Malaysia: 2025 Article IV Consultation-Press Release; and Staff Report

2025ARTICLE IV CONSULTATION—PRESS RELEASE;ANDSTAFF REPORT Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussionswith members, usually every year. In the context of the2025Article IV consultation withMalaysia, the following documents have been released and are included in this package: •APress Release. •TheStaff Reportprepared by a staff team of the IMF for the Executive Board’sconsideration ona lapse of time basis, following discussions that ended onDecember13, 2024, with the officials ofMalaysiaon economic developments andpolicies. Based on information available at the time of these discussions, the staffreport was completed onFebruary 6, 2025. •AnInformational Annexprepared by the IMFstaff. TheIMF’s transparency policy allows for the deletion of market-sensitive information andpremature disclosure of the authorities’ policy intentions in published staff reports andother documents. Copies of this report are available to the public fromInternational Monetary Fund•Publication ServicesPO Box 92780•Washington, D.C. 20090Telephone: (202) 623-7430•Fax: (202) 623-7201E-mail:publications@imf.org Web:http://www.imf.org International Monetary FundWashington, D.C. IMF Executive Board Concludes 2025 Article IV Consultationwith Malaysia FOR IMMEDIATE RELEASE Washington, DC – March 3, 2025:On February 25, 2025, the Executive Board of theInternational Monetary Fund (IMF) concluded the Article IV consultation1with Malaysia andendorsed the staff appraisal without a meeting on a lapse-of-time basis.2 Malaysia’s economic performance has improved significantly in 2024. The economy grew by5.2 percent (y/y) in the first three quarters of 2024, supported by strong private consumption,buoyant investment, improvements in external demand for electrical and electronic products,and a recovery in tourism. Labor market conditions have been strong, with the unemploymentrate low at 3.2 percent in 2024Q3. Meanwhile, inflation has been stable around 2 percent, andthe ringgit appreciated against the U.S. dollar by 2.6 percent in 2024. Current policies are focused on rebuilding fiscal buffers, augmenting growth potential, andstrengthening social protection while preserving macroeconomic and financial stability. Thelandmark Public Finance and Fiscal Responsibility Act (FRA), enacted in 2023, aims tostrengthen fiscal management and governance. Fiscal consolidation continued in 2024, withthe overall fiscal deficit estimated to have declined from 5.0 percent of GDP in 2023 to thebudget target of 4.3 percent of GDP in 2024, supported by subsidy reforms and strengtheningof the sales and service tax. Bank Negara Malaysia (BNM) has kept the Overnight Policy Rate(OPR) unchanged at 3.0 percent since May 2023. Under the Economy MADANI Framework,the authorities have developed a set of concerted policy frameworks that focus on increasingincomes, addressing climate change, promoting digitalization, and enhancing governance. Executive Board Assessment In concluding the Article IV consultation with Malaysia, Executive Directors endorsed thestaff’s appraisal as follows: Malaysia’s favorable economic conditions provide a window of opportunity to buildmacroeconomic policy buffers and accelerate structural reforms. Malaysia’s strong growthmomentum is expected to be sustained in the near term, with growth projected at 4.7 percentin 2025. Inflation, which eased to 1.8 percent in 2024, is projected to increase to 2.6 percent in2025 on account of the anticipated implementation of gasoline subsidy reforms, beforemoderating to 2.3 percent in 2026. Malaysia’s external position in 2024 is preliminarily assessed to be stronger than the level implied by medium-term fundamentals and desirablepolicies. Risks to growth, mostly external, are tilted to the downside, while inflation risks are tilted to theupside. Downside external risks include deepening geoeconomic fragmentation, a growthslowdown in major trading partners, and intensification of geopolitical conflicts, while upsidegrowth risks include faster implementation of investment projects. The upside risks to theinflation outlook stem from global commodity price shocks and potential wage pressures fromincreases in minimum wage and civil servants’ pay. Fiscal consolidation should continue to rebuild buffers and achieve the medium-term targetsset under the FRA. Staff recommends achieving a small structural primary balance by 2027.Building on successful subsidy reforms, including for electricity and diesel, staff recommendsgradually phasing out remaining fuel subsidies. Revenue mobilization efforts toward a morebroad-based and efficient tax system are warranted. Reintroducing the GST could helpachieve this goal. The associated impact of fiscal reforms on vulnerable households should bemitigated by well-targeted cash transfers. Staff welcomes the historic enactment of the FRAand recommends its swift and thorough implementation. The current neutral monetary policy stance