KUALA LUMPUR: Malaysia should tighten its monetary policy further to bring the currently accommodative stance to neutral to keep inflation contained and expectations anchored, the International Monetary Fund (IMF) recommends.
An IMF team led by Lamin Leigh made the recommendation after conducting discussions with Malaysian authorities and other stakeholders during its visit here from March 8-20.
"Continued clear communication of the rationale for the Bank Negara Malaysia policy decisions is critical in a rapidly evolving and highly uncertain environment," Leigh said today.
"Enhanced monitoring of household and corporate balance sheets is needed in the current environment of higher interest rates and weaker growth momentum. Expanding the macroprudential toolkit should help support these efforts. Exchange rate flexibility should be the first line of defense against external shocks," he added.
Leigh said the time was right to forge ahead with implementing the concerted policy agenda set out in the 12th Malaysia Plan and the 2023 Budget.
"The plan is appropriately focused on enhancing broad-based productivity drivers as well as inclusive growth, addressing climate change, promoting digitalisation, enhancing governance, and strengthening anti-corruption reforms," he added.
The IMF said the Malaysian economy had registered a strong recovery in 2022.
Growth reached 8.7 per cent driven by pent-up domestic demand following the reopening of the economy in April 2022 and resilient export performanc,' it added.
"(The team) estimates the output gap to have closed in 2022. The recovery remains uneven with agriculture, mining, and particularly construction sectors remaining below pre-pandemic levels.
"With record spending on subsidies, headline inflation did not surge in tandem with global food and commodity prices but was still on the rise for most of 2022, reaching 3.3 per cent for the year. Inflation expectations remained well anchored," Leigh said.
The IMF projects Malaysia's economic growth to moderate to about 4.5 per cent in 2023, driven by external headwinds.
Inflation is projected to remain elevated at about 3.25 per cent, with likely persistence in core inflation, amid a positive output gap, and evidence of a build-up of demand-side pressures.
Downside risks are mostly external, including an abrupt global slowdown and larger than envisaged monetary policy tightening by major central banks.
The IMF said a gradual fiscal consolidation strategy, as appropriately set out in the 2023 Budget, is needed to rebuild buffers, put debt on a downward path, and reduce fiscal risks.
It should however be credibly underpinned by high-quality and durable revenue measures.
"Those measures would create space for critical investment needs and for targeted transfers to low-income households and help buttress market confidence in Malaysia's strong fundamentals.
"The authorities' commitment to fiscal reforms is welcome, including the upcoming tabling of the Fiscal Responsibility Act, the planned subsidy reform, and plans to develop a medium-term revenue strategy," Leigh said.