November 1994 IMF Staff Country Report No. 94/4 · 2019. 12. 11. · 21. Operations of tibe Employees' Provident Fund, 1989-93 39 22. Outstanding Federal Government Debt, 1989-93

1994 International Monetary Fund

November 1994

IMF Staff Country Report No. 94/4

Malaysia—Recent Economic Developments

This report on recent economic developments in Malaysiawas prepared by a staff team of the International MonetaryFund as background documentation for the periodicconsultation with this member country. In releasing thisdocument for public use, confidential material may havebeen removed at the request of the member.

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INTERNATIONAL MONETARY FUND

MALAYSIA

Recent Ecflt^Tftic Developments

Prepared by a staff team comprisingA. M. Husain, T. Rumbaugh, and R. van Elkan (SEA),

and A. Kovanen (MAE)

Approved by the Southeast Asia and Pacific Department

September 2, 1994

Contents Page

List of Abbreviations iv

Basic Data v

I. Historical Perspective 1

u. Real Sector Developments 3

1. Aggregate demand, production, and prices 32. Investment and saving 63. Labor market 7

ffl. Recent Fiscal Developments 8

1. Overview of budgetary trends 82. Expenditure trends: Reallocating to priority sectors 83. Revenue developments and budgetaryfinancing 11

a. Revenue trends: Tax reform and improvements in administration 11b. Budgetaryfinancing 12

4. Consolidated public sector 12a. General government 12b. Public enterprises 14c. Privatization 14

IV. Monetary and Financial Sector Developments IS

1. Overview 152. Monetary policy and developments IS


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Contents Page

3. Financial intermediation and the capital market 17a. Interest rates and lending 17b. Stock market developments 18c. Development of the financial system 19

V. External Developments 19

1. Overview 192. Current account 213. Capital flows and international reserves 224. External debt and debt service 225. Exchange rate developments 236. Trade policies 23

Text Tables

1. Economic Trends, 1977-93 42. Summary of Federal Government Budgetary Developments, 1985-94 93. Federal Government Functional Expenditure Shares, 1985-94 104. Components of Revenue, 1985-94 135. Banking Survey, 1990-94 166. Balance of Payments, 1989-93 20

Appendix Tables

7. Expenditure on Gross Domestic Product in 1978 Prices, 1989-93 258. Expenditure on Gross Domestic Product in Current Prices, 1989-93 269. Gross Domestic Product by Sector of Origin in 1978 Prices, 1989-93 27

10. Production of Major Primary Products, 1989-93 2811. Industrial Production Index, 1989-93 2912. Consumer Price Index, 1989-94 3013. Producer Price Index, 1989-94 3114. Composition of Investment and Saving, 1989-93 3215. Total Proposed Capital Investment in Approved Manufacturing Projects,

by Type of Ownership, 1989-93 3316. Labor Market Developments, 1989-93 3417. Federal Budgetary Developments, 1989-94 3518. Economic Classification of Federal Government Expenditure

and Net Lending, 1989-94 3619. Functional Classification of Federal Government Expenditure

and Net Lending, 1989-94 3720. Federal Government Revenue and Grants, 1989-94 3821. Operations of tibe Employees' Provident Fund, 1989-93 3922. Outstanding Federal Government Debt, 1989-93 4023. Consolidated Public Sector, 1989-94 4124. Federal Government Operations, 1989-94 42


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Contents Page

25. Operations of Statutory Bodies, 1989-94 4326. Operations of State Governments, 1989-94 4427. Operations of Local Governments, 1989-94 4528. General Government Operations, 1989-94 4629. Operations of Nonfinancial Public Enterprises, 1989-94 4730. Reserve Money by Components, 1989-94 4831. Assets and Liabilities of Bank Negara, 1990-94 4932. Money Market Indicators, 1991-94 5033. Central Bank Liquidity Operations, 1990-94 5134. Monetary Authorities9 Account, 1989-94 5235. Assets and Liabilities of Commercial Banks, 1988-94 5336. Consolidated Statement of Assets and Liabilities of Nonmonetary

Banking Institutions, 1989-94 5437. Interest Rates of Commercial Banks and Finance Companies, 1987-94 5538. Direction of Commercial Bank Lending, 1989-93 5639. Developments in the Kuala Lumpur Stock Exchange, 1989-93 5740. Funds Raised in the Capital Market, 1989-93 5841. Trade Indices, 1989-93 5942. Composition of Manufactured Exports, 1989-93 6043. Merchandise Exports, 1989-93 6144. Gross Imports, 1989-93 6245. Direction of Trade, 1989-93 6346. Services Account, 1989-93 6447. International Reserves, 1989-94 6548. External Debt and Debt Service, 1989-93 66

Annexes

I. Determinants of Saving 67H. Guidelines and Incentives for Investment in Malaysia 77

Charts

1. Selected Macroeconomic Indicators, 1986-93 4a2. Investment and Saving, 1986-93 6a3. Labor Market Developments, 1986-93 8a4. Budgetary Trends, 1985-93 8b5. Expenditure Developments, 1988-93 8c6. Consolidated Public Sector Deficit, 1985-93 12a7. Monetary Developments, 1989-94 16a8. Stock Market Developments, 1990-94 18a9. Comparative Stock Market Indicators, 1990-93 18b

10. External Developments, 1985-93 20a11. Net Private Capital Hows, 1989-93 20b12. Exchange Rate Indices, 1986-94 24a1-1. Gross National Saving, 1970-92 68a1-2. Public and Private Saving, 1970-92 68b1-3. Private Saving, 1970-92 68c


- iv-

Malavsia

List of Abbreviations

AFTA

APC

APS

ASEAN

BLR

EPF

FDI

FTZ

GIC

HRDF

ICA

KLSE

MAS

MGS

NDP

NEP

NFPEs

NIEs

PMP

SRR

TMB

TNB

ASEAN Free Trade Area

Average propensity to consume

Average propensity to save

Association of South East Asian Nations

Base Lending Rate

Employees Provident Fund

Foreign direct investment

Free trade zone

Government Investment Certificates

Human Resource Development Fund

Industrial Coordination Act

Kuala Lumpur Stock Exchange

Malaysian Airlines

Malaysian Government Securities

National Development Policy

New Economic Policy

Nonfinancial public enterprises

Newly industrializing economies

Privatization Master Plan

Statutory Reserve Requirement

Telekom Malaysia Berhad

Tenaga Nasional Berhad


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\Âfllavsia* Basic Pata

Area:Population (1993)/growth rate:GNP/GNP per capita (1993):

329,758 square kilometers19.0 million/2.4 percentUS$61.3 bUlion/US$3,218

Sources: Data provided by the Malaysian authorities; and staff estimates and projections.

Prel.1989 1990 1991 1992 1993

Growth and inflation (percent chance)Real GDP 9.2 9.7 8.7 7.8 8.5RealGNP 9.1 11.2 8.2 7.2 8.8Real domestic demand 15.2 12.9 18.0 2.5 10.7

Consumption 12.6 10.1 11.8 2.8 7.7Fixed [investment 31.9 22.0 21.2 8.1 10.7

CPI (period average) 2.8 3.1 4.4 4.7 3.6

Unemployment rate (in percent) 6.7 5.1 4.3 3.7 3.0

Saving and investment (percent of GNP)Gross national savings 31.6 30.7 29.5 32.6 33.1Gross domestic investment 30.8 32.9 38.8 35.6 37.1

Terms of trade (percent change) -0.9 -1.4 -0.5 5.7 2.0

Federal government (percent of GNP)Revenue 25.1 26.2 27.9 27.9 26.6Expenditure 29.6 29.3 30.5 28.9 26.4Overall balance -4.5 -3.2 -2.7 -1.0 0.2Bankfinancing 0.1 -0.5 -1.7 -1.3 0.7

Public sector balance (percent of GNP) -3.4 -2.2 -0.7 -0.6 -0.7

Money and credit (end year, percent change)Total domestic credit 18.0 20.6 18.6 9.9 12.2Total liquidity (M3) 20.1 19.6 13.7 18.0 22.8

Interest rate (interbank, percent) 4.5 6.5 7.6 8.1 7.2

Balance of payments (in US$ bn.)Exports 24.6 28.6 33.5 39.6 45.9Imports 20.3 26.0 33.0 36.2 42.5Current account 0.3 -0.9 -4.2 -1.6 -2.5

(In percent of GNP) 0.7 -2.2 -9.3 -3.0 -4.0Capital account 1.3 1.8 5.6 8.1 9.6

Foreign direct investment 1.7 2.3 4.0 4.5 4.3Short-term 0.6 0.5 1.9 4.7 4.9Official -0.9 -1.0 -0.2 -1.1 0.4Errors and omissions -0.3 1.1 -0.3 0.5 3.1Overall balance 1.3 2.0 1.2 6.9 10.2

International reservesGross official reserves (end year, US$ bn.) 8.1 10.0 11.2 18.1 28.3(In months of imports of goods and

services) 4.3 4.1 3.7 5.5 7.5

External debt (endyear, US$ bn.) 17.1 17.9 20.1 22.9 27.3(Percent of GNP)

Of which: Medium- and long-term 15.6 15.4 16.1 16.4 19.1(Percent of GNP) 43.5 37.5 35.4 30.5 32.8

Debt service (percent of exports ofgoods and services) 10.4 8.5 7.4 7.0 7.1

Exchange rate (RM/$; end period) 2.70 2.70 2.72 2.61 2.70Nominal effective exchange rate

(annual average, percent change) -0.4 -2.1 -2.7 4.9 -1.2Real effective exchange rate (annual

average, percent change) -1.8 -4.0 -2.9 6.3 -1.0




I. Historical Perspective

Over the past three decades, the Malaysian economy has grown on average by 6 3/4 percenta year, with an annual per capita GDP growth of 4 percent. This performance places Malaysiasquarely in the group of fast-growing Southeast Asian economies and, therefore, among the topperforming economies in the world. Rapid growth has coincided with a major shift in the structureof the economy from one highly dependent on a small group of primary commodities to one wheremanufacturing is the largest sector. In addition, considerable diversification in both the range ofprimary commodities and manufactured products has occurred over this period. Growth has beensupported by a rise in the investment rate from an average of 14 percent of GDP in the 1960s to33 percent in 1990. This rise was facilitated by the growing openness of Malaysia's economy,since much of the investment came from abroad and was concentrated in export-oriented activities.

At independence in 1957,I/ Malaysia's economy was heavily resource-dependent, withagriculture and mining accounting for about 38 percent and 6 percent of GDP, respectively, whilemanufacturing contributed less than 10 percent to total output. Furthermore, two commodities-rubber and tin-together accounted for over 70 percent of »ports. Within agriculture, two distinctactivities coexisted: export-oriented, foreign-owned plantation farming; and low-productivity,subsistence or smallholder farming which was largely associated with the ethnic Malay population.

In order to broaden the economic base, an import-substitution policy was adopted,supported by the introduction in 1958 of the Pioneer Industries Ordinance, which grantedexemptions from corporate income tax for periods up to eight years to firms in approved industries.This legislation fostered the development and expansion of the food, rubber products, textiles, andcar assembly industries, and contributed to an increase in manufacturing's share in GDP to14 percent by 1970. A decline in rubber prices and the emergence of synthetic alternativesprovided the impetus for a diversification of the agricultural base. Attesting to this diversification,palm oil emerged as a major agricultural crop and a significant source of export revenue.

Reflecting the success of the industrialization strategy, real output grew by 6 1/2 percent ayear during the 1960s. Hie emergence of new agricultural commodities was, however, insufficientto offset the reduction in rubber production. As a result, agriculture's role in the economy declinedover the decade. 2/ In addition, reflecting the bias toward import substitution policies during the1960s, the share of imports in GDP declined from about 45 percent in the early 1960s to 37 percentby 1969.

In 1970, Malaysia embarked on a second stage in its development strategy with theintroduction of the 20-year New Economic Policy (NEP). The main objectives of the NEP werepoverty eradication and wealth redistribution. Economic growth through industrialization wasviewed as essential to the success of the Plan since, givra the distributional objectives of the NEP,only rapid growth could ensure that no group would be left worse off. In pursuit of the NEP

I/ Malaya achieved independence in 1957. In 1963, the Federation of Malaysia was formedbetween Malaya, North Borneo (later renamed Sabah), Sarawak, and Singapore. Singapore left theFederation in 1965.

2/ Nevertheless, in 1970, rubber remained the single largest export earner, contributing one thirdof total exports.


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objectives, the Government greatly increased its involvement in the industrial sector through directparticipation in industrial projects and the regulation of private sector activity. During the 1970s,the number of public enterprises increased by 50 percent, financed by a large buildup ingovernment-guaranteed foreign debt. The 1975 Industrial Coordination Act (ICA) established asystem of licensing that enabled the Government to control what goods were produced, as well asthe share of employment and equity ownership reserved for Malays. The regulatory environmentassociated with the ICA was met by a sharp drop in private investment, from 19 percent of GNP in1974 to 13 3/4 percent in 1976.

In addition, under this second phase of Malaysia*s development, manufacturing becameincreasingly export oriented. This reflected, in part, the degree to which the size of the domesticmarket had constrained manufacturing production under the import-substitution policies of the1960s. Under the Investment Incentives Act introduced in 1968, tax relief was offered to firms thatexported more than 20 percent of their production, and export promotion expenses were eligible fora double tax deduction. In addition, free trade zones (FTZs) were established, which permittedfirms to import their components free of duty and export their products exclusive of sales andexcise taxes. As a result, foreign direct investment (FDI) expanded rapidly, reaching 19 percent ofGDP in 1975, most of which was directed to the textile and apparel, and electrical and electronicsindustries established in the FTZs. During this period, nearly 15 percent of new manufacturingjobs were created in FTZs and, by 1980, 70 percent of manufactured exports were produced inthese zones. However, tariff concessions granted to firms in the FTZs tended to increase theimport content of the goods produced. In some industries, the propensity to import intermediateand capital goods exceeded 90 percent.

Reflecting the goal of export-led industrialization, manufacturing increased its share in GDPfrom 14 percent in 1970 to 20 percent in 1980 and exports grew from 46 percent of GDP to58 pa-cent over the same period. As a result, the share of agriculture declined from 32 percent ofGDP to 23 percent of GDP during the 1970s. Growth in manufacturing, which averaged12 perçait a year during the 1970s induced a shift in employment from the rural sector and helpedto reduce the rate of unemployment from 7 1/2 percent in 1970 to 5 1/4 percent in 1980. Thediscovery in the early 1970s of extensive petroleum deposits more than offset the effects on miningactivity of the depletion of tin reserves. As a consequence, mining increased its share in GDP from7 percent in 1970 to 10 percent in 1980. Petroleum developed into a major export commodityduring the decade, rising from less than 5 percent of total export earnings in 1970 to nearly20 percent of exports in 1980. Overall, output grew by 8 percent per annum during the 1970s.

The objective of rapid growth through export-driven industrialization was set back by theworld recession of the early 1980s. Indeed, the global recession of 1981-82 had a severe, albeitdelayed, effect on the Malaysian economy. Manufacturing, which was heavily concentrated intotwo export-oriented industries-electronics and textiles-was hard-hit by the decline in externaldemand. Relative to exports, debt service obligations-to which the surge in public enterprisespending and government-guaranteed debt under the NEP had contributed-increased significantly.Exacerbating the effects of weak external demand was a sharp deterioration in the terms of trade in1985-86 (of about 24 percent)-owing largely to the drop in oil prices-and a collapse in privateinvestment. As a result, output contracted by 1 percent in 1985-the only year since independencein which GDP declined-after rising by 6 3/4 percent per year during 1980-84.


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In order to restore economic growth, the Government reoriented its policies and introduceda set of measures designed to promote private sector activity. The package, introduced between1983 and 1986, included: (i) improvements in the investment climate by liberalizing equity andemployment requirements and by introducing more generous corporate tax relief, particularly forexport-oriented firms, and (ii) a reduction in the public sector's role in industry through a cut in theshare of development expenditure equivalent to 10 percent of GNP between 1983 and 1990, and theinitiation of a privatization program.

Reflecting these measures, as well as an improvement in the external environment, theeconomy began a remarkable private investment-led recovery in 1987. Over the next few years,FDI inflows turned up sharply and the value of approved projects more than doubled between 1987and 1988, accelerating further to reach a record level in 1991. Investment was particularly strongfrom Japan and the Asian newly industrialized economies (NIEs), which reflected, in pan, therelocation of their production bases to lower cost countries. The net result was manufacturinggrowth that averaged 15 percent per annum over the period 1986-90 and annual GDP growth ofabout 8.3 percent during the same period.

Encouraged by the economy's performance under the liberal policies set in place during thesecond half of the 1980s, the Government introduced its ten-year National Development Policy(NDP) in 1991. The NDP emphasized growth through the promotion of private sector activity andhuman resource development. While the social objectives of poverty elimination and wealthredistribution were maintained, these were to be achieved through greater emphasis on educationand equality of opportunity.

Rapid growth since 1987, which was concentrated largely in the export-orientedmanufacturing sector, contributed to a sharp decline in the unemployment rate, from 8.2 percent in1987 to 3.7 percent in 1992. As a result, shortages of both skilled and unskilled labor emerged.Increasingly tight labor market conditions contributed to rising labor costs, which threaten to erodeMalaysia's external competitiveness and to reduce the flow of foreign investment. While theeconomy has begun to shift away from (labor-intensive) assembly-type production and to implementlabor-saving technologies in a number of sectors, thereby adding to potential output, demandpressures have intensified in recent years owing, in pan, to a surge in short-term capital inflows.

u. Real Sector Developments

1. Aggregate demand, production, and prices

Real output growth strengthened to 8 1/2 percent in 1993 from 7 3/4 percent in the previousyear. In contrast to 1992, however, growth in output was driven exclusively by domestic demand,with all components recording stronger growth in 1993 than in the previous year (Chart 1, Table 1,and Appendix Tables 7 and 8). Consumption spending grew by 7 3/4 percent in 1993, up from2 3/4 percent in 1992. Fuelled by higher real wages and the positive wealth effect of higher equityprices, real private consumption rose by 7 1/2 percent in 1993, compared to 2 1/2 percent in 1992.Public consumption increased by 8 percent, reflecting higher spending for defense and essentialservices and supplies, and the payment of salary bonuses to public sector employees.


