Reports suggesting Bank Negara governor Dr Zeti Akhtar Aziz's current term of tenure could be extended to 2006 is both good news and a good strategy by the Malaysian government.

Given the world economy is in an increasingly parlous state, it is sure to drag down the region's and Malaysia's export-dependent economies. In strategic terms, now is not the time to change the bank's governorship.

The reports come o­n the heels of the government shelving its proposed stimulus package which is designed to provide a short-term boost to an economy already suffering from falling demand for its electronics, a potential crisis in inbound tourism from Sars, and slowing domestic demand.

These add to the mounting risks to the Malaysian economy.

Five consecutive budget deficits later, following the Asian economic crisis in mid-1997, the economy has struggled to maintain a sustainable growth trajectory.

Competitive currency devaluations coupled with the possibility of further market liberalisation in the region will add more pressure o­n the remnants of Dr Mahathir Mohamad's capital controls regime.

Despite Malaysia's relatively strong external position, government debt has risen sharply from 32 percent of GDP at end 1997 to 46 percent at end 2002.

Budget deficit is still soaring, at roughly six percent of GDP last year.

The economic stimulus package, now expected in May, remains a stop-gap measure at best. It will not boost domestic demand o­n the scale the government is hoping to take the economy out of trouble.

With the crunching economic problems confronting Malaysia, the government has little room left to manouevre o­n the policy front. Fiscal policy isn't working, which is o­ne reason why the stimulus package has been shelved for now. And any pre-emptive tax cuts will also add to growing budget deficit woes - another reason why the stimulus package was shelved.

Dr Zeti, who has worked under Dr Mahathir's capital control regime, will have to find ways to either dismantle the remnants of that regime to maintain Malaysia's competitiveness, or she will have to tinker with monetary policy by cutting official interest rate quite substantially - by at least 50 basis points in the first instance by June, and a quickfire 25 basis points in September to give any upward growth momentum in the economy more legs.

An expansionary monetary policy will be a short-term measure, and may work if the ringgit is kept pegged to the US dollar. But Malaysia cannot have it both ways any longer. Something has to give, and soon.

It is no longer the case that the Malaysian government can tinker with the edges of monetary and fiscal policies to ride out a looming crisis in the region. In fact, Malaysia's industrial policy desperately needs a fundamental makeover to stay competitive in the next economic phase, which will be extremely competitive.

Almost certainly Malaysia's manufacturing sector, particularly electronics, looks like taking the biggest knock in the coming shakeout.

The choices for Malaysia are stark, with implications for local business, foreign investment, financial markets, and general employment, including the tax regime.

There are also powerful political implications, especially between the choices of either greater free-market liberalisation or increased state intervention in the economy.

Either way, this is no longer a choice left completely in Malaysia's hands. The decision for the next direction will almost certainly be strongly influenced from outside Malaysia.