Malaysia's central bank calls for reforms with economy on firmer footing

KUALA LUMPUR — Malaysia's central bank on Wednesday (March 20) called for an acceleration of structural reforms to ensure long-term sustainable economic strength and support for the ringgit currency.

Favourable economic conditions expected in 2024, including moderate inflation and a projected pick-up in trade activity, provided space for the government to carry out much-needed changes such as subsidy rationalisation, Bank Negara Malaysia said in documents released along with its annual report.

Malaysia's government plans to shift away from blanket subsidies to a targeted system that mainly aids low-income groups but has not finalised when it will introduce the measures, which could see a rise in fuel costs.

"With the positive macroeconomic prospects, this presents a window of opportunity to undertake... key structural reforms to ensure growth in the Malaysian economy becomes stronger and more sustained," BNM Governor Abdul Rasheed Ghaffour told reporters after the report's release on Wednesday.

Any move to targeted subsidies, however, would need to be carefully calibrated and assessed to minimise its impact on growth and inflation, Abdul Rasheed said, noting that previous subsidy policies had not required any monetary policy intervention from the central bank.

BNM maintained its 2024 growth forecast at between four per cent and five per cent, the report showed. Exports were projected to rise five per cent, rebounding after an eight per cent contraction last year.

New taxes and changes to utility tariffs aimed at boosting government revenue were expected to have a marginal impact on inflation, BNM said.

Headline inflation was forecast at between two per cent to 3.5 per cent this year, compared to 2.5 per cent in 2023, though upside risks remained due to increased prices from subsidy and price control adjustments, and higher input costs stemming from Malaysia's weakened currency.

The ringgit has gained since falling to a 26-year low last month, but is still down about 3.2 per cent to the US dollar so far this year.

Abdul Rasheed, who contends that the currency is undervalued, said the central bank has seen positive results from steps taken to increase inflows, including encouraging companies to repatriate and convert their foreign investment incomes.

"We have also seen the positive response from the forex traders and most of them agree the ringgit is undervalued and they appear more willing to hold onto their positions for longer," he said, adding that expected rate cuts by the US Federal Reserve this year should further ease pressure on the currency.

Longer term support for the ringgit would come from reforms tackling longstanding structural issues in the labour market, as well as increased investments in decarbonisation and high-value industries, he said.

ALSO READ: Malaysia central bank says Google misquoted exchange rate a second time