Table 1. Malaysia: Economic Trends, 1977-93

1977-80 1981-84 1985-88 1989 1990 1991 1992Prel.1993

1; (Annual percentage change)

Real GDPReal domestic demandConsumer prices I/Terms of trade

Gross national savingPrivatePublic

Gross domestic investmentPrivate, fixedPublic, fixedChange in stocks

Current account balanceTotal external debtFederal government debtFederal government fiscal balanceConsolidated public sector balanceDebt service ¿/International reserves 41

7.911.45.07.7

30.4.... . •

28.115.910.12.12.3

22. U/48.5-6.3

2Ï6 U6.4

6.86.75.7-0.6

26.521.84.7

37.019.316.90.8

-10.547.971.0

-12.5

10Ï44.1

3.53.41.1

-5.1

30.421.68.8

27.515.911.8-0.22.9

72.1103.5

-7.1-5.317.16.2

9.215.22.8-0.9

(Percent of (

31.621.010.630.819.611.5-0.30.7

47.893.0-4.5-3.410.44.3

9.712.93.1

-1.4

3NP)

30.717.812.932.921.912.0-1.0-2.243.6-85.5-3.2-2.28.54.1

8.718.04.4-0.5

29.516.213.338.825.411.91.4

-9.344.280.1-2.7-0.77.43.7

7.82.54.75.7

32.619.613.035.624.311.94.6-3.042.769.2-1.0-0.67.05.5

8.510.73.62.0

33.120.013.137.124.112.01.0

•4.046.760.70.2-0.77.17.5

Sources: Data provided by the Malaysian authorities; and staff estimates.

i/ Period average.21 1979-80.2/ In percent of exports of goods and services.4/ In months of imports of goods and services.


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MALAYSIA

SELECTED MACROECONOMIC INDICATORS, 1986-93

Source: Data profided by the Malajrian authorities




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Total investment expanded by 16 percent in 1993, up sharply from 2 percent in 1992.Private fixed investment increased by 10 percent in real terms, compared to 6 1/2 percent in 1992,reflecting a decline in real interest rates, the implementation of investment projects approved duringthe peak period 1990-91, and the announcement of a two-step reduction in the corporate tax ratebeginning in 1994. Manufacturing continued to receive the largest share of private investmentspending (26 percent), followed by the service and construction sectors, with 21 and 16 percent,respectively. Reflecting a greater emphasis on infrastructure upgrading, public investment increasedby 12 1/4 percent in 1993, compared to 11 percent in 1992. Also contributing to the growth ininvestment was a buildup in inventories, following a accumulation in the previous year.

In line with the acceleration in private spending, real import demand grew by 14 percent in1993, following a decline of 1 percent hi 1992. Reflecting the strength of investment and outputgrowth, imports of intermediate and capital goods increased more rapidly than imports ofconsumption goods. Real exports grew by 11 1/4 percent in 1993 (up from S percent in 1992),owing largely to the penetration of new markets for manufacturing goods in the Asia-Pacific region.Overall, therefore, while net exports were the primary source of growth in 1992, their contributionto growth in 1993 was negative.

On the supply side, the diversification of output continued in 1993, with the manufacturing,construction, and service sectors growing more rapidly than the economy as a whole (AppendixTable 9). Despite the rapid increase in manufacturing investment, capacity utilization (inmanufacturing) rose to nearly 85 percent by end-1993, a historically high level. In addition, themanufacturing sector absorbed 24 percent of the labor force in 1993, up from 15 percent in 1986.Agriculture continued to expand in 1993, albeit at a moderate pace, while activity in the miningsector turned around to register a small decline (Appendix Table 10).

Manufacturing, which accounted for 29 percent of GDP in 1992, was the leading growthsector in 1993, expanding by 12 3/4 percent compared to 10 3/4 percent in the previous year(Appendix Table 11). Despite the sluggish economic performance of industrial countries, growth inexport-oriented industries-electronics, wood products, textiles, and processed edible oils-rose to14 1/4 percent from 11 1/4 percent in 1992. This development reflected, in part, the strengtheningof demand in the United States' computer market and the relocation of production facilities fromJapan and Taiwan Province of China to Malaysia. Fuelled by the acceleration in domestic demand,domestic market-oriented manufacturing grew by 11 percent in 1993, compared to 9 1/4 percent in1992. Within domestic-oriented manufacturing, the 58 percent growth rate recorded by thefabricated metals sector was particularly noteworthy.

The growth performance of the construction and service sectors, at 11 1/2 percent and9 percent, respectively, in 1993, was largely unchanged from the previous year. Residentialconstruction was boosted by the rise in real incomes and the wealth effect of higher equity prices.Additional impetus to construction activity was provided by several major ongoing infrastructureprojects, including a new international airport and a light rail transit system. Service sector growthwas dominated by the performance of the financial and business subsector, which expanded by12 percent during 1993. A major factor was the surge in activity on the Kuala Lumpur StockExchange (KLSE).


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Despite the acceleration in domestic demand, consumer price inflation moderated to3 1/2 percent in 1993 from 4 3/4 percent in 1992 (Appendix Table 12), although it picked up at theend of the year. The moderation reflected a number of factors, including low world inflation andthe steady value of the ringgit. In addition, the introduction in January 1993 of administrativemeasures—including the reduction or removal of import duties on more than 600 intermediate andfinal goods—also helped to limit increases in domestic prices, especially for food. I/

Producer prices continued to increase more slowly than consumer prices in 1993.Reflecting growing wage pressure, local production costs were the main factor behind the1 1/2 percent increase in the PPI (Appendix Table 13). However, in the first quarter of 1994,supply constraints and seasonal factors led to a sharp rise in the price of food at the producer level,which contributed to an acceleration in the 12-month PPI to 2 percent.

2. Investment and saving

The current account deficit widened to 4 percent of GNP in 1993, a one percentage pointincrease relative to the previous year. The deterioration in ate external balance reflected anincrease in investment equivalent to 1 1/2 percent of GNP, which more than offset the increase innational saving of about 1/2 percent of GNP (Appendix Table 14). The increase in the nationalsaving was attributed to the rise in private saving to 20 percent of GNP, 1/2 percentage point higherthan in 1992 (Chart 2).

Gross fixed capital formation stabilized at just above 36 percent of GNP in 1993, with theprivate and public components remaining relatively constant at 24 and 12 percent, respectively.The relative stability of the private fixed investment ratio reflected three distinct forces. First, adiversion of foreign investment to lower cost countries in the region contributed to a reduction inFDI of 1 3/4 percent in nominal terms in 1993. Second, locally sourced investment reboundedstrongly in 1993, following the introduction of the Domestic Investment Initiative which promotesinvestments by local businesses. This resurgence in locally sourced investment more than offset thedecline in FDI. 2/ Third and finally, however, the deflator for fixed investment rose less rapidlythan the GNP deflator in 1993. Other things equal, this relative price effect tended to reduce theshare of private fixed capital formation in nominal GNP. I/

I/ The price of food, which has a weight of about one third in the CPI, rose by only2 1/4 percent in 1993, compared to 6 1/2 percent in the previous year. More recently, however,food prices have shown a tendency to accelerate, reflecting negative supply shocks and thecoincidence of several major religious festivals. As a result, inflation rose to 4 1/2 percent in thefirst quarter of 1994 from 3 1/4 percent in the previous quarter. In response to these unfavorabledevelopments, the authorities introduced in early 1994 a further round of tariff and excise taxreductions affecting some 500 commodities.

2/ Although private fixed investment grew rapidly in 1993, a SO percent decline in manufacturinginvestment approvals (especially for projects with foreign participation) may signal less rapidinvestment growth in the future (Appendix Table 15).

y The differential behavior of the investment and GNP deflators was an important factorcontributing to the increase in nominal stockbuilding relative to nominal GNP in 1993.


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CHART 2

MALAYSIA

INVESTMENT AND SAVING, 1986-93

Source: Data provided by the Malaysian authorities.




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3. Labor market

The continued expansion in economic activity led to a further tightening of labor marketconditions in 1993. Employment growth of 3 1/2 percent contributed to a reduction in theunemployment rate, from 3 3/4 percent in 1992 to 3 percent, despite a 2 3/4 percent increase in thesize of the labor force (Appendix Table 16). Employment growth was strongest in themanufacturing and construction sectors (8 1/2 percent), whereas the primary sector continued toshed its workforce. Manufacturing alone accounted for more than half of total new employmentand, in 1992, surpassed agriculture as the leading employer.

Labor shortages were evident throughout the economy in 1993 but were most pronounced inthe manufacturing and service sectors, where skilled labor was scarce, and in the plantation andconstruction sectors, where unskilled workers were in short supply. To increase the availability ofskilled labor, the Government set up in January 1993 the Human Resource Development Fund(HRDF) to encourage greater private sector participation in skills training. The HRDF received astart-up capital of RM 49.8 million from the Government (payable in three equal annualinstallments beginning in 1993) and is financed by a 1 percent levy on wages, payable by companieswith 50 or more employees. The importation of foreign workers to alleviate the shortage ofunskilled labor, however, has been temporarily frozen since January 1994, pending resolution of theproblem of illegal immigrants.

For the economy as a whole, average labor productivity, measured as real GDP per worker,increased by 5 percent during 1993, following a similar increase in the previous year. Agriculturecontinued to achieve the most rapid gains in productivity during the year (9 1/2 percent), followedby the service sector (5 percent). Labor productivity in manufacturing rose by 3 3/4 percent in1993, following a small decline in the previous year. 2/

Reflecting the tightness in labor market conditions, real wage costs accelerated during 1993(Chart 3). Although economy-wide wage data are not available, an indication of the rising cost ofprivate-sector employment can be obtained from data on new collective agreements amongunionized workers. I/ Under private sector collective agreements concluded in 1993, nominalwages rose<by 12 percent, 2.1 up from 9 percent in the previous year. These increases, whichexceeded improvements in (nominal) labor productivity, contributed to a sharp rise in unit laborcosts and to an erosion of international competitiveness. As in 1992, wage increases were highestin manufacturing, followed by the service sector. Manufacturing wages increased by IS percent onaverage, compared to 10 percent in 1992. In contrast, wage increases in other sectors weregenerally smaller than in the previous year. Within the manufacturing sector, wage increasesdisplayed considerable variability, ranging from 0-34 percent depending on the subsector. Attestingto the acute shortage of skilled labor, more experienced and better trained workers tended to receivelarger percentage wage increases.

II These agreements have a minimum duration of three years and mature on a staggered basis.While the coverage of new collective agreements is relatively low (only 10 percent of the laborforce is unionized and, on average, less than one third of the unionized workforce is eligible for anew agreement in any given year), they are nonetheless indicative of the trend in wages in the restof the economy.

21 Measured as the weighted average increase in the wages of workers who concluded newcollective agreements.


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ni. Recent Fiscal Developments

1. Overview of budgetary trends

After expanding considerably during the recessions of 1980-82 and 1985-86, the publicsector was scaled back during the period of the Fifth Malaysia Plan (1986-90). Governmentspending was reduced sharply with a reprioritization of development expenditure and cutbacks inspending on goods and services, subsidies, and personnel recruitment. In addition, tax reformswere introduced to promote the development of the private sector. As a result, the federalgovernment's overall deficit declined from over 10 percent of GNP in 1986 to 3 percent of GNP by1990 (Chart 4, Table 2, and Appendix Table 17).

The process of fiscal consolidation and restructuring has continued in the early 1990s and,in 1993, the overall balance of the federal government recorded a surplus, resulting in the federalgovernment's best financial performance in more than 30 years. The main fiscal developments in1993 included a continuation of restraint in operating expenditure, further reprioritizing ofdevelopment spending, and ongoing tax reforms aimed at increasing the efficiency of the taxsystem.

2. Expenditure trends: Reallocating to priority sectors

The reduction in total government spending, from 28 percent of GNP in 1992 to 26 percentof GNP in 1993, was accompanied by a reallocation of expenditure. Most of the spending cutsfocused on current expenditure, while development expenditure was broadly maintained relative toGNP. However, within development spending, there was a reallocation toward more expenditureon infrastructure (particularly transportation) and social services (Chart 5). The shift in spendingpriorities was also evident on the functional side (Table 3 and Appendix Table 18). Expenditure oneconomic services and interest payments declined, while spending on education and health remainedstable relative to GNP.t-

The decline in current expenditure, from 24 percent of GNP in 1992 to 21 percent in 1993,was reflected in all of the major categories (Appendix Table 19). Wages and salaries fell by1 percentage point of GNP, although this owed a one-time payment arising from the introduction ofthe New Remuneration System in 1992, which involved an 8-10 percent increase in salary levelswith a backdating of the wage increase to January 1989. Adjusting for this one-time payment, theunderlying wage bill grew by 14 percent in 1993, owing to wage increases in line with the normalannual increment, the payment of a half-month cash bonus, and new recruitment to fill essentialvacancies in health and education. II

\l At end-1993, the number of established posts in the civil service (including state and localgovernments but excluding the military and police) was about 841,000, of which 683,000 postswere filled. The Government is currently engaged in a review of the vacant posts and movedduring 1993 to abolish those posts that have been vacant for more than three years. In addition, aspart of the effort to downsize the public sector, a reassessment of manpower needs is being made inother areas to partially compensate for new recruitment in the health and education sectors.


- 8a -

CHART 3

MALAYSIA

LABOR MARKET DEVELOPMENTS, 1986-93

Source: Data prorldcd by the Malaysian Authorities.

I/ Wage increases are based on collcctiTc afreements concluded during the year.


8b

CHART 4

MALAYSIA

BUDGETARY TRENDS, 1985-93(In percent of GNP)

Source: Data prorided by the Malaysian authorities; and staff estimates.


8c

CHART 5

MALAYSIA

EXPENDITURE DEVELOPMENTS, 1988-93

Source: Data provided by the Malaysian authorities-, and itaff estimates.I/ Based on national classification excluding security expenditures.


Prqj.

Total revenue and grantsTax revenueNonpetroleum

PetroleumNontax revenue

PetroleumOther

Total expenditure and net lendingCurrent expenditureDevelopment expenditure and lending

Direct development expenditureNet lending

Overall balance

Overall financing (net)ExternalDomestic

Memorandum item:Consolidated public sector overall balance

1985

30.224.216.28.06.12.23.9

34.326.47.93.84.1

-4J.

4.11.92.2

-2.8

1986

29.623.014.88.26.62.34.2

41.030.011.05.25.9

-1L4

11.42.49.0

-10.3

1987

24.717.612.45.37.03.23.8

33.327.06.34.12.2

-ÍA

8.6-3.311.9

-5.6

1988

24.918.012.45.66.92.94.0

29.524.74.83.90.9

•M

4.6-3.68.2

-2.4

1989

25.118.113.15.07.02.94.0

29.623.95.75.8-0.1

4¿

4.5-1.15.6

-3.4

1990

26.220.114.75.46.02.63.4

29.323.06.47.8

-1.4

-12

3.2-0.73.9

-2.2

1991

27.921.815.46.46.42.83.2

30.524.16.45.60.8

-UL

2.70.12.6

-0.7

1992

27.921.516.15.46.42.83.6

28.923.75.25.2

—

-LO

1.0-2.33.2

-0.6

1993

26.621.116.54.55.62.43.1

26.420.95.55.10.4

Q¿

-0.2-2.01.8

•0.7

1994

25.120.716.93.84.42.22.3

24.719.25.54.90.6

M

-0.4• • •

...

-0.4


Table 2. Malaysia: Summary of Federal Government Budgetary Developments, 1985-94

fin percent of ONP)


Table 3. Malaysia: Federal Government Functional Expenditure Shares, 1985-94

an percent of GNP)

Proj.1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

General servicesGeneral public services

General administrationInternal security

DefenseEducationHealthSocial securityHousing and community amenities

Of which:Other community and

social services

Economic servicesAgriculture, forestry, and

rural developmentTransport and communicationOther

UnallocableOf which:

Public debt interest

Adjustment for accounts payable

Total expenditure and net lending

18.75.13.12.13.46.01.61.11.5

0.9

8.5

2.92.92.7

7.3

7.0

-0.2

34.3

23.06.03.92.13.57.21.81.23.2

1.2

9.7

2.94.32.5

7.8

7.8

0.4

41.0

19.35.13.22.02.86.31.51.32.3

1.0

6.6

2.32.02.3

7.6

7.7

-0.2

33.3

17.24.52.81.72.65.81.41.11.8

0.9

6.4

2.21.92.3

6.4

7.2

-0.5

29.5

18.44.93.31.72.95.81.51.12.1

1.1

6.9

2.12.22.6

4.6

7.0

-0.3

29.6

17.64.02.41.62.76.01.61.02.2

1.3

8.1

2.12.23.8

4.0

6.2

-0.5

29.2

18.54.22.61.63.55.71.61.52.0

1.0

5.8

1.92.11.8

6.1

5.7

0.1

30.5

18.54.52.81.83.25.71.71.61.8

1.1

5.7

1.72.51.5

4.8

5.2

-0.2

28.9 ,

17.24.22.61.53.15.41.51.51.5

0.9

4.9

1.52.21.2

4.4

4.5

—

26.4

16.23.52.21.33.05.31.31.31.8

1.0

5.5

1.52.51.5

3.6

4.1

—

25.3

Sources: Data provided by the Malaysian authorities; and staff estimates and projections.©International Monetary Fund. Not for Redistribution

-11-

As regards the other principal components of operating expenditure, subsidies and currenttransfers declined, owing to a reduction in federal government transfers to statutory bodies, in linewith the policy to encourage these agencies to rely more on self-financing. Expenditure on goodsand services declined relative to GNP, reflecting government policy to exert strict control on theoverall growth of these expenditures. Interest payments also fell, reflecting the reduced level ofgovernment debt.

While overall development expenditure, which includes net lending, increased slightly toabout 5 1/2 percent of GNP in 1993, direct development spending remained broadly stable relativeto GNP. However, there was a significant shift in the allocation of direct spending across the mainsectors. Expenditure on transportation was increased, reflecting higher allocations for therehabilitation of the highway network, the development of the rail system, and the upgrading ofairports. Spending on the education sector also increased. Expenditure on commerce and industry,in contrast, continued to decline, in line with the reduced presence of the Government in theeconomy and the privatization of public enterprises. Lending to state governments and publicagencies stabilized in nominal terms in 1993 but, as repayments declined slightly, there was a smallincrease in net lending.

3. Revenue developments and budgetary financing

a. Revenue trends: Tax reform and improvements in administration

In line with aie objectives of the Sixth Malaysia Plan (1991-95), a series of reforms havebeen implemented in recent years with a view to increasing the efficiency of the revenue system.Tax rates and tariffs have been lowered in order to improve the climate for private sector activityand lower cost pressures in the economy. The corporate tax rate was reduced from 40 percent in1988 to 35 percent in 1989, 34 percent in 1993, and 32 percent in 1994, with a further reduction to30 percent already announced to take effect from January 1, 1995. Personal income tax rates havebeen cut from a range of 4-35 percent in 1991 to 2-34 percent in 1993. The development tax,which was 5 percent in 1989, has been gradually reduced and was eliminated in 1993. In addition,export duties have been either reduced or eliminated, stamp duties have been reduced, the estateduty has been eliminated, and import duties were reduced or eliminated on about 600 items in the1993 budget and a further 500 items in the 1994 budget.

