MACRO ECONOMIC POLICY
The Ministry of Finance Incorporated building in Putrajaya. The Ministry ensures that financial and budgetary efforts help achieve steady economic growth in line with national development policies.
Malaysia is an open economy that is strongly dependent on trade and therefore heavily influenced by global economic forces in its performance. To manage the economy, the government uses macroeconomic policy to ensure high employment, low inflation, sustainable economic growth rates and a healthy balance of payments. The key tools used to achieve these goals are fiscal policy and monetary policy.
Since the 1970s, policy thrusts have emphasized improvement of economic resilience, enhancement of competitiveness and the promotion of foreign private investment while keeping in mind the attainment of socioeconomic distributional objectives. New sources of growth such as high value-added and knowledge-based manufacturing and services have been developed since the 1990s.
Fiscal prudence and responsibility are the cornerstone of the nation’s fiscal policy. This strong fiscal discipline has ensured that the fiscal deficit and debt levels remain sustainable and easily financed. With the Privatization Policy of 1983, the relative size of the public sector shrank. Nevertheless, fiscal deficits were common, mainly due to the government’s commitments toward development and measures to counter economic slowdowns.
Government expenditure is primarily financed through taxation and borrowing. Direct—as opposed to indirect—taxation has traditionally been the major source. Revenue from import and export duties continues to decline in line with trade liberalization. Monetary policy complements fiscal policy in maintaining stable prices, stable exchange rates and a healthy balance of payments position. The trend towards domestic, as opposed to foreign, borrowing in the form of government bonds and private debt securities grew as a result of post-liberalization policies such as the centralizing of the regulation of financial markets in 1999.
Overall, Malaysia’s exchange rate has been largely determined by market forces, till the Asian financial crisis of 1997–98 when a fixed exchange rate regime with selective capital controls was adopted, and the Ringgit was de-internationalized. However, in July 2005, the Ringgit was de-pegged from the US dollar and now trades within a managed float system.
Malaysia’s government has also been actively using investment incentives to draw foreign direct investment as the economy industrializes. These have ranged from the introduction of Pioneer Status in the 1950s, when the focus was on promoting new industries and industrialization, to the incentives under the Multimedia Super Corridor in the 1990s which were used to draw more high-technology investments. At the same time, domestic investments have begun to grow and the role of the private sector as a source of domestic investment is expanding. The widening of the range of capital market assets available will also draw more savings from the private sector.