MONETARY POLICY

The basic thrust of monetary policy in 1999, was to create an environment to support economic recovery and facilitate structural reforms, while preserving price stability. The easing of monetary policy which began in August 1998 was continued into the year. Against an environment of a strengthening financial sector; benign inflationary environment; improving balance of payments position and a more favourable performance of the world economy including the regional economies, monetary policy remained accommodative throughout the year. With the large trade inflows, however, an important task of monetary policy in 1999 was to manage excess liquidity to avoid inflationary pressures. While interest rates were reduced to support economic recovery, efforts were taken to ensure a positive real return to depositors.

The conduct of monetary policy was balanced to ensure that monetary easing did not destabilise the financial system and will continue to promote long-term savings. The year saw the imposition of more stringent guidelines aimed at strengthening the banks. These included, among others, guidelines governing the extension of lending to their controlling shareholders and guidelines on future capitalisation of banking institutions by controlling shareholders.

FISCAL OPERATIONS AND POLICY

The 1999 Budget announced in October 1998 focused on the counter-cyclical role of fiscal policy to revitalise economic activities and strengthen the nation¡¯s resilience and competitiveness. Various measures were also introduced to further improve the balance of payments; strengthen the financial sector; promote the services and agriculture sectors; and improve governance in the public and private/business sectors as well as ensure social well-being. Overall, the budget strategy reinforced the fiscal stimulus adopted in 1998 in line with the plan to revilatise the economy as set out in the National Economic Recovery Plan. The fiscal stimulus in 1999 as reflected by a budget deficit of 3.4 percent of GNP contributed to the restoration of consumer and investor confidence, particularly in the second half of 1999.

While the government undertook a stimulative role, fiscal prudence and discipline continue to be maintained to contain the fiscal deficit at a manageable level so as not to jeopardise long-term growth. The level of expenditure, therefore, was managed with the consideration that current revenue should be sufficient to finance operating expenditure; fiscal deficit be contained at a sustainable level, and availability of domestic and external financing without crowding out the private/business sector.

Meanwhile, the better-than-expected revenue out-turn in 1999, reflecting the strong pick-up in the momentum of economic recovery as the year progressed, provided the government with increased flexibility in managing its fiscal policy. It enabled the government to expand its fiscal stimulus to reinvigorate the economy further through increased expenditure during the course of 1999, without further deteriorating the budgetary position of the government.

MEDIUM -TERM OUTLOOK

Growth in the Malaysian economy is expected to be sustained in year 2000, while the external sector will continue to strengthen. Against the more favourable external environment and strengthening domestic economy, the forecast for GDP growth for 2000 has been revised upwards to 5.8 percent, from the earlier estimate of 5 percent. Given the strong recovery in the regional economies and the generally favourable world economic outlook for 2000, export growth is expected to be sustained at high levels. The external sector is expected to remain strong although the current account will narrow in line with higher output growth.

Private/business sector investment is expected to recover in line with improving investment sentiments and policy measures aimed at projecting the private/business sector to lead as the engine of growth. Measures to promote consumption under the 2000 Budget together with strong export performance will increase the disposable income of Malaysians, thereby strengthening consumer sentiments and expenditure. Asstronger recovery in private/business sector expenditure took place, while public expenditures continued to support growth, real aggregate domestic demand is expected to strengthen further in 2000.

On the supply side, growth is expected to be more broad-based, led by the manufacturing and services sectors. The construction, agriculture and mining sectors are also expected to contribute to growth, although at relatively moderate rates. Prospects for the manufacturing sector remain favourable in 2000. Expected sustained external and domestic demand will support further expansion of value-added by 10 percent.

With the improved outlook for the economy, value-added in the services sector is expected to increase by 5.4 percent. Growth will emanate from the intermediate and final services sub-sectors. In particular, demand for transport, storage and communications services is expected to pick up strongly, reflecting mainly a strong increase in external trade. Activity in the finance sub-sector is also expected to increase, reflecting the projected higher loan growth and the favourable outlook in the equity market. Meanwhile, the return of consumer confidence and the expected increase in tourist arrivals from 8 million in 1999 to 8.5 million in 2000, are expected to contribute to higher growth in the wholesale, retail trade, restaurants and hotels sub-sector.

MALAYSIA: OVERALL ECONOMIC PERFORMANCE