While direct tax rates have been lowered, revenue collections have been maintained by theextension of the coverage of the services tax, improvements in tax administration, and an increasein tariffs on alcohol and tobacco products. With respect to tax administration, in addition to themeasures introduced in 1991 and 1992,1/ several additional measures were implemented in 1993and 1994 that have improved performance and increased collections from corporate and personalincome taxes despite the reductions in tax rates: Q) a series of lectures, exhibitions, and dialoguesessions were held as part of a taxpayer education program and resulted in an increase in voluntarycompliance; (ii) collection regulations were tightened to reduce payment of tax obligations byextended installment; (m) direct banking of daily tax collections was initiated; and (iv) the functionsof the Inland Revenue Department were decentralized and regional offices were opened.

I/ See the Recent Economic Developments paper for the 1993 Article IV consultation(SM/93/195).


-12-

In 1993, revenue collections declined relative to GNP, owing mainly to a drop inpetroleum-related revenue, a reduction in nontax revenue, and tax concessions granted in the budget(Table 4 and Appendix Table 20). The impact of these factors, however, was partly offset by thecontinued strong performance of corporate and individual tax collections. I/ At the same time,administrative measures introduced by the Inland Revenue Department raised tax collections, andservice taxes increased considerably, owing to a further broadening of the tax base to includetelecommunications and other services.

b. Budgetary financing

Public sector deficits in Malaysia have typically been financed by external borrowing andfrom domestic nonbank sources like the Employees Provident Fund (EPF) (Appendix Table 21);relatively little recourse has been made to bank financing. The consolidation of the fiscal positionin recent years has enabled the Government to make significant reductions in total outstandinggovernment debt relative to GNP (Appendix Table 22). Moreover, since 1988, domestic sources offinancing have been sufficient for the Government to make substantial prepayments on its externaldebt.

In 1993, the Government continued to make substantial net repayments and prepayments ofexternal debt financed primarily by a drawdown of government cash balances in the central bankand other cash assets. Because of die low borrowing need of the Government, die issuance ofgovernment securities was limited during the year and, in contrast with previous years, GovernmentInvestment Certificates (QIC) were the major instrument of domestic borrowing. In addition, therewas one issue of Malaysian Government Securities (MGS).

4. Consolidated public sector

The public sector is made up of the public enterprises and the general government which, inturn, consists of the federal government, statutory bodies, and 13 state and 80 local governments.In recent years, the evolution of the consolidated public sector position has largely reflected changesin the federal government's overall balance (Chart 6 and Appendix Table 23). However, during1992-93, improvements in the federal government's financial position were offset by a deteriorationin the position of the public enterprises, owing to a substantial increase in development expenditure.

&• General government

The overall balance of the general government, after adjusting for intergovernmentaltransfers, improved from a deficit of 3 percent of GNP in 1989 to a small surplus in 1993, closelyreflecting the position of the federal government. The position of the rest of the generalgovernment, not including the federal government, has been roughly unchanged—local governmentshave remained broadly in balance, while state governments and statutory bodies have had smalldeficits (Appendix Tables 24-28).

I/ Despite reductions in income tax rates, the tax buoyancy of corporate and individual incometax revenue has averaged 2.0 and 1.6, respectively, since 1990.


CHART 6

Source: Dai» provided 17 the Malaysian authorities; and staff estimate«.I/ After adjusting for tnter-forernmenti] Irtiiffen.2/ ConsifU of statutory bodies, and state and local foremments.

MALAYSIA

CONSOLIDATED PUBLIC SECTOR DEFICIT, 1985-93 I/(In percent of GNP)




Table 4. Malaysia: Components of Revenue, 1985-94

(In percent of GNPÏ


1 Proj.1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

Tax revenue 24.2 23.0 17.6 18.0 18.1 20.1 21.8 21.5 21.1 20.7

Taxes on net income and profits 12.2 12.4 8.2 8.3 7.5 8.7 10.0 10.3 9.9 10.2Taxes on property 0.1 0.2 0.1 0.1 0.1 0.1 0.1 0.2 0.1 0.1Taxes on goods and services 5.2 5.2 4.7 4.8 5.4 5.7 6.0 6.0 6.3 5.8Taxes on international trade 6.1 4.8 4.3 4.4 4.6 4.9 5.0 4.3 3.8 3.6

Import duties 3.5 3.1 2.6 2.8 3.0 3.1 3.3 3.1 2.9 2.8Export duties 2.6 1.7 1.7 1.6 1.6 1.8 1.6 1.2 0.9 0.8Others 0.5 0.4 0.3 0.4 0.5 0.7 0.7 0.8 0.9 1.0

Nontax revenue 5.8 6.4 6.9 6.8 6.9 6.0 6.0 6.4 5.6 4.4

Capital revenue 0.2 0.2 0.1 0.1 0.1

Total revenue 30.2 29.6 24.7 24.9 25.1 26.2 27.9 27.9 26.6 25.1


-14-

b. Public enterprises

The public enterprise sector has undergone considerable reform in recent years, focusing onoperational improvements in those enterprises remaining in the public sector and a moratorium onthe creation of new public enterprises. I/ This has led to a reduction in the number of loss-makingenterprises and an increase in the overall operating surplus of the public enterprises, the bulk ofwhich has been accounted for by several of the major enterprises, including the petroleum company(PETRONAS), Telekom Malaysia Berhad (TMB), Tenaga Nasional Berhad (TNB), and MalaysianAirlines (MAS). However, the increase in the operating surplus of the public enterprise sector hasbeen more than matched by increases in development expenditure.

In 1993, development expenditure of nonfinancial public enterprises (NFPEs) increasedsharply, particularly for infrastructure and public utilities, with the bulk of investment accounted forby several partially privatized public enterprises (MAS, PETRONAS, TMB, and TNB). As aresult, the public enterprise sector recorded a small overall deficit for the first time since 1986(Appendix Table 29).

c. Privatization

The Government's privatization policy was initiated in 1983 and, to facilitate and accelerateits implementation, the Privatization Master Plan (PMP) was introduced in 1991. Within the PMPis a Privatization Action Plan, a two-year rolling plan under which individual projects andenterprises are identified for privatization. Several methods of privatization have been used: (i) thesale of equity or assets in government companies; 00 * lease of the use of the assets for a specifiedperiod; (iii) management contracts; and (iv) build-operate and build-operate-transfer arrangementsfor new investment (primarily infrastructure) projects.

As of April 1994, 107 projects had been "privatized." Of these projects, 56 involved thesale of equity or assets in government enterprises and 22 projects involved die transfer of newinvestment projects to the private sector through build-operate or build-operate-transferarrangements. The remaining projects primarily involved leases or management contracts. Majorpublic enterprises that have either been completely privatized or have had the Government's equitystake reduced to a minority share are the Cement Industries of Malaysia, Edaran OtomobilNasional, and Sports Toto Malaysia. Equity sales have also taken place in MAS, TMB, and TNB,although the Government still maintains a majority shareholding in these companies. In 1993, theGovernment divested its shares in two companies. In addition, 22 existing and new projects wereprivatized. During the first four months of 1994, three more new projects were privatized andequity sales in two enterprises were held.

I/ For purposes of classification, all companies that have greater than 50 percent of their equityheld by the Government are considered public enterprises and are pan of the consolidated publicsector. In the mid-1980s, there were 56 nonfinancial public enterprises, but this number wasgradually reduced to 42, as of end-1993, through privatization. Of the remaining enterprises, manyhave substantial private sector equity participation.


- 15-

IV. Monetary and Financial Sector Developments

1. Overview

While significant fiscal restructuring and consolidation have contributed to moderatingdemand pressure in recent years, monetary policy has also played an important role. The primarymonetary policy tools used by Bank Negara have been direct borrowing from the banking system,changes in the Statutory Reserve Requirement (SRR), and the transfer of government and EPFdeposits to the central bank. These instruments have been supplemented by sales of MGS and,since early 1993, Bank Negara bills.

During 1992-93, surging capital inflows complicated the conduct of monetary policy.Despite a sharp increase in Bank Negara's liquidity operations in an effort to offset theexpansionary impact of the inflows on the monetary base, monetary conditions eased and reservemoney grew rapidly (Chart 7, Table 5, and Appendix Table 30). Moreover, the increasedabsorption of liquidity imposed a heavy cost on Bank Negara, contributing to the large reservelosses suffered in 1992-93.

2. Monetary policy and developments

Despite large-scale liquidity operations undertaken by Bank Negara throughout 1993,liquidity conditions eased gradually during the course of the year (Appendix Table 32). Theoperations, which included direct short-term borrowing from the money market, the sale ofBank Negara bills, the issuance of long-term saving bonds, and the transfer of government and EPFdeposits to the central bank, absorbed RM 38 billion of liquidity (Appendix Tables 33 and 34).However, these operations were insufficient to fully offset the impact of a continuation of the surgein capital inflows. The inflows, which included a sharp increase in short-term external borrowingby commercial banks and other financial institutions (Appendix Tables 35 and 36), were related tothe significant interest rate differential in favor of Malaysia, a pickup in international interest inMalaysia's stock market, and market expectations of an appreciation of the ringgit. As aconsequence, interest rates eased over the course of the year, with the three-month interbank ratedeclining from 8 percent at end-1992 to 6 1/2 percent at end-1993.

Liquidity conditions continued to ease in the first half of 1994, although the instrumentsemployed by Bank Negara to counter the effects of the capital inflows varied considerably overthe period. In response to a pickup in inflows at end-1993 and early 1994, Bank Negaraimposed a set of measures to stem the inflow of short-term capital. These measures, implementedin stages during the period mid-January to mid-February, included: subjecting banking institutionsto a ceiling on their nontrade- or noninvestment-related external liabilities; prohibiting residentsfrom selling short-term monetary instruments to nonresidents; and requiring commercial banks toplace with Bank Negara the ringgit funds of foreign banking institutions held in noninterest-bearing


Table 5. Malaysia: Banking Survey, 1990-94 J7


I/ Consolidation of the accounts of the monetary authorities, commercial banks, finance companies, merchant banks, and discounthouses.

March June Sept. Dec. March June Sept. Dec. March1990 1991 1992 1993 1994

fin billions of ringgit: end of period)

Foreign assets (net) 26.6 25.2 28.8 28.7 30.2 33.9 38.8 41.5 41.4 55.5 66.8

Net domestic assets 100.8 119.7 123.5 130.3 135.0 137.1 136.4 142.2 152.3 154.5 159.3

Domestic credit 132.6 157.2 166.1 163.1 167.4 172.7 175.0 178.9 181.9 193.7 195.9Claims on government (net) 12.1 10.3 11.9 6.8 6.8 8.5 8.4 7.0 7.0 9.3 9.3Claims on private sector 120.5 146.9 154.2 156.3 160.6 164.2 166.6 171.9 174.9 184.4 186.6

Other items -31.8 -37.5 -42.7 -32.8 -32.4 -35.6 -38.6 -36.7 -29.6 -39.2 -36.6

Total liquidity (M3) 127.4 144.9 152.3 159.0 165.2 171.0 175.2 183.7 193.7 210.0 226.1

Memorandum items:Narrow money (Ml) ¡ 27.0 30.8 31.5 31.7 33.0 35.5 36.8 38.7 40.9 48.1 49.8Broad money (M2) • 90.9 104.3 108.5 113.9 119.4 123.9 127.0 132.7 138.8 152.4 168.0

(Twelve-month rate of chance)

Foreign assets (net) 14.3 -5.2 5.2 4.5 19.1 34.5 34.7 44.6 37.1 63.7 72.2

Domestic credit 20.6 18.6 19.4 13.7 10.3 9.9 5.3 9.7 8.7 12.2 11.9Claims on government (net) -4.6 -14.5 -6.1 -38.4 -37.2 -18.0 -30.0 2.9 2.9 9.4 10.7Claims on private sector 23.9 21.9 22.0 18.0 13.9 11.8 8.1 10.0 8.9 12.3 12.0

M3 19.6 13.7 14.5 18.7 18.6 18.0 15.1 15.5 17.3 22.8 29.1Ml 16.8 13.9 13.6 13.1 12.9 15.4 16.9 22.1 23.9 35.5 35.3M2 13.6 14.7 13.6 19.1 20.5 18.8 17.1 16.5 16.2 23.0 32.3

(Change in percent of M3 at beginning of period)

Foreign assets (net) 3.1 -1.1 1.1 0.9 3.5 6.0 6.6 8.0 6.8 12.6 16.0DoSc credit ' 21.3 19.3 20.3 14.6 11.2 10.7 5.8 9.9 8.8 12.3 11.9

Government (net) -0.5 -1.4 -0.6 -3.2 -2.9 -1.3 -2.4 0.1 0.1 0.5 0.5PrâteTector 21.8 20.7 20.9 17.8 14.1 12.0 8.2 9.8 8.7 11.8 11.4


- 16a -

CHART 7

MALAYSIA

MONETARY DEVELOPMENTS, 1989-94

Source: Data provided by the Malaysian authorities.I/ Include« net claims on financial institutions, issues of Bank Nef ara bills, and tbe recyclingof the deposits of the Employees Provident Fund.




- 17 -

accounts. II In addition, the eligible liabilities base was broadened to include inflows from abroadand the SRR was raised three times by a cumulative 3 percentage points to 11 1/2 percent in orderto siphon off liquidity. Although the measures appeared to have succeeded in halting the short-terminflows, the substantial buildup of liquidity on account of the intervention operation at the start ofthe year gradually wound its way through the banking system. 21 As a result, interest ratescontinued to decline during the first five months of 1994, and the three-month interbank rate fell to4.5 percent by May before stabilizing at that level. Beginning in mid-February, the ringgitappreciated and, by mid-May, was broadly at the same level against the dollar as prevailed prior tothe depreciation.

The rates of growth of the monetary aggregates reflected the strength of the capital inflows.However, the inflows, which initially were in the form of bank deposits, did not have a significantimpact on lending. Instead, there was a substantial buildup of excess reserves of the bankingsystem with the central bank and, as a result, velocity declined sharply. For 1993 as a whole, thegrowth rates for Ml and M3 were 35 1/2 percent and 23 percent, respectively, compared with15 1/2 percent and 18 percent, respectively, in 1992. By Mardi 1994, the 12-month growth rate ofM3 had risen to 29 percent, while the growth of Ml remained above 35 percent. As regards thecredit aggregates, domestic credit expansion to the private sector, which had moderated to12 percent at the end of 1992, slowed further to 8 percent in the first quarter of 1993, beforepicking up as economic activity accelerated. By end-1993, credit growth was just under 12 percentbut declined slightly to about 11 1/2 percent by March 1994.

3. Financial intermediation and the capital market

The banking system in Malaysia consists of commercial banks, merchant banks, financecompanies, and other financial institutions, including the National Savings Bank, pension andprovident funds, insurance companies, and specialized credit agencies. There are presently37 commercial banks, 21 of which are domestically owned and 16 are foreign. The commercialbanks account for about 85 percent of the total assets of the banking system. The maindevelopments in the financial system in 1993 and early 1994 included an easing of lending anddeposit interest rates, a surge in equity prices on the KLSE in 1993 followed by a market correctionin early 1994, and continued development of the capital market.

a. Interest rates and lending

Since the late 1970s, the authorities have gradually liberalized the process by whichcommercial banks are allowed to set lending rates. At present, each bank or finance company mayset its own base lending rate (BLR) based on its cost of funds, including the cost of holding

I/ The ringgit funds of foreign financial institutions held in noninterest-bearing accounts, referredto as Vostro accounts, were also considered part of the eligible liabilities base for the calculation ofrequired reserves, resulting in a negative effective interest rate on Vostro balances. This latterrequirement was lifted in May 1994.

21 Most of the measures imposed on short-term inflows in January-February were terminated inmid-August 1994. At this time, three measures are still in place.


-18-

statutory reserves and of meeting the liquid asset requirement. Subject to the margins surroundingthe BLR, and excluding interest rates on certain priority sector lending which are subject toguidelines, financial institutions are free to determine their own lending rates.

Reflecting the easing of liquidity conditions during 1993 and early 1994, the BLRs offinancial institutions declined gradually (Appendix Table 37). The average BLR among thecommercial banks fell from 9 1/2 percent at the end of 1992 to 8 1/2 percent at end-1993 and7 1/2 percent by March 1994. At the same time, commercial banks' average lending rate declinedfrom 10 1/4 percent at end-1992 to 9 3/4 percent by end-1993 and 9 1/4 percent in March 1994.Interest rates on fixed deposits have closely followed the trend in lending rates, declining fromalmost 8 percent for most maturities at end-1992, to 6 1/4 percent by end-1993 and 5 3/4 percentby March 1994.

The pattern of lending by the commercial banks was broadly unchanged in 1993(Appendix Table 38). As in recent years, the manufacturing sector was the largest recipient ofloans, accounting for almost one fourth of total lending. Lending to the financing, insurance, andbusiness services sector rose by 25 percent, and the share of this sector in total lending increased toalmost 15 percent. Individual housing loans and lending to the transport and communications sectoralso rose sharply. The share of the agricultural and mining sectors in total lending, however,continued to moderate in 1993, in line with the declining importance of these sectors in theeconomy.

b. Stock market developments

Malaysia's stock market has grown rapidly in recent years and, in terms of marketcapitalization, it ranks among the 15 largest markets in the world (Charts 8 and 9, andAppendix Table 39). J7 In 1993, the market experienced sustained increases in equity prices andthe KLSE composite index doubled during the course of the year. Optimism in the stock marketwas broad based, supported by strengthening activity and the easing of inflation and interest ratesduring the course of the year. In addition, a sharp increase in participation by internationalinvestors served to boost equity prices to unprecedented highs, with net inflows for the purchase ofstocks and shares estimated to have tripled to RM 23 billion in 1993.

In January 1994, after price/earnings ratios had risen to an historically high level, the KLSEexperienced a sharp correction. Share prices, turnover volumes, and market capitalization fell fromtheir peak levels on January 5. Share prices were further weakened as interest rates abroad roseand investors adjusted their portfolios in favor of nonringgit assets. After continuing to decline inthe first quarter of 1994, the composite index stabilized and recovered slightly during the secondquarter. By end-July, the composite index was about 20 percent below its level at end-1993.

The stock market has become an important source for raising funds to finance privateinvestment in recent years (Appendix Table 40). In 1993, issues of shares and debt securities bythe private sector amounted to RM 3.2 billion (8 1/2 percent of private fixed investment). Whilethis represented a significant decline from 1992, the decrease was due mainly to the absence of new

II For a detailed discussion of the development of Malaysia's capital market, see Annex II of the1993 Recent Economic Developments paper for Malaysia (SM/93/195).


