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The IMF report commended but also cautioned us

The 2016 International Monetary Fund (IMF) consultations with Malaysia has just produced a balanced though subtle report on Malaysia’s state of the economy and its prospects.

The IMF praised Malaysia for its good performance, despite the unexpected external and domestic economic shocks, including lower energy prices, the adverse effects of the economic slowdown in China as our biggest trading partner, and the heavy capital outflows.

The IMF also singled out as our drawbacks, what it described as our “domestic political controversy” and the institutional weakness of “a government-owned strategic investment fund, that is embroiled in scandal, ( underscoring) the need to uphold high standards of governance”.

Surprisingly even the IMF shied away from mentioning the 1MDB. This suggests how sensitive and subtle the IMF can be. So much so there is a lot to read in what it says and what it chooses not to say. And so we have to read a great deal more from between the lines of IMF and even World Bank Reports.

IMF commendations

Satisfactorily on the other hand and from an overall point of view, the IMF mentioned that the Malaysian economy has “strong fundamentals” and “remained resilient”.

The IMF commended Malaysia for -

i) Economic growth at a robust growth rate of 4.4 percent this year.

ii) Inflation increase close to 3 percent, although Malaysians will tell you that it’s much more.

iii) A strong financial system.

iv) Good economic outlook, although we all share the view that global uncertainty persists

v) Favourable fiscal consolidation, with the introduction of the Goods and Services Tax (GST) and the reduction in subsidies.

v) Allowing the ringgit to depreciate by about 25 percent against the US dollar between July 2014 and December 2015.

Here again, we ask why the ringgit had to decline so much, at a cost of depleting our reserves by US$36.5 billions.

Is it partly because of our unnecessary financial scandals and too much politicking?

IMF’s serious cautions

The IMF at the same time cautioned us seriously about -

i) The need to push ahead with structural reforms. There is obviously the need for less corruption, more efficient expenditure and greater meritocracy.

ii) Striving to balance the budget by 2020. This must mean that we cannot afford to slacken the pace of fiscal discipline.

iii) Continuing with our exchange rate flexibility. This would imply the need to accept further exchange rate fluctuations - depending on our competitiveness and the extent of the world economic uncertainty and currency volatility. We have therefore to brace ourselves for ringgit fluctuations and even some more decline?

iv) Our foreign exchange reserves must be maintained at an “adequate level”. This implies that we should not use our reserves to defend the ringgit from too much decline - if it occurs for several reasons.

v) Our household and corporate debt are still high. We must thus reduce our debt and the new Bank Negara governor has a tough job to rein in the borrowers and insist that the non-performing loans are more carefully scrutinised and not allowed to get out of control.

What are the IMF’s major recommendations?

i) Malaysia must boost its low productivity to be able to move forward, especially in the next few years leading to 2020.

Thus, new policies must be devised to raise quality and competition.

The IMF has advised that our participation in the Asean Economic Community and the Trans-Pacific Partnership Agreement should help raise our productivity.

But the operative word is should. The question will remain - whether we could take up the challenge and become more productive? For that the New Economic Model (which the IMF has unfortunately not mentioned, has to be implemented with greater priority.

ii) The IMF board of directors in Washington also stressed the need to Improve the quality of education as it is critical in achieving our higher income status.

But how much can we do and how soon, while other countries are moving faster ahead? We are still so slow to advance the teaching of English in our schools and universities.

iii) Another major and new recommendation is for the government to form a new agency to ensure higher standards of governance and efficiency of public enterprises and government-linked companies (GLCs). Thus the IMF proposed the setting up of a new Public Investment Management Assessment Agency.

This is an excellent idea. It could help enhance good governance, and higher fiscal and financial integrity and thus get Malaysia going forward faster, please.

Conclusion

The IMF report is most welcome. But I hope it will be given the deepest consideration at the highest levels of government. If we do not take sufficient heed of the IMF recommendations and really act upon them, Malaysia and our people will have a lot to lose, but our competitors, rivals and adversaries will have much to gain.

So let’s seize the challenges and the opportunities to say, with conviction - Malaysia Boleh.


RAMON NAVARATNAM is chairperson of Asli/Centre of Public Policy Studies.

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