Malaysia urged to develop revenue strategy to boost low taxes - IMF

As of 2021, Malaysia's tax revenues stood at about 11 per cent of gross domestic product.

The IMF said the 2023 Budget committed to improving revenue collection by minimising leakages and enhancing tax compliance, guided by the adoption of an MTRS, but it lacks specific medium-term revenue-enhancing measures and a timeline for the medium-term revenue strategy.

"With no plans to reinstate the goods and services tax (GST) this year, the preparatory work for its reintroduction should be promptly initiated to lay the ground for effectively activating this indispensable source of revenue, consistent with staff's call for enacting high-quality and durable measures," the IMF said in its Malaysia: 2023 Article IV Consultation-Press Release and Staff Report released on June 1.

It added that the government should consider the introduction of a carbon tax, which could generate an estimated 1.0 to 3.0 per cent of GDP per year in fiscal revenues by 2030.

"Staff urge the authorities to prioritise the development of a medium-term revenue strategy including the necessary quantitative underlying work in determining gaps and identifying goals, in light of Malaysia's significant spending needs under the 12th Malaysia Plan and its ambition to achieve high-income status.

"In that respect, the authorities' request for technical assistance from the Fund on the medium-term revenue strategy is a very encouraging first step and bodes well with capacity development-surveillance integration," it added.

Meanwhile, the IMF said Malaysia's monetary policy should be tightened further to bring the stance to neutral and Bank Negara Malaysia should clearly communicate the rationale for its policy decisions amid high uncertainty.

The still elevated core inflation, amid a positive output gap, and evidence of a build-up in demand-side pressures, suggest the need for monetary policy to shift to a neutral stance now to keep inflation contained and expectations anchored, it added.

"Staff estimates of the neutral real rate suggest that monetary policy currently remains accommodative. Staff analysis suggests that the short-term output costs of monetary policy tightening such as the sacrifice ratio are low in Malaysia due in part to the high openness of the economy.

"Staff analysis also suggests that monetary policy transmission could be weakened and further delayed (longer lags) in the environment of high inflation, thus requiring early action," it said, also noting that the exchange rate should continue to serve as a shock absorber.

The IMF said forex intervention (FXI) is not a substitute for needed policy adjustment and should not be used to lean against exchange rate pressures that are driven by fundamentals.

"That said, there is a role for FXI as needed to address disorderly market conditions and to respond to large and relevant shocks when well-identified and costly frictions are present," the Fund said.