18a

CHART 8

MALAYSIA

STOCK MARKET DEVELOPMENTS, 1990-94

Source: ITC, Emerging Market* Databan.


18b

CHART 9

MALAYSIA

COMPARATIVE STOCK MARKET INDICATORS, 1990-93

Source: ITC, Emerging Markets Database.


-19-

issues by privatized companies, which contributed heavily to the new issues in 1992, and thegeneral easing of liquidity conditions in the financial system.

c. Development of the financial system

As the financial market has grown in sophistication and complexity, measures in recentyears have been directed toward enhancing the market's efficiency in allocating scarce resourcesand ensuring the introduction of and compliance with appropriate prudential regulations. In 1993,several measures were implemented to promote the development of the capital market. Theseincluded the launching of operations of the Securities Commission, a single regulatory agency tooversee the entire capital market; the implementation of the Futures Industry Act, providing a legalframework for trading in financial futures and options; the introduction of new guidelines andminimum standards governing the disclosure of information by stockbroking and securities firms;the liberalization of the activities of unit trust funds, according greater flexibility in the managementof these funds; and the launching of the Interest-Free Banking Scheme, increasing access to Islamicbanking facilities. In addition, reforms to strengthen the KLSE were implemented, including theissuance of guidelines on independent audits for all listed companies and the implementation of acentral depository of information.

V. External Developments

1. Overview

Over the last two decades, the Malaysian economy has become increasingly open, with theratio of exports and imports to GNP having risen from 44 percent and 37 percent in 1970,respectively, to 75 percent ami 70 percent in 1993, respectively (Chart 10). As the economy hasindustrialized, the share of manufactured products in total exports has increased steadily from12 percent in 1970 to 74 percent in 1993. Within the manufacturing sector, exports of electricalmachinery and components have grown most rapidly, accounting for well over one half ofmanufacturing exports in recent years. Textiles and clothing have also been an important source ofexport earnings, although their share in manufacturing exports has declined from 10 percent in 1987to 6 percent in 1993.

The growth of the manufacturing sector, especially in recent years, has been financed to alarge extent by inflows of FDI. Over the period 1988-93, investment inflows amounted to$17.5 billion, averaging 6 percent of GNP and accounting for almost one tenth of FDI flows todeveloping countries (Chart 11). These inflows have financed the import of investment goods andhave more than onset the deficit in Malaysia's external current account that emerged during theinvestment boom of the late 1980s and early 1990s. During 1992-93, however, short-term capitalinflows have gained in prominence.

In 1993, the pickup in domestic demand pressures was reflected in a strong recovery inimports which, despite continued strong performance of manufacturing exports, resulted in a slightdeterioration of the external current account position (Table 6). As regards the capital account, adecline in FDI inflows was more than offset by the continuation of the surge in short-term flows.


-20-

Tableó. Malaysia: Balance of Payments, 1989-93

(In billions of U.S. dollars)

Trade balanceExports, f.o.b.Imports, f.o.b.

Services balanceOf which:

Freight and insuranceTravelInvestment income

Transfers (net)

Current account

Capital accountLong-term capital (net)

Official (net)Federal governmentOther

Private (net)Borrowing (net)Direct investment (net)

Short-term (net)Domestic financial sector I/Other

Errors and omissions

Overall balance 2/

Monetary movements 2/Change in gross reservesChange in liabilities

Current account/GNP (percent)Reserves/months of imports

1989

4.424.6

-20.3

-4.2

-1.1-0.3-2.2

0.1

0.3

1.30.8

-0.9-0.4-0.51.7

—1.7

0.60.40.2

-0.3

1.3

-1.3-1.3

—0.74.3

1990

2.628.6

-26.0

-3.6

-1.40.2

-1.9

0.1

-0.9

1.81.3

-1.0-0.3-0.82.3

—2.3

0.50.8-0.3

1.1

2.0

-2.0-2.0

—-2.24.1

1991

0.533.5

-33.0

-4.7

-1.80.2

-2.4

—-4.2

5.63.8

-0.2

—-0.34.0

—4.0

1.91.30.6

-0.3

1.2

-1.2-1.2

—-9.33.7

1992

3.439.6

-36.2

-5.1

-1.70.3

-2.9

0.1

-1.6

8.13.4

-1.1-1.20.14.5

—4.5

4.73.61.1

0.5

6.9

-6.9-6.9

—-3.05.5

Prel.1993

3.445.9

-42.5

-5.9

-1.90.3

-3.2

0.1

-2.5

9.64.70.4

-1.21.64.3

—4,3

4.94.20.6

3.1

10.2

-10.2-10.2

—•4.07.5


I/ Excludes operations of the central bank.2/ Includes valuation adjustments.


- 20a -

CHART 10

MALAYSIA

EXTERNAL DEVELOPMENTS, 1985-93

Source: Data provided by the Malajiian authorities.


- 20b -

CHART 11

MALAYSIA

NET PRIVATE CAPITAL FLOWS, 1989-93

Source: DaU provided by the Malayiian authorities.


- 21 -

As a result, the overall balance of payments surplus rose sharply and external reserves increasedfurther.

2. Current account

After narrowing sharply to 3 percent of GNP in 1992, mainly on account of a moderation inimport growth emanating from weak domestic demand conditions, the external current accountdeficit widened to 4 percent of GNP in 1993, as imports accelerated in line with the recovery indomestic demand. Export volumes, which had slowed considerably in 1992 owing to weakeconomic conditions in major trading partners, picked up in 1993 (Appendix Table 41). The strongexport performance reflected mainly the relocation to and expansion of multinational corporations*production facilities in Malaysia; an increase in market shares of Malaysian products in the rapidlygrowing regional economies; and the pickup in growth in the United States toward the end of theyear.

Exports of manufactured goods rose by 24 percent in 1993, in line with the trend in recentyears, and the share of manufactured goods in total exports expanded further to 74 percent(Appendix Table 42). Within the manufacturing categories, exports of electronics and electricalproducts, and wood, metal, and petroleum products recorded the most rapid increases. However,exports of food, beverages and tobacco, and textiles and footwear moderated, reflecting a shifttoward higher value-added production and away from labor-intensive activities. The electronics andelectrical products sector, which accounted for 61 percent of manufacturing exports in 1993, hasundergone a significant structural transformation over the past decade. In 1984, electroniccomponents contributed 73 percent of the sector's exports, while consumer and industrial electronicscomprised only 6 percent and 5 percent, respectively. By 1993, however, the share of electroniccomponents had declined to 34 percent, while the shares of consumer and industrial electronics hadrisen to 23 percent and 25 percent, respectively.

In contrast with the performance of manufacturing exports, exports of commodities declinedby 3 percent in 1993, with the shares of agricultural goods and minerals in total exports declining to15 percent and 9 percent, respectively (Appendix Table 43). This owed not only to a reduction inexport volumes for many commodities, but also to a decline in export unit values of tin, petroleum,and liquified natural gas. Export receipts from rubber and tin fell by 10 percent and 33 percent,respectively, while exports of palm oil rose by 6 percent. Timber exports were virtually unchangedfrom their 1992 level, with a significant decline in sawn logs exports offset by an increase inexports of sawn timber.

The acceleration of domestic demand in 1993 was reflected in the recovery of importgrowth to 15 percent (Appendix Table 44). The strongest growth occurred in imports ofintermediate goods, which rose by 18 percent in volume terms, compared with a decline of8 percent in 1992. The volume of consumption goods imports also accelerated to 13 percent, from7 percent in 1992, reflecting the pickup in consumer spending. Despite a recovery in investmentspending, however, the volume of investment goods imports continued to decelerate to 10 percent,mainly on account of the behavior of lumpy imports and because of lower imports of ships, boats,and railway locomotives.


-22-

The direction of Malaysia's trade continued to change somewhat in 1993 (AppendixTable 45). The share of exports destined for ASEAN countries fell by almost 2 percentage points,while the share of exports to the United States rose by almost 2 percentage points. The importanceof export markets in Hong Kong and Taiwan Province of China increased and exports to China roseby 58 percent. In contrast, the share of Malaysia's exports accounted for by Japan and theEuropean Union declined slightly. On the import side, the importance of Japan and theUnited States as trading partners rose, while imports from the ASEAN economies and theEuropean Union declined.

The services account deficit, after improving to 9 percent of GNP in 1992, widened to9 1/2 percent of GNP in 1993 (Appendix Table 46). Freight and insurance payments rose by12 percent, reflecting the stronger import activity, and accounted for one third of the deteriorationin the services account. In addition, investment income payments, particularly the repatriation ofprofits and dividends to foreign direct investors, rose significantly, while net interest receiptsdeclined, reflecting the interest differential in favor of Malaysia.

3. Capital flows and international reserves

The balance of payments in 1993 were dominated by developments in capital flows,particularly short-term inflows. Buoyed by continued inflows of short-torn capital and a sharp risein errors and omissions, which the authorities view as partly reflecting unrecorded inflows of fundsdestined for the stock market, die overall balance of payments surplus surged to $10 billion(17 percent of GNP), compared with $7 billion (13 percent of GNP) in 1992. As a result, officialreserves rose to the equivalent of 7 1/2 months of imports of goods and services (AppendixTable 47).

Net short-term inflows, after rising to $4.7 billion in 1992, increased further to $4.9 billionin 1993. Moreover, net errors and omissions rose to $3 billion. Key factors underlying the surgeincluded the wide interest rate differential in favor of Malaysia; increased interest by internationalinvestors üf Malaysia's stock market; and expectations in the market thai die ringgit wouldappreciate.

Inflows of FDI, though continuing at a high level of $4.3 billion, declined relative to GNPto 7 percent from 8 percent of GNP in 1992 and 9 percent of GNP in 1991. This decline may beattributed to both external and domestic factors. On the external side, outward investment fromJapan and the Asian NIEs fell, owing to the economic slowdown in Japan and because therelocation of labor-intensive industries of investor countries was either nearing completion or wasincreasingly directed to lower-wage countries in the region. On the domestic front, growing laborshortages and rising wages acted to erode the competitiveness of the more labor-intensive industries.

4. External debt and debt service

The Government has pursued a cautious external borrowing policy and, in recent years, hasengaged in early repayments of external debt. Consequently, the ratio of external debt to GNP,which was already low in comparison with other developing countries, has declined, with thedecrease in public external debt more than offsetting a moderate rise in private long- and short-termborrowing (Appendix Table 48).


-23-

In 1993, external debt rose somewhat relative to GNP as a result of increased private sectorborrowing, both long- and short-term, to exploit the wide interest rate differential in favor ofMalaysia. Although the Government's policy to prepay external obligations was maintained,increased external borrowing by public enterprises kept the public external debt ratio unchanged.

5. Exchange rate developments

The exchange value of the ringgit is determined by a managed float. Bank Negara monitorsexchange rate developments against several baskets of currencies and intervenes in the interbankforeign exchange market to influence the value of the ringgit. Commercial banks are the onlyfinancial institutions licensed to deal in foreign exchange and are free to set their own rates andmargins between buying and selling rates.

After appreciating by 9 percent against the dollar and 10 percent in nominal effective termsduring the first half of 1992, the ringgit was broadly stable until mid-December 1993 (Chart 12).Between mid-December 1993 and mid-February 1994, die ringgit depreciated by 8 percent againstthe dollar and 9 percent in nominal effective terms, initially as a result of intervention byBank Negara to deter currency speculators and later in response to the imposition of controls onshort-term capital inflows. Since mid-February, however, the ringgit has appreciated steadily,stabilizing at broadly the same level against the dollar that had prevailed prior to the depreciationepisode.

6. Trade policies

Malaysia has traditionally maintained an open trade and exchange system. While there havebeen no major changes in the exchange system in recent years, efforts to further liberalize the tradesystem are continuing. I/ Following a reduction in import duties on 600 items in the 1993 budget,duties on a further 500 items were reduced or abolished altogether in the 1994 budget. As a result,the ratio of import duty receipts to the value of imports declined from 4 3/4 percent in 1989 to4 1/4 percent in 1992 and 4 percent in 1993.

Under the ASEAN Free Trade Agreement (AFTA), which aims to encourage thecomplementary use of resources in the region by lowering tariff barriers, Malaysia has offered3,266 tariff lines for duty reductions in the 1994 package. Some of these reductions took place in1993 and the remainder will be undertaken in 1994. In addition, more than 4,000 tariff linesalready carry tariff rates of less than 1/2 percent, thereby conforming to Malaysia's commitmentunder the AFTA tariff reduction schedule. 2/

Under the recent Uruguay Round agreement, Malaysia has offered to reduce and bind tariffson 5,900 tariff lines in the industrial sector and 1,297 tariff lines in the agricultural sector. Thebindings, covering 79 percent of imports, will increase the proportion of bound tariff lines to65 percent, compared with 1 percent presently. As a result of the tariff reductions, the

I/ In addition, all exchange control restrictions governing transactions with South Africa werelifted in September 1993.

2/ See Annex m of the 1993 Recent Economic Developments paper for Thailand (SM/93/99) fora detailed discussion of the AFTA.


-24-

trade-weighted average-tariff rate for industrial items will decline from 10 1/4 percent to 9 percent.For the agricultural sector, tariffs on all items will be lowered by an average of 28 percent and allnontariff barriers will be converted to tariffs. In order to conform with the Uruguay Roundagreement on trade-related investment measures, local content requirements for investment approvaland the provisioning of investment incentives will be phased out.


24a

CHART 12

MALAYSIA

EXCHANGE RATE INDICES, 1986-94(I960 = 100)

Sources: Off. International Financial Statistic«, and Information Notice System.




-25-

Table?. Malaysia: Expenditure on Gross Domestic Productin 1978 Prices, 1989-93

APPENDIX

1989 1990 1991 1992Prel.1993

fin millions of ringgif)

Domestic demandConsumptionPrivatePublicInvestment

PrivatePublicChange in stocks

Net exportsExportsImports

Gross domestic productNet factor payments from abroad

Gross national product

Domestic demandConsumption

PrivatePublic

InvestmentPrivatePublicChange in stocks I/

Net exports I/ExportsImports

Gross domestic productNet factor payments from abroad

Gross national product

67,54746,53035,61610,91421,01713,3827,830-195

4,85853,90349,045

72,405-4,085

68,320

15.212.614.27.5

21.430.534.3-2.1

-4.218.129.1

9.210.4

9.1

76,23851,24139,72811,51324,99716,7059,167-875

3,21763,25060,033

79,455-3,425

76,030

(Annual

12.910.111.55.5

18.924.817.1-0.9

-2.317.322.4

9.7-16.2

11.3

89,97857,26844,33112,93732,71021,33910,0131,358

-3,64672,93876,584

86,332-4,100

82,232

percentage

18.011.811.612.430.927.79.22.8

-8.615.327.6

8.719.7

8.2

92,25058,86145,40113,46033,38922,74911,128

•488821

76,60875,787

93,071-4,881

88,190

change)

2.52.82.44.02.16.6

11.1-2.1

5.25.0

-1.0

7.819.0

7.2

102,10463,40048,87414,52638,70425,01212,5011,192

-1,15485,20586,359

100,950-5,091

95,859

10.77.77.67.9

15.99.9

12.31.8

-2.111.213.9

8.54.3

8.7

Source: Data provided by the Malaysian authorities,

i/ Contribution to GDP growth.


-26- APPENDIX

Table 8. Malaysia: Expenditure on Gross Domestic Productin Current Prices, 1989-93

Source: Data provided by the Malaysian authorities,

i/ Contribution to GDP growth.

PreL1989 1990 1991 1992 1993

(In millions of rinppit")

Domestic demand 97,437 113,530 137,199 145,234 164,295Consumption 67,658 77,093 89,320 95,350 105,714

Private 52,889 60,903 70,929 76,046 84,850Public 14,769 16,190 18,391 19,304 20,864

Investment 29,779 36,437 47,879 49,884 58,581Private 18,966 24,207 31,432 34,044 38,010Public 11,097 13,283 14,749 16,653 18,997Changeinstocks -284 -1,053 1,698 -813 1,574

Net exports 5,097 2,298 -7,640 2,550 1,578Exports 75,030 88,740 105,468 115,231 132,545Imports 69,933 86,442 113,108 112,681 130,967

Gross domestic product 102,534 115,828 129,559 147,784 165,873Net tactor payments from abroad -5,903 -5,064 -6,011 -7,517 -8,113

Gross national product 96,631 110,764 123,548 140,267 157,760

("Annual percentage chance)

Domestic demand 19.6 16.5 20.8 5.9 13.1Consumption 16.9 13.9 15.9 6.8 10.9

Private 17.9 15.2 16.5 7.2 11.6Public 13.6 9.6 13.6 5.0 8.1

Investment 26.3 22.4 31.4 4.2 17.4Private 35.7 27.6 29.8 8.3 11.6Public 39.7 19.7 11.0 12.9 14.1Change in stocks I/ -2.1 -0.7 2.4 -1.9 1.6

Net exports i/ -4.8 -2.7 -8.6 7.9 -0.7Exports 22.5 18.3 18.9 9.3 15.0Imports 34.9 23.6 30.8 -0.4 16.2

Gross domestic product 12.8 13.0 11.9 14.1 12.2Net factor payments from abroad 16.1 -14.2 18.7 25.1 7.9

Gross national product 12.7 14.6 11.5 13.5 12.5


-27- APPENDIX

Table 9. Malaysia: Gross Domestic Product by Sector of Originin 1978 Prices, 1989-93


I/ Includes ownership of dwellings.2/ Includes utilities, domestic services to households, and import duties less imputed bank

charges.

