Malaysia: 2023 Article IV Consultation-Press Release and Staff Report

This 2023 Article IV Consultation discusses that Malaysia registered a strong economic recovery in 2022, backed by its well-diversified economy, sound policy frameworks, and commodity exporter status. While monetary policy started a gradual post-pandemic normalization, record costly spending on fuel subsidies broadly kept inflationary pressures suppressed in 2022. Meanwhile, the new national unity government has signaled its commitment to the reform priorities outlined in the Twelfth Malaysia Plan and the 2023 Budget to propel the economy toward net-zero greenhouse gas emissions and high-income status. In view of the positive output gap and ongoing inflationary pressures, near-term policies should focus on accelerating the pace of policy tightening, while managing downside risks and trade-offs. The financial sector remains healthy but warrants stepped-up monitoring, especially of highly leveraged entities and non-bank financial institutions, given increased risks from rising interest rates, tighter financial conditions, exchange rate depreciation, and weaker expected growth. Expanding the macroprudential toolkit should support these efforts.