Malaysia’s Fiscal Policy Supports Strategy for Economic Recovery and Growth

Malaysia’s Fiscal Policy Supports Strategy for Economic Recovery and Growth

The Fiscal Policy Committee (FPC) chaired by YAB Prime Minister, Tan Sri Dato’ Haji Muhyiddin bin Haji Mohd Yassin convened on 27 May 2021 to review the country’s latest economic performance and projection; the current and medium-term Federal Government fiscal position; as well as public finance reform initiatives. The Committee members include the Minister of Finance, Minister in the Prime Minister’s Department (Economy), the Chief Secretary to the Government, the Secretary General of the Treasury, the Director General of the Economic Planning Unit, Prime Minister’s Department and the Governor of Bank Negara Malaysia.

In general, global economy and trade are expected to improve in 2021 in line with the recovery in advanced economies. Growth is expected to be supported by additional fiscal measures of advanced nations, particularly the US, as well as accelerated delivery of vaccines and immunisation programmes all over the world. The Business Confidence Index (BCI) for most major economies have also improved, reflecting increased confidence towards economic recovery and a robust business performance in the near term.

The external spillover effect from the recovery in global demand, including the continued increase in trade activities have contributed to Malaysia’s economic recovery. This is evident through the GDP performance for the first quarter of 2021 (Q1 2021) which contracted at a smaller rate of 0.5% on a year-on-year basis compared to the 3.4% contraction in the fourth quarter of 2020. This was also contributed by therecovery in GDP growth in March 2021, which increased 6% year-on-year, the highest in the past 12 months.

Notwithstanding, the Government remains vigilant on the downside risks due to uncertainties in both the domestic and global economic environment that could affect the country's economic growth. These include the prolonged outbreak of COVID-19 due to new variants which have spread globally; COVID-19 vaccines’ supply disruption which may hamper efforts to achieve herd immunity; global commodity price shocks as well as volatility in the global financial markets.

Domestically, the implementation of the National COVID-19 Immunisation Program, more targeted COVID-19 containment measures, as well as economic stimulus packages and Budget 2021 measures that are still on-going are expected to support the economic growth for this year. Despite risk tilted to the downside due to implementation of the Movement Control Order 3.0 (MCO 3.0), GDP for 2021 is expected to grow between 6.0% - 7.5%, in line with projections by the IMF (6.5%), World Bank (6.0%) and the Asian Development Bank (6.0%). The MCO 3.0 impact to growth is estimated to be less than one percentage point, premised on a more balanced strategy that restricts contact-intensive sectors, while allowing sectors which contribute to more than 90% of GDP to operate. In addition, Malaysia's economic performance will also be supported by the growth of our major trading partners, such as Singapore, China and the US which expanded by 0.2%, 18.3% and 0.4% respectively, in Q1 2021.

In terms of Malaysia’s fiscal position, the Government has revised the deficit target from 5.4% to 6% of GDP for 2021, having factored in continuing measures from 2020 economic stimulus packages, as well as the PERMAI and PEMERKASA packages launched in the first quarter of this year. Consequently, the overall Federal Government debt is expected to remain at approximately 62% by end-2021, while statutory debt (which comprises of MGS, MGII and MITB) is estimated to increase from 58% in 2020, to 58.5% by end-2021. This is still below the statutory debt limit of 60%, which was approved by Parliament in August 2020. The country's debt profile remains favourable with more than 90% of Government debt denominated in Ringgit, supported by ample domestic liquidity and long maturity issuances which supports funding flexibility. The Committee also discussed reform initiatives, including the Fiscal Responsibility Act framework as one of the measures to enhance management, governance and accountability in public finances.

The Government's current priority is to protect lives from the threat of COVID19, while also ensuring the country’s economic recovery agenda is on track, underscored by the principles of prudent financial management. Enhanced efforts towards fiscal consolidation measures will be implemented in phases in the medium to longer-term, when our economy is firmly on its recovery and growth trajectory. This strategy will ensure that we balance short-term fiscal requirements with long-term fiscal and economic sustainability by, among others, spurring high-impact quality investments and diversifying our revenue base. The Government is confident its fiscal strategy will ensure that economic growth prospects remain strong in the medium to longer term to fulfil the country's development agenda and achieve our Shared Prosperity Vision. 

Ministry of Finance Malaysia
27 May 2021