Prel.1989 1990 1991 1992 1993

(In millions of rinppit")

Gross domestic product 72,405 79,455 86,332 93,071 100,950

Primary sector 22,151 22,559 22,747 23,520 24,026Agriculture 14,768 14,799 14,795 15,432 16,042Mining and quarrying 7,383 7,760 7,952 8,088 7,984

Secondary sector 20,824 24,175 27,557 30,474 34,343Manufacturing 18,444 21,340 24,307 26,859 30,310Construction 2,380 2,835 3,250 3,615 4,033

Tertiary sector 29,430 32,721 36,028 39,077 42,581Transport, storage,

and communications 4,839 5,483 6,058 6,579 7,174Wholesale and retail trade 7,687 8,825 10,090 11,165 12,332Finance, insurance, real estate,

and business services i/ 6,770 7,759 8,733 9,607 10,765Government services 8,185 8,579 8,964 9,466 9,944Other services 2/ 1,949 2,075 2,183 2,260 2,366

(Annual percentage change1)

Gross domestic product 9.2 9.7 8.7 7.8 8.5

Primary sector 6.8 1.8 0.8 3.4 2.2Agriculture 6.0 0.2 0.0 4.3 3.9Mining and quarrying 8.5 5.1 2.5 1.7 -1.3

Secondary sector 13.9 16.1 14.0 10.6 12.7Manufacturing 14.2 15.7 13.9 10.5 12.8Construction 11.6 19.1 14.6 11.2 11.5

Tertiary sector 7.9 11.2 10.1 8.5 9.0Transport, storage, and

communications 9.7 13.3 10.5 8.6 9.0Wholesale and retail trade 10.0 14.8 14.3 10.7 10.4Finance, insurance, real estate,

and business services I/ 11.2 14.6 12.6 10.0 12.0Government services 4.7 4.8 4.5 5.6 5.0Other services 2/ -1.4 6.5 5.2 3.5 4.7


-28- APPEND1X

Table 10. Malaysia: Production of Major Primary Products, 1989-93

OutputRubberPalm oilPalm kernel oilCocoaPaddyTin (concentrate)Tin metalBauxiteIron oreCopper

Crude oil

Saw logsSawn timber

Area under cultivationRubberPalm oilPaddy

YieldsRubberPalm oilPaddy

1989

1,4156,056

750250

1,6883252

355192101

589

39,7098,390

1,8551,946

621

1,0843,6022,644

1990 1991 1992

fin thousands of metric tons)

1,291 1,253 1,2176,095 6,141 6,373

827 782 812247 230 220

1,841 1,957 2,07028 21 1449 43 46

398 376 331344 375 320102 98 112

fin thousands of barrels per day)

601 649 659

(In thousands of cubic meters')

40,147 40,169 43,5128,696 8,875 9,482

fin thousands of hectares)

1,836 1,822 1,8011,984 2,094 2,197

658 738 670

fin kilogram per hectare)

1,100 1,011 9883,562 3,545 3,4302,729 2,734 3,145

Prel.1993

1,0747,403

966200

1,917104067

223100

648

37,1359,200

1,7812,281

663

1,0003,7772,893



Table 11. Malaysia: Industrial Production Index, 1989-93

(1988 = 100)

Annual Percentage Change

Total

MiningElectricity

ManufacturingFoodBeverages 'TobaccoTextilesWearing apparelPetroleum refineriesIndustrial chemicalsOther chemicalWood productsRubber productsNonmetallic mineralsIron and steelNonferrous metalFabricated metalElectrical machinery

and electronicsTransport equipment

1990

125.5

113.1127.3

132.1•121.0

125.4108.9133.7120.4118.5106.3137.5133.4113.9153.1136.6115.2115.4

157.8183.7

1991

139.5

118.9144.1

150.4116.5127.7110.1141.6120.8126.0122.9152.0140.4126.6183.3154.9114.1137.0

203.3215.0

1992

151.5

122.1164.2

166.5123.7133.7104.5164.4126.4130.6126.3173.8160.4141.1202.0184.2132.9196.3

226.7201.7

1993

165.9

123.0184.4

187.4134.7118.797.6

214.7127.6141.5133.4189.7187.0166.5214.3207.5139.0309.3

262.3208.7

1990

12.2

5.213.8

15.75.6

14.57.2

11.34.4

13.81.9

11.014.38.7

21.014.28.2

18.6

33.632.5

1991

11.2

5.113.2

13.9-3.71.81.15.90.36.3

15.610.55.2

11.219.713.4-1.018.7

28.817.0

1992

8.6

2.713.9

10.76.24.7

-5.116.14.63.72.8

14.314.211.510.218.916.543.3

11.5-6.2

1993

9.5

0.812.2

12.88.9

-11.2-6.730.60.98.35.69.1

20.118.06.1

12.7 '4.6

57.6

15.73.5



Table 12. Malaysia: Consumer Price Index, 1989-941/

(1990= 100)

(

TotalFoodBeverages and tobaccoClothing and footwearGross rent, fuel and powerFurniture and household equipmentMedical care and health expensesTransport and communicationsRecreation, education, and cultural

servicesMiscellaneous

Weights

100.033.74.34.0

20.25.81.8

18.6

5.26.4

1989

97.095.996.798.299.598.297.495.2

99.197.1

1990

100.0100.0100.0100.0100.0100.0100.0100.0

100.0100.0

1991

104.4104.8107.8106.2130.0104.4105.3104.2

102.6103.6

1992

109.3111.7117.1109.4106.8107.2109.0108.8

105.6105.9

Ol 02 O3\

O41993

111.9112.1134.3109.9109.3107.5112.6114.2

106.2107.4

112.9113.7134.3110.0110.3108.1114.4114.6

106.0108.1

113.5114.7134.5110.2111.0109.3115.4114.8

105.9109.5

114.5116.5134.6109.4111.5109.7115.8116.1

106.3109.8

Ql1994

117.0120.4140.8109.2112.0110.1116.7119.3

106.5111.3


If Kew weights apply since December 1990.


Table 13. Malaysia: Producer Price Index, 1989-94

(1978 = 100)

FoodBeverages and tobaccoCrude materialsMineral fuelsAnimal and vegetable oilsChemicalsManufactured goods, n.e.i.Machinery and transport equipmentMiscellaneous goodsCommunication and transport

TotalDomestic productionImports

Weights

16.82.7

20.811.35.94.4

14.917.84.11.4

100.071.828.2

1989

163.8182.7134.7139.588.5

142.8132.0131.9146.0164.0

139.0138.1142.4

1990

174.8184.3123.6163.567.2

143.1128.5132.9148.4190.8

140.2138.4144.9

1991

195.8197.1123.0168.677.8

146.1128.9134.7153.4191.0

145.9144.9148.9

1992

203.5208.5124.5160.789.0

144.6128.2135.9156.2172.9

147.5147.6147.1

Ol O2 O3 041993

206.7225.5126.5159.793.5

143.6128.0140.3156.6177.7

149.9150.5148.2

209.2229.6127.4159.689.2

143.4129.1141.0156.9176.7

150.6151.3148.7

208.0237.0126.5156.183.2

143.8130.2140.4157.1171.7

149.6150.1148.6

205.1237.0124.6152.582.1

145.1130.2140.4157.3170.6

148.4148.2148.7

Ql1994

218.0237.5131.4151.794.4

144.6129.9140.8159.9170.8

152.7154.3148.5



- 32 - APPENDIX

Table 14. Malaysia: Composition of Investment and Saving, 1989-93

(In billions of ringgirt

Gross domestic investmentPrivate sector

Gross fixed capital formationOil and gasOther

Changeinstocks

Public sectorGross fixed capital formation

Federal governmentState governmentsPublic enterprisesStatutory bodiesLocal governments

Gross national savingPrivate sectorPublic sector

1989

29.8

19.01.9

17.1-0.3

11.13.21.84.71.20.2

30.520.310.2

1990

36.4

24.22.8

21.4-1.1

13.34.22.74.61.50.3

34.019.714.3

1991

47.9

31.43.4

28.01.7

14.74.32.66.21.30.4

36.420.016.4

1992

49.9

34.03.5

30.5-0.8

16.74.73.06.81.70.4

45.727.518.2

Prel.1993

58.6

38.14.4

33.71.5

19.05.83.37.71.70.5

52.231.620.6



-33- APPENDIX

Table 15. Malaysia: Total Proposed Capital Investment in ApprovedManufacturing Projects, by Type of Ownership, 1989-93 i/

(In millions of ringgif)

Foreign ownership

Joint ownership

Malaysian majorityForeign majorityEqual ownership

Malaysian ownership

Total

1989

5,944

5,310

2,8462,245

219

961

12,215

1990

6,817

19,878

13,0456,430

403

1,473

28,168

1991

8,159

18,715

8,5199,526

670

3,944

30,818

1992

11,623

14,481

9,2905,125

66

1,671

27,775

1993

3,713

6,520

4,3772,084

59

3,520

13,753


I/ Includes equity and loans.


-34- APPENDIX

Table 16. Malaysia: Labor Market Developments, 1989-93


Prel.1989 1990 1991 1992 1993

(In thousands)

Population 17,377 17,846 18,178 18,606 19,044

Total laborforce 6,850 7,042 7,204 7,370 7,567Labor force participant rate (in percent) 66.3 66.5 66.8 66.9 66.8Unemployment rate (in percent) 6.7 5.1 4.3 3.7 3.0

Total employment 6,390 6,686 6,891 7,096 7,341Primary sector 1,866 1,775 1,716 1,621 1,555

Agriculture, forestry, andfishery 1,833 1,738 1,680 1,585 1,520m Jf . V •* **** *9*9 t£ 1£ *»«•Mining and quarrying 33 37 36 36 35

Secondary sector 1,548 1,757 1,926 2,147 2,330Manufacturing 1,171 1,333 1,470 1,640 1,780Construction 377 427 456 507 550

Tertiary sector 2,976 3,154 3,249 3,328 3,456Of which:

Transport, etc. 278 302 314 326 345Wholesale and retail services 1,144 1,218 1,314 1,254 1,280Finance, insurance, real estate,

and business services 253 258 279 300 320Government services 847 850 854 858 863

•

(Annual percentage change)

Total labor force 3.4 2.8 2.3 2.3 2.7Total employment 5.0 4.6 3.1 3.0 3.5

Primary sector -4.1 -4.9 -3.3 -5.5 -4.1Agriculture, forestry, andfishery -3.9 -5.2 -3.3 -5.7 -4.1Mining and quarry ing -10.8 12.1 -2.7 - -2.9


Tertiary sector 7.4 6.0 3.0 2.4 3.9Of which:

Transport, etc. 6.5 8.6 4.0 3.8 5.8Wholesale and retail services 6.9 6.5 7.9 -4.6 2.1Finance, insurance, real estate,

and business services . . . . 2.0 8.1 7.5 6.7Government services 0.4 0.4 0.5 0.5 0.6

(Percentage share)

Total employment 100.0 100.0 100.0 100.0 100.0

Primary sector 29.2 26.5 24.9 22.8 21.2Agriculture, forestry, andfish«y 28.7 26.0 24.4 22.3 20.7Mining and quarrying 0.5 0.6 0.5 0.5 0.5


Tertiary sector 46.6 47.2 47.1 46.9 47.1Of which:

Transport, etc. 4.4 4.5 4.6 4.6 4.7Wholesale and retail services 17.9 18.2 19.1 17.7 17.4Finance, insurance, real estate,

and business services 4.0 3.9 4.0 4.2 4.4Government services 13.3 12.7 12.4 12.1 11.8


-35-

Table 17. Malaysia: Federal Budgetary Developments, 1989-94

(Tn million* of ring git)

APPENDIX

Sources: Date provided by the Malaysian authorities; and staff estimates and projections.

I/ Includes taxes on property.2f Includes "other tax revenue."2/ Includes adjustment for accounts payable.

Proj.1989 1990 1991 1992 1993 1994

Total revenue and grants 24,228 28,972 34,458 39,172 42,033 45,156Tax revenue 17,506 22,241 26,969 30,181 33,235 37,186

Nonpctrokum tax revenue 12,673 16,279 19,045 22,620 26,063 30,309Taxes on net income and profits!/ 5417 7,101 8,463 11,200 12,979 15,919Saks tax and excises 2/ 4,861 6,435 7,375 8,353 9,944 10,828Taxes on international trade 2,295 2,743 3,207 3,067 3,140 3,562

Petroleum tax revenue 4,833 5,962 7,924 7,561 7,172 6,877Oil production companies 1,847 2,644 4,052 3,417 2,859 2,634Excises and duties 2,986 3,318 3,872 4,144 4,313 4,243

Nontax revenue 6,721 6,727 7,489 8,991 8,798 7,970Petroleum 2,809 2,927 3,475 3,874 3,841 3,907Other 3,912 3,800 4,014 5,117 4,957 4,063

Total expenditure and net lending 28,609 32,498 37,735 40,508 41,714 44,482Current expenditure 23,132 25,435 29,801 33,181 33,032 34,594

Wages and salaries 8,451 9,164 9,944 11,660 11,803 12,487Other expenditure on goods and services 3,080 3,454 4,917 4,992 5,071 5,872Subsidies and transfers 4,859 5,980 7,885 9,225 8,992 8,874Interest 6,742 6,830 7,048 7,304 7,166 7,361

Development expenditure 5,477 7,063 7,934 7,327 8,682 9,888Direct expenditure 5,5*3 8,661 6,953 7,350 8,071 8,748Net lending J/ -106 -1^98 981 -23 611 1,140

Overall balance -4,381 -3426 -3,277 -1,336 319 674

Memorandum items:Current balance 1,033 3407 4,627 5,934 8,964 10433Primary balance 2,361 3404 3,771 5,968 7,485 8,035

Overallfinancmglnet) 4481 3426 3,277 1436 -319External (net) -1,016 -815 117 -3,168 -3,135Domestic (net) 5497 4441 3,160 4404 2,816

Banking system 123 -522 -2,044 -1,778 1,084Central bank 415 1,152 -1,070 -1,050 -107

Of which:Share acquisition 1,050 1,050 1,050 . . .Banking institutions -333 2,492 -256 -645 -1476Change in government cash balances 41 -4,166 -718 -S3 2,767 -

Nonbanks 5,274 4,863 5,204 6,282 1,732Employees Provident Fund 1,602 2,021 2,148 1462 -367Petronas 32 1,151 100 -502 110Other 3,640 1,691 2,956 5,422 1,989

(In percent of GNP)

Memorandum kerns:Overall balance -4.5 -3.2 -2.7 -1.0 0.2 04Current balance 1.1 3.2 3.7 4.2 5.7 5.9Primary balance 2.4 3.0 3.1 4.3 4.7 4.5


-36- APPENDDC

Sources: Data provided by the Malaytitn authorities.

I/ Includes expenditure refund.21 Includes defense expenditures shown in the development budget and some net lending shown in the current

budget2/ Excludes contributions to the sinking funds.£/ Consists of subsidies, indemnities, refunds and write-offs, transfers to statutory bodies (excluding emoluments), and

other transferí.¿/ Includes repayment! of loans from revenue and loan funds.

Table 18. Malaysia: Economic Classification of Federal Government Expenditureand Net Lending, 1989-94

Proj.1989 1990 1991 1992 1993 1994

(fn jpÛjnns of fin p fit)

Current expenditure!/ 23,132 25,435 29,801 33,181 33,032 34,594

Expenditure on goods and services 11,531 12,618 14,861 16,652 16,874 18,359Wages and salaries 8,451 9,164 9,944 11,660 11,803 12,487Other purchases of

goods and services 2/ 3,080 3,454 4,917 4,992 5,071 5,872

Interest payments I/ 6,742 6,830 7,048 7,304 7,166 7,361

Subsidies and other current transfers 4,859 5,987 7,892 9,225 8,992 8,874Transfers to state governments 1,220 1,457 1,333 1,219 1,302 1,378Pensions 1,073 1,154 1,815 2,183 2,320 2,355Other current transfers 4/ 2466 3,376 4,744 5,823 5,370 5,141

Development expenditure 5,765 7,581 7,789 7,590 8,739 9,888Direct development expenditure 5,583 8,661 6,953 7,350 8,071 8,748Net lending S/ 182 (1,080) 836 240 668 1,140

Adjustment for accounts payable (288) (518) 145 (263) (57)

Total expenditure and net lending 28,609 32,498 37,735 40,508 41,714 44,482

(in percent of total expenditure and net lendine)

Current expenditure i/ 80.9 78.3 79.0 81.9 79.2 77.8Expenditure on good* and services 40.3 38.8 39.4 41.1 40.5 41.3

Wages and salaries 29.5 28.2 26.4 28.8 28.3 28.1Other goods and services 10.8 10.6 13.0 12.3 12.2 13.2

Interest payments 23.6 21.0 18.7 18.0 17.2 16.5Subsidies and other current transfers 17.0 18.4 20.9 22.8 21.6 19.9

Transfers to state governments 4.3 4.5 3.5 3.0 3.1 3.1Pensions 3.8 3.6 4.8 5.4 5.6 5.3Other current transfers 9.0 10.4 12.6 14.4 12.9 11.6

Development expenditure 20.2 23.3 20.6 18.7 20.9 22.2Direct development expenditure 19.5 26.7 18.4 18.1 19.3 19.7Net lending 0.6 -3.3 2.2 0.6 1.6 2.6

Adjustment for accounts payable -1.0 -1.6 0.4 -0.6 -0.1 —


-37- APPENDIX

Table 19. Malaysia: Functional Classification of Federal Government Expenditureand Net Lending, 1989-94

(In millions of ringgifl

General servicesGeneral public services

General administrationInternal security

DefenseEducationHealthSocial security I/Housing and community developments

Of which:Other community and social securities

Economic servicesAgriculture, forestry, and rural developmentTransport and communicationOther economic services JJ

UnallocablePublic debt interestGrants to statesOthers 2/


Total expenditure and net lending

Mémorandum kern:Public debt interest/GNP

1989

17,7704,7663,1411,6252,7615,6491,4541,0732,067

1,025

6,6482,0522,1202,476

4,4796,7421,220

(3,483)

(288)

28,609

7.0

1990

19,4614,4672,6421,8253,0436,5961,7771,1542,424

1,435

8,9942^422,4564,196

4,4616,8301,457

(3,826)

(518)

32,398

6.2

1991

22,9015,2213,2631,9584,3237,0672,0351,8152,440

1,198

7,16423452,6252,194

7,5257,0481,333(856)

145

37,735

(fr

5.7

1992

25,9786,3553,8862,4694,5008,0592,4142,1832,467

1,613

8,0022,38934172,096

6,79173041,219

(1,732)

(263)

40,508

percent)

5.2

1993

27,1276,5844,1472,4374,9518,5382,4072,3202,327

1,437

7,7762,4423,4641,870

6,8687,1661,302

(1,600)

(57)

41,714

4.5

Budget1994

29,1496,2784,0172,2615,3679,5502,4182,3553,181

1,777

9,8482,6754,4092,764

6,45773611,378

(2,282)

-

45,454

4.1


U Includes government pensions.2/ Includes general administration, regulations and research, mining, manufacturing and construction, and utilities.2/ Includes expenditure refunds and net lending items.


-38- APPENDIX

Table 20. Malaysia: Federal Government Revenue and Grants, 1989-94

(In millions of ringgit)


I! Includes effects of tax measures contained in the budget.2/ Consists of income taxes on cooperatives and other direct taxes.2/ Excludes expenditure refunds and net lending.4/ Excludes revenue from sales of shares.

