand is expected to remain robust.

"A moderate increase in inflation is expected in 2015 following GST implementation but subdued underlying inflationary pressures will mitigate its impact," said Mourmouras.

He added that Malaysia's recent strong economic growth, high investment and improvements in business environment scorecards were impressive.

However, he said, lower potential growth in the advanced economies makes maintaining the growth performance more challenging and provides an additional imperative for structural reforms.