Proj.1989 1990 1991 1992 1993 1994 i/

Tax revenue 17,506 22,241 26,969 30,181 33,235 37,186Taxes on net income and profits 7,295 9,650 12,397 14,386 15,661 18,391

Oil production companies 1,847 2,644 4,052 3,417 2,859 2,634Petronas 1,382 1,983 2,707 2,283 1,913 1,795Other ou companies 465 661 1,345 1,134 946 839

Other companies 3,402 4,497 5,352 7,524 8,551 10,580Individuals 2,043 2,506 2,989 3,441 4,248 5,172Other2/ 3 3 4 4 3 5

Taxes on property 69 95 118 231 177 162Taxes on goods and services 5,179 6,366 7,469 8,410 9,986 10,436

Sale, tax 1,913 2,442 2,763 3,082 3,468 3,668Imported goods 659 838 974 1,112 1,343 1,270Domestic goods 1,254 1,604 1,789 1,970 2,125 2,398

Selective excises on goods 1,932 2,266 2,849 3,062 3,712 3,540Tobacco and alcoholic beverages 421 459 590 700 887 890Petroleum products 794 671 943 1,138 1,423 1323Motor vehicle tax 661 1,056 1,249 1,145 1,326 1,258Other 56 80 67 79 76 69

Selective excises on services 1,334 1,658 1,857 2,266 2,806 3,228Of which:

Motor vehicle tax 772 87 1,012 1,070 1,152 1,116Taxes on international trade 4,487 5,39 6,136 6,073 6,030 6,482

Import duties 2,899 3,420 4,107 4,384 4,566 5,036Tobacco and alcoholic beverages 270 312 315 358 295 254Petroleum products 760 737 1,029 1,360 1,461 1,514Other import duties 1,772 2,335 2,763 2,665 2,810 3,268Surtax on imports 97 36 — 1 — —

Expon duties 1,588 1,970 2,029 1,689 1,464 1,446Rubber 58 3 _ _ _ _Petroleum , 1,432 1,910 1,900 1,646 1,429 1,406Tin 2Palm o i l 1 4 2 4 6 7 8Other 82 55 125 37 28 32

Other tax revenue 2/ 476 740 849 1,081 1381 1,715Nontax revenue 6,658 6,697 7,459 8,934 8,761 7,941

Property income 5,360 5,608 6,106 7,816 7,205 6,523Nonfinancial public enterprises 1 — — — — —Public financial institutions 804 802 820 1,010 501Rent and interest 4/ 1,746 1,879 1,811 2,932 2,863 2,616Dividends paid by Petronas 2,300 2,300 2,600 3,100 3,100 3,100Petroleum royalties 509 627 875 774 741 807

Administrative fees and chargessale of goods, fines, and forfeit 78 863 908 987 1,440 1,318

Contributions to pension fund 244 153 123 - - -Other nontax revenue 271 73 322 131 116 100

Capital revenue 63 30 30 57 37 29Total revenue 24,227 28,968 34,458 39,172 42,033 45,156Foreign grants 1 4 - - ' — -Total revenue and grants 24,228 28,972 34,458 39,172 42,033 45,156


-39 - APPENDIX

Table 21. Malaysia: Operations of the Employees' Provident Fund, 1989-93

(In millions of ringgiO

ReceiptsContributionsInvestment incomeOther

ExpenditureWithdrawalsOperating expenditure

Balance(In percent of GNP)Holding of government securitiesRegistered employees

(in millions)Registered employers

On thousands)

1989

6,5433,5662,951

26

1,6671,596

71

4,8767.1

34,108

5.5

160

1990

7,3984,1393,231

28

1,8081,727

81

5,5907.4

36,129

5.9

171

1991

8,7074,9213,752

34

2,0561,967

89

6,6518.1

38,276

6.3

191

1992

10,8716,3174,504

50

1,8721,760

112

8,99910.2

39,635

6.6

206

1993

12,6797,3765,251

2.3312,205

126

10,34810.8

39,264

6.9

223



-40- APPENDDC

Table 22. Malaysia: Outstanding Federal Government Debt, 1989-93

1989 1990 1991 1992Est.1993

(Jn h^1|iops of ringpit: end of period)

Domestic debtGovernment securitiesTreasury billsOther

Foreign debtTntffnwtiopa' vvtitntinns

and foreign governments I/Muket loans

Total debt

Domestic debtGovernment securitiesTreasury billsOther

Foreign debtIntentional-institutions

and foreign governments I/Market loans

Total debt

65.758.24.33.2

24.2

7.217.0

89.9

68.060.24.43.3

25.0

7.417.6

93.0

70.062.14.33.6

24.7

8.516.2

94.7

(IP

63.256.13.93.3

22.3

7.714.6

85.5

73.665.34.34.0

25.4

8.716.7

99.0

oercent of GNP1

59.652.93.53.2

20.6

7.013.5

80.1

76.166.64.35.2

20.9

8.112.8

97.0

54.347.53.13.7

14.9

5.89.1

69.2

76.566.04.36.2

19.4

7.811.6

95.9

48.441.82.73.9

12.3

4.97.3

60.7

Somce: Data provided by the Malaysian authorities.

I/ Consists of project loans.


-41- APPENDDC

Total revenue and giants 2/Federal governmentStatutory bodiesState governmentsLocal governmentsNFPE operating surplus

Total expenditure and net lendingTotal current expenditureFederal governmentStatutory bodiesState governmentsLocal governments

Total development expenditureFederal governmentStatutory bodiesState governmentsLocal governmentsNFPEs

Net lending


Overall public sector balance

Financing of the public sectorExternalDomesticChange in assets

Memorandum items:Current balanceOverall balance (in percent of GNP)

1989

36,61724,2281,9984,5381,1394,714

39,94327,11520,2032,3823,532

998

12,6393,5731,5862,533

2624,685

477

(288)

(3,326)

3,326(2,583)7,840(1,931)

9,439-3.4

1990

43,09928,9722,2365,3371,4415,113

45,53529,82721,9612,6044,1701,092

15,6945,6932,2182,943

3294,511

532

(518)

(2,436)

2,436(712)

10,56007,412)

13,242-2.2

1991

50,37834,452,2975,0521,2197,352

51,21734,37925,7562,6814,7551,187

15,4094,7941,4353,063

4265,691

1,284

145

(839)

839(292)

4,615(3,484)

15,969-0.7

1992

56,38839,172,8615,3321,3927,631

57,29938,74929,3113,1055,0331,300

18,3725,5902,0433,472

3966,871

441

(263)

(911)

911(2,851)6,719

(2,957)

17,582-0.6

1993

59,28042,0333,0505,3031,5327,362

60,43138,13928,7073,2344,8091,389

21,5886,6532,0733,572

5078,783

761

(57)

(1,151)

1,151(2,733)1,1242,760

21,104-0.7

Proj.1994

64,82045,152,9245,1921,5949,954

65,62840,40030,4913,4444,8671,598

24,3536,9102,2263,542

63511,040

875

—(808)

808(133)961(20)

24,391-0.4


I/ Consists of the federal government, statutory bodies, state and local governments, and nonñnancialpublic enterprises.

2/ Net of transfers.

Table 23. Malaysia: Consolidated Public Sector, 1989-94J7

<Tn pillions of rinf gift


-42- APPENDIX

Table 24. Malaysia: Federal Government Operations, 1989-94

fln millions of ringgit)

Source«: Data provided by the Malaysian authorities; and staff estimates and projections.

I/ Excludes net lending shown in the current budget.2f Includes reimbursement to state governments.

Proj.1989 1990 1991 1992 1993 1994

Total revenue and giants 24,22« 28,972 34,458 39,172 42,033 45,156Revenue 24,227 28,968 34,458 39,172 39,855 45,156Giants 1 4 -

Total expenditure and net lending 28,609 32,498 37,735 40,508 41,714 44,482Current expenditure I/ 23,132 25,435 29,801 33,181 33,032 34,594

Of which:Transfers to: 2,929 3,474 4,045 3,870 4,325 4,103

Statutory bodies 1,672 1,973 2,680 2,603 2,958 2,681State governments 1,220 1,457 U 20 1,219 1,305 1372Local governments 37 44 45 48 62 50NFPEs - - - - -

Direct development expenditure 5,583 8,661 6,953 7,350 8,071 8,748Of which:

Transfers to: 2,010 2,968 2,159 1,760 1,418 1,838Statutory bodies 1,618 2,102 1,500 1,378 1,034 1,597State government* 2/ 64 57 57 101 101 101Local governments 37 63 28 68 69 114NFPEs 291 746 574 213 214 26

Net lending 182 -1,080 836 240 668 1,140Of which:

Loans (net) to: -295 -1,612 -448 -201 -93 265Statutory bodies 268 231 111 32 -5 32State governments -3 -291 44 290 124 246

Local governments 3 -12 -13 -13 -13 -13NFPEs .563 -1,540 -590 -510 -199

Adjustments for accounts payable -288 -518 145 -263 -57

Overall balance -4,381 -3,526 -3,277 -1,336 319 674

Financing ' 4,381 3,526 3,277 1,336 -319 -674External (net) -1,016 -815 117 -3,168 3,135

Project loans -435 363 -56 -184 -1,199M**et loans -398 -1,010 339 -2,858 -1,824Other -183 -168 -166 -126 -112

l>omestic (net) 5,397 4,341 3,160 4,504 2,816Banking system _. 123 -522 -2,044 -1,778 1,084

Central bank 415 1,152 -1,070 -1,050 -107Banking institution! -333 2,492 -256 -645 -1,576Use of cash balances 41 -4,166 -718 -83 2,767

Nonbanki 5,274 4,863 5,204 6,282 1,732Employees' Provident Fund 1,602 2,021 2,148 1,362 -367PETRONAS 32 1,151 100 -502 110Other 3,640 1,691 2,956 5,422 1,989

memorandum items:Current balance 1,032 3,503 4,627 5,934 8,964 10,533Overall balance

(In percent of CNF) -4.5 -3.2 -2.7 -1.0 0.2 0.4


- 43 - APPENDIX

Table 25. Malaysia: Operations of Statutory Bodies, 1989-94

fln millions of ringgif)

Total revenueOwn revenueTransfers from:

Federal government(operating grants)

Federal government(development grants)

State governmentsLocal governmentsNFPEs

Total expenditureOperating expenditureDevelopment expenditure

Overall balance

FinancingDomestic

Federal governmentnet lending

OtherChange in assets

Foreign

Current balanceOverall balance

(In percent of GNP)

1989

5,2881,9983,290

1,672

1,618

———

3,9682,3821,586

1,320

-1,320-1,151

252136

-1,539-169

1,288

1.4

1990

6,3112,2364,075

1,973

2,102

———

4,8222,6042,218

1,489

-1,489-1,395

113-169

-1,339-94

1,605

1.3

1991

6,4772,2974,180

2,680

1,500

———

4,1162,6811,435

2,361

-2,361-2,078

111230

-2,419-283

2,296

1.9

1992

6,8422,8613,981

2,603

1,378

———

5,1483,1052,043

1,694

-1,694-1,491

32417

-1,940-203

2,359

1.2

1993

7,0423,0503,992

2,958

1,034

———

5,3073,2342,073

1,735

-1,735-1,525

-5482

-2,002-210

2,774

1.1

Proj.1994

7,2022,9244,278

2,681

1,597

———

5,6703,4442,226

1,532

-1,532-1,399

32575

-2,006-133

2,161

0.9



-44-

Table 26. Malaysia: Operations of State Governments, 1989-94

(In millirms of finggft)

APPENDIX

Sources: Date provided by the Malaysian authorities; and staff estimates and projections.

Proj.1989 1990 1992 1992 1993 1994

Revenue and giants 5,822 6,851 6,429 6,652 6,709 6,665Ownrevenue 4,538 5,337 5,052 5,332 5,303 5,192Transfersfrom: 1,284 1,514 1,377 1,320 1,406 1,473

Federal governments(statutory giants) 578 641 607 742 798 836

Federal governments(other giants) 706 873 770 578 608 637

Statutory bodies — — — — — —Local governments — — — — — —NFPEs _ _ _ _ _ _

Expenditure 6,216 7,326 7,995 8,732 8,583 8,567Operating expenditure 3,594 4,263 4,838 5,096 4,866 4,898

Of which:Transfersto: 62 93 83 63 57 31

Federal government _ _ _ _ _ _Statutory bodies _ _ _ _ _ _Local government 62 93 83 63 57 31NFPEs _ _ _ _ _ _

Development expenditure 2,622 3,063 3,157 3,636 3,717 3,669Direct development expenditure 2,618 3,057 3,168 3,608 3,689 3,641

Of which:Transfersto: 85 114 105 136 117 99

Federal government _ _ _ _ _ _Statutory bodies _ _ _ _ _ _Local governments 85 114 105 136 117 99NFPEs _ _ _ _ _ _

Net lending 4 6 -11 28 28 28Of which:

Local governments 4 6 -11 28 28 28

Overall balance -394 -475 -1,566 -2,080 -1,874 -1,902

Financing (net) 394 475 1,566 2,080 1,874 1,902Lending from federal government -3 -291 44 290 124 246Changes in assets (increase -) 397 766 1,512 1,790 1,750 1,656Domestic borrowing — — 10 — — _

Memorandum items:Current balance 2,228 2,588 1,591 1,556 1,843 1,767Overall balance

(In percent of GNP) -0.4 -0.4 -1.3 -1.5 -1.2 -1.1


-45- APPENDDC

Table 27. Malaysia: Operations of Local Governments, 1989-941/

fln millions of ringgif)

Total revenueOwn revenueTransfers from:

Federal government(operating grants)

Federal government(development grants)

Statutory bodiesState governmentsNFPEs

Total expenditureCurrent expenditureDevelopment expenditure

Overall balance

FinancingLending from federal governmentLending from state governmentsChanges in assets (increase -)Domestic borrowing

Memorandum hems:Current balance

(In percent of GNP)

1989

1,3601,139

221

37

37-

147

—

1,260998262

100

-10034

-107

—

3620.1

1990

1,7551,441

314

44

63

—207

—1,4211,092

329

334

-334-12

6-328

—

6630.3

1991

1,4801,219

261

45

28-

188

—1,6131,187

426

-133

133-13-11157

—

293-0.1

1992

1,7071,392

315

48

68

—199

—1,6961,300

396

11

-11-1328

-26

—

407

—

1993

1,8371,532

305

62

69

—174

—1,8%1,389

507

-59

59-132844

—

448

—

Proj.1994

1,8881,594

294

50

114

—130

—2,2331,598

635

-345

345-1328

330

—

290-0.2


I/ Figures include 111 of the 141 local governments in Peninsular Malaysia.


-46- APPENDIX

Table 28. Malaysia: General Government Operations, 1989-941/

Total revenue and grantsRevenue

Federal governmentStatutory bodiesState governmentsLocal governmentsGrants

Total expenditure and net lendingCurrent expenditure

Federal governmentStatutory bodiesState governmentsLocal governments

Direct developments expenditureFederal governmentStatutory bodiesState governmentsLocal governments

Net lendingFederal governmentState governments

Adjustments for accounts payable

Overall balance

Financing (net)ExternalDomesticChange in assets (increase -)

Memorandum items:Current balanceOverall balance (in percent of GNP)

1989

31,90331,90224,2271,9984,5381,139

1

34,98627,11520,2032,3823,532

9988,2453,8641,5862,533

262-86-86

—-288

-3,083

3,083-1,1855,476

-1,208

—4,725

-3.2

1990

37,98637,98228,9682,2365,3371,441

4

40,23029,82721,9612,6044,1701,092

11,9296,4392,2182,943

329-1,008•1,008

—-518

-2,244

2,244-909

8,220-5,067

8,129-2.0

1991

43,02643,02634,4582,2975,0521,219

—

45,51034,37925,7562,6814,7551,187

10,2925,3681,4353,063

426694694

—145

-2,484

2,484-166

4,118-1,468

8,617-2.0

1992

48,75748,75739,1722,8615,3321,392

—

50,13138,74929,3113,1055,0331,300

11,7145,8032,0433,472

396-69-69

—-263

-1,374

1,374-3,3715,004-259

9,951-1.0

1993

51,91851,91842,0333,0505,3031,532

—

51,66338,13928,7073,2344,8091,389

13,0196,8672,0733,572

507562562

—-57

255

-255-3,345

5312,559

13,7420.2

Proj.1994

54,86654,86645,1562,9245,1921,594

—

54,61440,40030,4913,4444,8671,598

13,3396,9362,2263,542

635875875_

—252

-252-133

99-20

14,4370.1


I/ Includes federal, 13 state, and 80 local governments; and statutory bodies.


-47- APPENDIX

Table 29. Malaysia: Operations of Nonfinancial Public Enterprises, 1989-94 I/

fin tnîllînng of ringgifl


I/ Consists of 42 NFPEs in 1993, 44 NFPEs in 1991, and 52 NFPEs in 1989 as defined in the Bank Negara Malaysia,Annual Reports.

Proj.1989 1990 1991 1992 1993 1994

Operating surplus 5,005 5,859 7,926 7,844 7,576 9,980Of which:

Transfersfrom: 291 746 574 213 214 26Federal government (operating grants) _ _ _ _ _ _Federal government

(development grants) 291 746 574 213 214 26Statutory bodies — — — — — ...State governments - - - — - . . .Local governments — — — — — ...

Transfers to: - - - — — ...Federal government - — — — — ...Statutory bodies - — — — — ...State governments - - - - — ...Local governments - - . . . . . .

Surplus net of transfers 4,714 5,113 7,352 7,631 7,362 9,954

Development expenditure 4,685 4,511 5,691 6,871 8,783 11,040Of which:

Transfers t o : . . . . . . . .Federal government - - . . . . . .Statutory bodies - - . . . . . .State governments - - . . . . . .Local governments - - . . . . . .

Overall balance 320 1348 2,235 973 -1,207 -1,060

Financing -320 -1,348 -2,235 -973 1,207 1,060Foreign borrowing -1398 197 -126 520 612Domestic borrowing 608 88 -218 -115 104

Lending from federal state governments -563 -1,540 -590 -510 -199Other (banking system) 1,171 1,628 372 395 303

Other 1,193 712 125 1320 290 1,060Use of assets -723 -2,345 -2,016 -2,698 201

Memorandum kerns:Current balance 5,005 5,859 7,926 7,844 7,576 9,980Overall balance in percent of GNP 0.3 1.2 1.8 0.7 -0.8 -0.6


-48- APPENDIX

Table 30. Malaysia: Reserve Money by Components, 1989-94

(In millions of ringgit: end of period)

Currency in Excess Required Deposits ofCirculation Reserves Reserves Private Sector Total

1989

1990

1991

1992First quarterSecond quarterThird quarterFourth quarter

1993First quarterSecond quarterThird quarterFourth quarter

1994First quarter

9,174.1

10,059.2

11,044.5

11,669.811,267.511,423.912,142.1

12,525.612,245.912,824.213,533.9

14,489.1

848.0

1,454.3

1,380.2

1,284.51,143.21,835.41,210.0

1,477.01,289.01,126.71,191.2

1,576.1

4,874.4

6,911.2

9,542.0

9,656.911,398.111,487.611,286.0

11,631.511,661.812,100.012,689.7

15,801.3

96.9

76.6

101.4

101.277.6

128.1106.9

95.8124.886.5

149.4

449.2

14,993.4

18,501.3

22,050.1

22,712.423,886.424,875.024,745.0

25,729.925,321.526,137.427,564.2

32,315.7



-49- APPENDIX

March

Foreign aiseuGold and foreign exchangeIMF reserve positionHoldings of SDR«

Claims on GovernmentBills discountedDeposits with financial institutionsDeferred expenditureLoans and advancesOther assets

Total assets

Paid-up capitalGeneral reserve fundOther reservesCurrency in circulationDeposits:

Banks and other financialinstitutions

Federal governmentOther

Bank Negara certificatesAllocation of SDKsOther liabilities

Total liabilities

1990

27,04525,886

629530

2,6814,0501,734

—2,1323,273

40.914

1003,2588,749

11,22415,223

9,9364,878

409

—5341,805

40.914

1991

30,46729,197

700570

1,6115,1952387

-1,8983,001

44.559

1003,458

10,05312,07016,515

10,4475,596

472-

5421,800

44.559

1992

47,21946,075

848296561

3,8601,944

—2^693,641

59.592

1003456

75313,17440,584

27,5595,6797^46

—491906

59.592

June Set*. Dec.1993

52,05050,948

806296508

4,0121,934

-23447,012

67.860

1003356

75314,01543,205

29,20353408,6623,825

4911,915

67.860

54,86953,774

793302373

4,0031,789

—333614,403

78.773

1003356

75313,40951,437

333636383

11,4918377

491450

am

57,01955,891

815306692

3,9831,818

—333223,034

89.871

1003356

75313,96263,219

44,8036,268

12,1487,175

491615

89.871

76,47475309

839326454

33241,7495,7072,6379,754

100.299

1003356

4114,64973,208

56,7622,911

133357,161

5091,076

100.299

March1994

90,91889,741

852325577

3,0112,6515,7072,818

12,999

118.681

1003356

4115,86493,864

74,6872372

16,8053,961

509786

118.681


Table 31. Malaysia: Assets and Liabilities of Bank Negara, 1990-94



Table 32. Milayiia: Money Market Indicator!, 1991-94

Source: Data provided by the Malaysian authorities

I! Commercial banka.y Coupon rate on eight-year bonda.3/ Fixed depoaita.

March June Sent, i Dee. March June Scot. Dec. March June Scot. Dec. March1991 ; 1992 1993 1994

\

Loan/deposit ratio i/ 97.4 102.4 103.5 101.2 104.0 98.2 95.2 93.9 93.7 91.9 87.9 83.5 76.8

Liquidity operations ofcentral bank (RM n», qtr. change) -3,773 2,130 3,575 530 -4,374 -538 -10,745 -7,828 -6,815 -11,498 -9,574 -12,411 -13,360

Interbank rate (overnight) 6.5 7.0 7.8 7.7 7.9 8.0 8.2 8.1 7.5 7.2 6.6 6.3 4.3

Treasury bill rate (3-month) 6.5 7.1 7.9 7.7 7.6 8.0 7.6 7.1 7.1 6.8 5.8 5.2 2.8

Bond coupon rate (8-year) V 8.1 8.0 8.2 8.1 8.0 8.0 8.5 8.4 8.5 8.5 8.5 8.5 8.0

Deposit rate (12-month) !/ 7.0 7.0 8.0 8.0 8.0 8.3 8.0 7.8 7.3 7.0 6.5 6.3 5.8/6.0Base lending rate i/ 7.5 8.0 8.5 9.0 9.0 9.5 9.5 9.5 9.25/9.5 9.25 9.0 8.5 7.6/7.9

Average lending rate i/ 9.1 9.4 9.2 9.7 10.0 10.3 10.3 10.3 10.2 10.1 10.0 9.7 9.3

(h t*rctn>; epd of period; upleu othflwi» jndic.t̂


-51- APPENDIX

Table 33. Malaysia: Central Bank Liquidity Operations, 1990-94

(Changes in millions of ringgif)

Export credit refinancing

Rediscount of B As

NIF financing

Lending to institutions

Money market interventionClean moneyRepos

Money market operations

Money market loans

BNM certificates

Bilateral payment*-

Vostro balance

Malaysia government securitiesOf which:

Direct transactionsReposMalaysia savings bond

EPF money market account

Cagamas bonds

Total

1990

1,679

—-77

1,282

2,237

51

2

—-

—

1,332

1,362-30

—

-3

6,503

1991

1,145

89

-95

313

2,072

101

—

—

—

—

-1,118

-1,17961

—

-45

2,462

1992

-1,335

-

-143

828

-14,939

-180

-

—

190

—-1,089

-1,034-55

-6,703

-114

-23,485

1993

-334

—

-116

-355

-25,194

-1,410

—

-6,129

206

—-985

-121-5

-859

-5,969

-12

-40,298

March1994

-513

—30

441

-9,622

-634

—

3,300

40

-2,885

-325

-354

29

-3,161

-31

-13,360



Table 34. Malaysia: Monetary Authorities' Account, 1989-94


]/ Includes commercial bank«, finance companies, and merchant banks.

March June Scot. Dec. March June Sent. Dec. March1989 1990 1991 1992 1993 1994

an millions of rineth: end of oeriod)

Foreign anett (net) 21,683 27,024 30,452 34,800 36,141 42.823 47.196 52,017 54,836 56,978 76.435 90,879

Domestic anda (net) -6,338 -8,172 -8,013 -11,841 -11,872 -17,529 -21,890 -25,878 -28,956 -30,374 -48,183 -58,086. Claims on Government (net) 817 -2,197 -3,985 -2,954 -7,505 -6,855 -5,118 -4,833 -6,010 -5,576 -2,457 -1,796

Claima on Government 1,529 2.681 1,611 1,649 1,610 742 561 508 -373 692 454 577Government deposita 712 4,878 5,596 4,603 9,115 7,597 5,679 5,340 6,383 6,268 2,912 2,372

Claimi on private aector 1,573 1.457 1,147 1,123 1,080 1,031 1,107 1,052 910 940 2,400 2,736

Claim, on banka \l -1,273 2,603 5,740 1,330 317 -9,358 -11,566 -12,727 -17,194 -28,079 -38,727 -50,942

Leu other hema net -7,455 -10,035 -10,915 -11,340 -5,764 -2,347 -6,314 -9,370 -6.662 2,341 -9,398 -8,084Of which:

BNM certificate« _ _ _ _ - - - - - - - _ _

Reserve money 15.345 18,852 22.439 22,959 24.270 25,294 25,306 26,139 25,880 26,604 28,253 32,793Of which:

Currency in circulation 9.903 11,224 12,070 12,860 12.296 12,478 13,174 13,840 13,405 13,931 14.649 15,853Banken' depoaita I/ 4,993 5,215 6,975 6,739 7,957 8,581 7,643 7,807 7,695 7,752 8,161 10,667NFIi* depoaita 1,262 1,986 2,904 3,013 3,556 3,688 3,822 3,987 4,096 4,369 4,605 5,347Other depoaita -813 427 490 348 461 547 667 505 683 553 839 927

(Twelve-month rate of chance)

Foreign aaaeta (net) 18.3 24.6 12.7 20.8 23.7 53.9 55.0 49.5 51.7 33.1 62.0 74.7

Domestic asaeta (net) 0.4 28.9 -1.9 21.1 17.7 156.3 173.2 118.6 143.9 73.3 120.1 324.5Claimi on Government (net) -42.1 -368.9 81.4 94.1 111.8 146.8 28.4 63.6 -19.9 -18.7 -52.0 -62.8Claim, on private aector 14.8 -7.4 -21.3 -19.3 -9.3 -12.6 -3.5 -6.3 -15.7 -8.8 116.8 160.1Claim« on banki -167.9 -304.5 120.5 -379.4 -83.7 -287.3 -301.5 -1.056.9 -5.524.0 200.1 234.8 300.3

Re«erve money 27.7 22.9 19.0 20.6 26.8 20.5 12.8 13.8 6.6 5.2 11.6 25.5


Table 35. Malaysia: Assets and Liabilities of Commercial Banks, 1989-941


ReservesForeign assetsClaims on GovernmentClaims on private sectorClaims on NFIs I/

iDemand depositsTime and savings depositsMoney market instruments 1)Foreign liabilitiesGovernment depositsCredit from central bankCapital accountsOther items (net)

1989

4,2047,889

11,79967,1842,845

12,09044,0959,8456,3174,2831,452

10,0065,833

1990

6,3327,610

11,97182,8024,473

14,58355,09613,3568,1291,8411,221

11,2417,721

1991

8,4746,340

11,97799,2346,756

16,05758,25720,22511,7552,3393,971

13,1517,026

1992

8,4685,221

11,069109,263

7,828

18,60172,72421,72218,6821,457

-12,94314,6506,956

March June Scot. Dec.1993

8,8935,840

10,355110,630

7,503

19,45476,14520,74019,2201,546

-14,37815,0145,480

8,6235,905

10,793114,372

7,087

21,32579,10421,22119,4711,771

-18,68115,5916,978

8,7155,996

10,300115,527

6,596

22,84484,43620,58921,743

1,910-29,62016,0959,137

9,03810,3729,872

121,1888,326

28,71588,62023,17031,488

1,871-40,08016,6308,382

March1994

11,6947,6719,775

122,5198,524

28,46697,24228,26431,8532,446

-52,06417,8116,165


I/ Nonmonetary financial institutions (finance companies, merchant banks, and discount houses).21 Includes bonds, repos, and other money market instruments.


Table 36. Malaysia: Consolidated Statement of Aaaeta and Liabilities ofNonmonetary Banking Institutions, 1989-94 ]/

(fa millions of ringait: end of period)


I/ Consolidation of the accounts of finance companies, merchant banks, and discount houses.

* March June Sert. Dee. Match June Scot. Dec. March1989 1990 1991 1992 1993 1994

Reterveí 2,856 4,524 3,756 3,601 4,063 4,265 4,436 5,051 5,487 7,536 8,421 11,133

Foreign atteta 28 84 130 131 130 130 129 132 139 134 137 147

aairns on federt! fovernment 5,368 4,563 4,885 4,556 4,402 4,221 4,209 4,538 4,037 4,098 3,727 3,276Finance companies 1,537 1,685 2,038 2,155 2,212 2,041 2,122 2,206 2,093 2,031 1,990 1,798Merchant banki 807 898 1,038 1,103 950 970 1,041 1,123 900 1,097 1,103 962Diacounthouaea 3,024 1,980 1,809 1,298 1,240 1,210 1,046 1,210 1,045 969 634 516

Claim* on private aector 27,440 36,230 45,473 47,207 48,906 51,122 52,706 53,857 55,494 57,292 59,683 60,219Finance companies 20,245 27,482 34,644 35,837 36,890 38,169 39,415 40,323 41,267 42,895 44,903 45,778Merchant banka 6,326 7,362 8,443 8,414 8,951 9,206 9,563 9,717 10,202 10,106 10,619 10,801Diacounthouaea 869 1,386 2,386 2,956 3,065 3,747 3,728 3,817 4,026 4,291 4,161 3,640

rime and aavinga depoaita 28,617 34,944 40,897 38,983 41,181 42,604 44,601 46,401 49,677 53,499 56,362 57,472Finance companies 20,806 25,750 32,354 31,848 34,028 34,765 35,440 37,219 39,067 40,509 43,200 45,345Merchant banka 5,274 5,141 5,747 4,989 5,112 5,449 6,372 6,415 7,345 9,191 9,464 7,993Diaoounthouaea 2,537 4,052 2,796 2,146 2,041 2,390 2,989 2,768 3,265 3,799 3,697 4,134

Money-market inatnimenta 828 2,689 3,863 4,246 4,348 4,193 5,091 4,206 4,743 5,193 5,039 5,530

Foreign liabilitiea 46 2 - - 0.1 0.1 12.8 45.3 21.2

Central government depoaita 1,107 424 510 469 458 490 453 500 553 598 722 622

Credit from commercial banka 785 4,497 4,578 3,881 4,011 4,427 4,717 6,402 5,437 5,983 6,911 10,108Finance companies 462 2,527 1,825 1,920 1,955 2,344 2,654 2,492 2,264 2,995 3,252 3,568Merchant banka 323 1,662 2,753 1,961 2,056 2,083 2,063 2,556 1,925 1,425 2,186 3,409

Capital accounts 3,538 4,517 5,246 5,440 5,580 5,746 5,934 6,106 6,320 6,517 6,820 7,226

Other Kema (net) -2,023 -1,962 -3,476 -2,360 -2,012 -2,172 -2,006 1,977 1,493 1,008 796 182


-55-

Table37. Malaysia: Interest Rates of Commercial Banks and Finance Companies,1987-94 i/, 2/

(In percent: end of period)

APPENDIX


I/ Most frequently quoted rates.2/ Rates in parentheses aie corresponding interest rates of finance companies.I/ With effect from February 1991, all lending rates are pegged to a bank's declared base lending rate,

with the exception of those levied on loans to priority sectors and those prescribed by law.47 Refers to the weighted average lending rate of all commercial banks and finance companies,

respectively.

Base AverageFixed Deposits Savings Lending Lending

1 3 6 9 1 2 Deposits Rate ¿/ Rate 4/

1987 2.00 2.25/2.50 3.00/3.50 3.50 4.25 3.50 7.50 9.73(3.50) (3.75) (4.25) (4.50) (5.50) (12.62)

1988 3.00 3.25 3.75 4.00 4.25 3.50 7.00 8.95(3.5/4.0) (4.00) (4.00) (4.50) (4.50) (12.47)

1989 4.50 5.00 4.75 5.00 5.50 3.50 7.00 8.70(5.25) (5.25) (5.50) (6.00) (4.50) (8.50) (11.86)

1990 6.50 7.00 7.25 7.25 7.25 3.50 7.50 8.99(7.60) (7.80) (7.80) (7.90) (5.00) (9.00) (11.87)

1991March 6.00 6.50 6.50/6.75 6.75 7.00 3.50 7.50 9.27

(6.8/7.0) (6.9/7.0) (7.00) (7.20) (5.00) (9.00) (12.04)June 6.50 7.00 7.10 7.00 7.00 3.50 8.00 9.36

(7.30) (7-45) (7.50) (7.50) (5.00) (9.0/9.5) (11.98)Sept 7.50 7.60 7.75 7.75 8.00 3.50 8.50 9.16

(8.50) (8.50) (8.60) (8.70) (5.00) (9.50) (13.07)Dec. 7.7/7.8 8.00 8.00 8.00 8.00 3.25 9.00 9.72

(7.90) (8.15) (8.35) (8.40) (8.50) (5.00) (10.00) (13.07)

1992March 7.70 7.80 8.00 8.00 8.00 3.25/3.5 9.00 10.00

C7.80) (8.05) (8.10) (8.15) (8.20) (5.00) (10.50) (12.94)June 8.00 8.20 8.20 8.20 8.25 3.25 9.50 10.32

(8.20) (8.30) (8.30) (8.30) (8.35) (5.00) (10.50) (12.97)Sept. 7.90 7.90 7.90 7.90 8.00 3.25 9.50 10.32

(̂7.90) (8.00) (8.00) (8.00) (8.00) (5.00) (10.50) (13.26)Dec. 7.90 7.90 7.90 7.90 7.80 3.25 9.50 10.26

(7.90) (8.00) (8.00) (7.95) (8.00) (5.00) (10.50) (12.28)

1993March 7.40 7.40 7.30 7.30 7.30 3.25 9.40 10.19

(7.40) (7.50) (7.50) (7.45) (7.45) (5.00) (10.50) (13.09)June 7.00 7.00 7.00 7.00 7.00 3.25 9.25 10.09

(7.25) (7.25) (7.20) (7.20) (7-10) (5.00) (10.50) (12.86)Sept. 6.70 6.70 6.70 6.50 6.50 3.25 9.00 9.95

(6.80) (6.80) (6.80) (6.80) (6.70) (5.00) (10.50) (12.09)Dec. 6.40 6.40 6.30 6.30 6.30 3.25 8.50 965

(6.50) (6.50) (6.50) (6.40) (6.40) (5.00) (10.50) (12.15)

1994March 5.80 5.80 6.00 5.80 5.80 3.25 7.60 9.25

(5.70) (5.85) (6.00) (6.00) (6.00) (5.00) (10.50) (12.14)


-56- APPENDDC

Table 38. Malaysia: Direction of Commercial Bank Lending, 1989-93 I/, 2.1


1989 1990 1991 1992 1993

Agriculture

Mining and quarrying

Manufacturing

Electricity

General commerce

Building and construction

Real estate

Individual housing loans

Transport, storage,and communication

Financing, ipsurancev

and business services

Other

Total

3,622(5.4)

876(1.3)

14,058(20.9)

197(0.3)

10,546(15.7)

4,763(7.1)

8,522(12.7)

8,143(12.1)

1,266(1.9)

7,419(11-1)

7,731(11.5)

67,142

4,238(5.2)

833(1.0)

18,742(23.2)

202(0.2)

11,642(14.4)

5,502(6.8)

9,097(11.3)

9,587(11.9)

1,342(1.7)

9,105(11.3)

10,473(13.0)

80,763

4,642(4.8)

831(0.9)

23,536(24.2)

709(0.7)

12,864(13.2)

6,730(6.9)

9,970(10.3)

11,588(11.9)

2,045(2.1)

11,533(11.9)

12,758(13.1)

97,206

4,657(4.4)

877(0.8)

25,395(24.0)

671(0.6)

12,907(12.2)

8,602(8.1)

10,975(10.4)

12,203(11.6)

1,452(1.4)

13,621(12.9)

14,361(13.6)

105,721

4,125(3.5)

631(0.5)

26,932(23.0)

937(0.8)

13,662(11.7)

9,309(7.9)

11,383(9.7)

14,508(12.4)

2,001(1.7)

16,983(14.5)

16,765(14.3)

117,236


I/ Figures in parentheses are percentage shares.2/ Excludes lending to Government and nonresidents, trade bills payable outside Malaysia, and

private sector securities.


- 57 - - APPENDIX

Table 39. Malaysia: Developments in the Kuala LumpurStock Exchange, 1989-93


I/ Federal government securities at cost, excluding treasury bills.2/ Corporate securities issued by companies listed in the Kuala Lumpur Stock Exchange.I/ Securities with maturities of more than one year.

1989 1990 1991 1992 1993

Number of listed companies 307 285 324 369 413

Capitalization (millionringgit) 156,100 131,691 161,344 245,823 619,637

Turnover (million ringgit) 18,535 29,522 30,097 51,469 387,275

KLSE index (percent change) 57.3 -10.1 9.9 15.8 98.0

Dividend yield (percent) 2.00 2.50 2.55 2.21 1.04

Price/earnings ratio 35.38 22.27 22.57 22.80 48.24


-58- APPENDIX

Table 40. Malaysia: Funds Raised in the Capital Market, 1989-93


I/ Refers to Malaysian Government Securities.21 Refers to corporate securities issued by companies listed on the stock exchange.I/ Special issues to Bumiputera and selected investors.4/ Includes short-term commercial paper.

OfÔk

1989 1990 1991 1992 1993

fin billions of ringpit)

By the public sectorNet federal receipts 2.5 3.9 3.2 1.4 -0.6

Net issues 3.6 3.9 3.2 1.4 -0.6Government securities (gross) I/ 5.0 5.1 3.5 3.8 1.6

Less: Redemptions (1.3) (1.2) (0.3) (2.4) (2.2)Advance subscriptions -1.3 - - - -

Less: Government holdings (-0.1) (-) (-) (-) (-)

Investment certificates (net) - -0.1 - 0.1 1.0Malaysia savings bonds — — — — 0.8Net funds raised l¿ M 12. LS. L¿

By the private sectorShares (net) 2.5 8.6 4.4 9.2 3.2

Public issues 2/ 1.3 3.8 1.7 5.4 1.4Rights issues 1.1 4.4 2.2 3.4 1.2Special issues y - 0.5 0.5 0.3 0.6Private placements _ _ _ _ _

Debt securities (net) 2.1 2.5 2.4 3.1 2.0Conventional bonds 0.3 0.6 0.6 1.5 1.1Convertible bonds 0.4 0.9 0.9 0.3 0.2Islamic notes - 0.4 0.4 - —Cagamas bonds 1.2 0.4 - 1.4 0.7

Net funds raised £4. 10.9 &¿ 12.3 5_¿

Total 6.9 14.7 9.4 13.8 6.4

Commercial papers 0.2 0.2 0.6 1.4 1.7Total including commercial papers 7.1 14.9 10.0 15.2 8.1

fin percent of GNP1

Memorandum items:Funds raised in the capital market (net) 4/ 7.4 13.5 8.1 9.8 5.1Public sector 2.5 3.5 2.6 1.1 0.8Private sector 4.8 10.1 5.5 8.8 4.3

Shares 2.6 7.8 3.6 6.5 2.0Debt securities 2.2 2.3 2.0 2.2 2.3


-59- APPENDIX

Table 41. Malaysia: Trade Indices, 1989-93 I/

1989 1990 1991 1992Prel.1993

(1983 = ION

ExportsValueVolumeUnit value

Imports 2/ValueVolumeUnit value

Terms of trade

ExportsValueVolumeUnit value

Imports 2/Value 'VolumeUnit value

Terms of trade

177.4206.086.1

166.9181.092.2

93.4

18.718.00.6

32.130.11.5

.-0.9

208.6233.8

89.3

214.2220.997.0

92.0

17.613.43.7

28.422.15.2

-1.4

243.4268.090.8

269.3271.399.2

91.5

{Percent

16.714.71.8

25.722.82.3

-0.5

288.3286.8100.5

292.5281.4103.9

96.7

change")

18.47.0

10.7

8.63.74.7

5.7

333.6322.4103.5

335.1319.3104.9

98.6

15.712.42.9

14.613.50.9

2.0


I/ Trade indices presented in this table are based on customs data and are in terms ofU.S. dollars.

2/ Clear imports, excluding lumpy items such as aircraft, ships, and onshore oil installations.


-60-

Table42. Malaysia: Composition of Manufactured Exports, 1989-93

(\n millions of U.S. dollars)

APPENDIX

Food, beverages, and tobacco

Textiles, clothing, and footwear

Wood and wood products

Rubber products

Chemical and petroleum productsOf which:

Petroleum products

Nonmetallic mineral products

Manufactures of metal appliances

Electrical machinery and appliancesOf which:

Electronic components

Transport equipment

Othcr iY?aimfactures I/

Total

1989

662

1,143

397

422

890

(371)

243

528

7,679

(3,757)

437

1,522

13,501

1990

762

1,444

498

501

1,018

(475)

285

583

9,798

(4,320)

713

2,216

17,317

1991

823

1,710

626

639

1,073

(418)

323

658

12,940

(4,746)

1,192

2,951

22,297

1992

958

2,021

924

847

1,467

(568)

350

899

16,322

(5,636)

1,505

3,618

28,051

Prel.1993

1,002

2,104

1,568

946

1,829

(726)

411

1,190

21,413

(7,262)

1,411

3,922

34,850


I/ Includes paper and paper products, and optical and scientific equipment.


-61 -

Table 43. Malaysia: Merchandise Exports, 1989-93 l/

fin millions of U.S. dollars')

APPENDIX

RubberVolumeUnit value

TinVolumeUnit value

Saw logsVolumeUnit value

Sawn timberVolumeUnit value

Palm oilVolumeUnit value

PetroleumVolumeUnit valueUnit value (US$/bbl)

LNGVolumeUnit value

Manufactured goods

Other!/

Total exports

1989

1,4581,85178.8

429352

121.7

1,6081,571102.3

1,073889

120.7

1,7322,066

83.8

2,9142,318125.723.36

762703

108.4

13,507

1,563

25,045

1990

1,1191,64568.0

333375

88.9

1,4941,51698.6

1,133919

123.3

1,6312,36469.0

3,9333,333118.021.94

974828

117.7

17,320

1,511

29,449

1991

9781,40969.4

249302

82.4

1,4911,438103.6

1,094884

123.8

1,8292,31579.3

3,7083,192116.121.59

1,193828

144.1

22,299

1,519

34,365

1992

9251,28871.8

283321

88.1

1,5121,334113.4

1,369949

144.2

2,1342,323

91.9

3,5813,183112.520.92

1,065810

131.5

28,054

1,772

40,695

Prel.1993

8281,16671.0

190253

75.2

1,132692

163.7

1,766964

183.2

2,2522,46691.3

3,1062,972104.519.43

1,009867

116.4

34,850

1,956

47,089


I/ Customs data; volumes are expressed in 1988 prices and unit values are based on 1988= 100.2/ Includes tin-in-concentrate.


-62- APPENDDC

Table 44. Malaysia: Gross Imports, 1989-931/

fln millions of U.S. dollars')

Frei.1989 1990 1991 1992 1993

Consumption goodsFoodBeverages, tobaccoConsumer durablesOther

Investment goodsMachineryTransportationMetal productsOther

Intermediate poodsPnr manufacturing

For constructionFor agricultureCrude petroleumOther

Imports for re-exportTin ore -Crude natural rubber

Total imports(trade basis)

Total imports(b.o.p. basis)

Memorandum item:Imports of petroleum products 1)

4,0221,065

90810

2,056

7,6882,3621,3421,4612,523

10,5048,324

576394117

1,094

25317479

22,467

20,754

847

4,8121,033

101980

2,697

10,9653,2641,8461,8473,719

13,27410,492

794405160

1,423

20012080

29,250

26,967

1,127

6,2241,157

1401,4003,527

14,8464,2812,4602,2605,845

15,80812,5461,103

384128

1,647

19213953

36,665

34,049

1,247

6,7871,354

1491,3373,947

16,5604,8652,8812,3806,434

16,24712,6771,182

476127

1,785

22716859

39,821

36,237

1,845

7,4011,435

1471,6084,212

18,5295,1402,5392,8368,014

19,47615,7501,328

505173

1,719

21111398

45,617

42,502

2,064


I/ Customs data.2/ Petroleum products are a component of "other imports" in both consumption and intermediate

goods categories.


Table 45. Malaysia: Direction of Trade, 1989-93

(Percentage shares)

ASEAN countriesOf which: Singapore

Japan

India

Australia

European Union

United States

Other

Total

1989

25.5(19.7)

16.1

1.3

2.3

15.4

18.7

20.7

100.0

1990

28.9(22.7)

15.8

1.6

1.7

14.9

16.9

JHL2

100.0

Exports

1991

29.3(23.3)

15.7

0.9

1.7

14.8

16.9

20.7

100.0

1992

29.5(23.0)

13.4

1.1

1.7

14.9

18.6

20.8

100.0

Prel.1993

27.9(21.7)

13.0

0.5

1.3

14.5

20.3

2JL5

100.0

1989

18.9(13.6)

24.2

0.7

3.8

14.0

16.9

2L5.

100.0

1990

18.9(14.9)

24.0

0.7

3.7

14.6

16.7

21A

100.0

Imports

1991

19.9(15.6)

26.1

0.8

3.2

13.7

15.3

21.0

100.0

1992

20.4(15.7)

26.0

0.9

2.7

12.5

15.8

2L1

100.0

Prel.1993

19.8(15.2)

27.4

0.9

2.8

11.6

16.9

20.6

100.0 •



-64- APPENDIX

Table 46. Malaysia: Services Account, 1989-93

fln millions of U.S. dollars)

Freight and insurance (net)ReceiptsPayments

Other transportation (net)ReceiptsPayments

Travel (net)ReceiptsPayments

Investment income (net)ReceiptsPayments

InterestDividends

Government, n.i.e. (net)ReceiptsPayments '

Other (net) I/Receipts

Payments

Total services (net)ReceiptsPayments

1989

-1,117580

1,697

-2693695

-3291,0361,365

-2,1911,0333,2241,3791,845

-9692

188

-470751

1,221

-4,2064,1858,390

1990

-1,419563

1,982

-9807816

2341,6841,450

-1,8751,6643,5391,3332,206

-18991

-5241,0701,595

-3,5955,8779,472

1991

-1,762613

2,376

-4957961

1991,7831,584

-2,4491,2953,7441,3002,445

-2089

109

-7121,2882,000

-4,7486,027

10,775

1992

-1,661740

2,401

-691,1391,208

2582,0281,770

-2,8851,4114,2961,2273,069

1610791

-7461,6072,353

-5,0877,032

12,119

Prel.1993

-1,937763

2,700

-1251,1111,236

2602,2201,960

-3,1641,3894,5531,2803,273

1210997

-9941,6012,595

-5,9487,192

13,140


I/ Includes contract and professional charges, agency fees, commissions, rents, royalties, andsalaries.


-65- APPENDDC

March

Central bank (net)Foreign assets

Gold and foreign exchangeReserve position in IMFSDKs

Foreign liabilities

Government and other officialentities (net)

Foreign assetsForeign liabilities

Total official (net)Foreign assetsForeign liabilities

Commercial banks (net)AssetsLiabilities

Memorandum items:Gold (in millions of

troy ounces)Gross official reserves

in months of imports

1989

8,0128,0217,627

224170

9

3939

—8,0518,060

9

1612,9402,779

2.37

4.3.

1990

10,00410,0119,582

233196

7

3737

—10,04110,048

7

-6862,8073,493

2.35

4.1

1991

11,17911,18510,718

257209

6

3535

—11,21411,219

6

-2,5902,3664,956

2.35

3.7

1992

18,06918,07817,640

325113

8

3131

—18,10018,109

8

-6,2421,9988,241

2.35

5.5

1993

28,29428,30827,877

31112114

3131

—28,32428,339

14

-10,0613,892

13,953

2.32

7.5

1994

33,99334,00733,567

31912215

3131

—34,02334,038

15

-11,1832,923

14,105

2.32

7.8


Table 47. Malaysia: International Reserves, 1989-94

(In millions of U.S. dollars)


-66- APPENDIX

Table 48. Malaysia: External Debt and Debt Service, 1989-93

(In millions of U.S. dollars: end of period)


I/ Original maturity of one year and over.2/ Mainly nonfinancial public enterprises.2/ Excludes prepayments and refinancing.4/ In percent of exports of goods and services.

d%&L

Prel.1989 1990 1991 1992 1993

Total external debt 17,071 17,890 20,062 22,931 27,284Medium- and long-term I/ 15,563 15,357 16,078 16,379 19,142

Public sector 13,856 13,528 13,610 12,375 13,473Government and government-

guaranteed 12,402 12,250 12,532 11,005 10,292By lender

Bilateral 2,227 2,752 3,156 3,234 3,474Multilateral 1,284 1,396 1,511 1,518 1,363Financial institutions 8,426 7,750 7,607 6,082 5,371Suppliers' credits 464 352 258 164 84IMF -

By debtorFederal government 8,945 9,153 9,331 8,010 7,167Other guaranteed 2/ 3,475 3,097 3,200 2,995 3,125

Public sector nonguaranteed 1,455 1,278 1,079 1,370 3,181Private sector 1,706 1,830 2,468 4,004 5,669

Short-term debt 1,508 2,533 3,984 6,552 8,142

Total debt service 2,988 2,936 2,944 3,245 3,780Medium- and long-term 2,785 2,719 2,614 2,951 3,382

Public sector 2,317 2,228 2,133 2,349 2,476Amortization!/ 1,202 1,159 1,206 1,469 1,718

Federal government 537 518 478 755 965Other 665 641 728 714 754

Interest 1,115 1,069 927 880 758Federal government 732 717 644 617 520Other 383 352 283 263 238

Private sector 468 484 432 416 906Amortization 408 444 439 549 782Interest 60 47 43 53 124

Short-term debt service 204 217 330 94 397

Debt/GNP ratio 47.8 43.6 44.2 42.7 46.7Medium- and long-term 43.5 37.5 35.4 30.4 32.8

Public 38.8 33.0 30.0 23.0 23.1Private 4.8 4.5 5.4 7.5 9.7

Short-term 4.2 6.2 8.8 12.2 13.9

Debt-service ratio 4/ 10.4 8.5 7.4 7.0 7.1Medium- and long-term debt — 9.7 7.9 6.6 6.3 64

Public sector 8.0 6.5 5.4 5.0 4.7Federal government 4.4 3.6 2.8 2.9 2 8Other 3.6 2.9 2.6 2.1 L9

Private sector 1.6 1.4 1.2 1.3 1.7Short-term debt 0.7 0.6 0.8 0.6 07


-67- ANNEX I

Detenflfp^pts of Saving

Over the past two decades, the rate of saving in Malaysia has increased significantly-fromabout 20 percent of GNP in the early 1970s to over 35 percent of GNP, on average, in the early1990s. Malaysia's saving performance ranks among the highest in the world and comparesfavorably even to that of many of the other dynamic Asian economies. This annex analyzes thetrends in saving during the period 1970-92 and presents econometric evidence on the maindeterminants of saving in Malaysia.

Three factors appear to account for much of the increase and variation in Malaysia's savingrate. First, a demographic change, manifested in a steadily increasing ratio of working age to totalpopulation, had a significant impact on private saving. The econometric analysis reported belowindicates that the increase in the working age population ratio by 7 1/2 percentage points during the1970s and 1980s served to raise the gross national saving rate by 5 1/4 percentage points of GNP.

Second, variations in the growth in private disposable incomes were also an importantdeterminant of changes in the rate of private saving. The econometric estimates suggest that incomegrowth, which averaged 8 1/2 percent in real terms and 6 percent in real per capita terms during1988-92, boosted gross national saving by 3 percentage points of GNP.

Third, the fiscal consolidation undertaken in recent years, reflected in an increase in publicsaving by 6 percentage points of GNP, raised the overall national saving rate by 6 percentage pointsof GNP. The econometric evidence indicates that changes in public saving did not have asignificant offsetting impact on private saving.

Finally, increases in mandatory saving through the EPF do not appear to have affectedoverall private saving. Instead, changes in EPF saving have tended to be offset by changes involuntary non-EPF saving.

1. Historical trends

While the rate of national saving has increased over the past two decades, the rise has beenmarked by considerable volatility reflecting domestic and external shocks (Chan M and Table 1).During the 1970s, the gross national saving rate rose from an average of 24 percent of GNP in thefirst half of the decade to 33 percent of GNP in the second half, despite a temporary decline in therate of saving in 1975 following the oil price shock. In the early 1980s, the saving rate fell againin response to the second oil price shock and the onset of a domestic recession but recoveredquickly until the recession of 1985-86. The subsequent economic recovery, though accompaniedinitially by a rebound in the rate of saving, was associated with a consumption boom and resulted ina decline in the saving rate. Finally, in 1992, the saving rate recovered as financial policies weretightened and the consumption boom subsided.


- 68 - ANNEX I

Table 1. Malaysia: Gross National Saving, 1970-74/1990-92

(In percent of GNP)

Sources: Data provided by the Malaysian authorities; and staff estimates.

Changes in the rate of private saving have accounted for developments in the overall rate ofsaving (Chart 1-2). I/ The bulk of private saving consists of voluntary saving. However, asignificant share of saving by the private sector, especially in recent years, has been due tomandatory contributions to the EPF (Chart 1-3). 2/ EPF saving has risen steadily from an averageof 2 percent of GNP in 1970-74 to over 6 percent of GNP during 1990-92. At present, EPF savingaccounts for over 20 percent of total private saving.

The contribution of the public sector to overall national saving has increased over the pasttwo decades, with public saving rising from an average of less than 1 percent of GNP in the early1970s to over 7 percent of GNP in the early 1990s. The increase, however, was interrupted duringtibe recessions in the early and mid-1980s when the public sector expanded substantially in an effortto onset the contractionary impact of the cyclical downturns. Since the recovery in the late 1980s,the ongoing process of fiscal consolidation and restructuring has resulted in a rapid increase inpublic saving.

I/ Time series data desegregating national saving into its private and public components are notavailable. However, fiscal data on tax revenue less subsidies and transfers to the private sector maybe used to calculate private disposable income, from which private consumption may be subtractedto yield private saving. The residual national saving may then be attributed to the public sector.

2/ EPF saving is calculated as contributions plus accumulated interest on EPF balances, lesswithdrawals for purposes other than the purchase of housing.

1970-74 1975-79 1980-84 1985-89 1990-92

Gross national saving 24.3 32.6 33.2 37.0 35.1

Private saving 24.2 27.5 27.1 32.3 27.9EPF 2.2 2.5 4.2 5.9 6.1Non-EPF 22.0 25.0 22.9 26.4 21.8

Public saving 0.1 5.0 6.1 4.6 7.2


- 68a -

CHART 1-1

MALAYSIA

GROSS NATIONAL SAVING, 1970-92(In percent of GNP)

Sources: Data prorided by the Malaysian authortties, and staff estimates.


- 68b -

CHART 1-2

MALAYSIA

PUBLIC AND PRIVATE SAVING, 1970-92(In percent of GNP)

Source: Data prortded bj the Malaysian authorities, and staff estimates.


68c •

CHART 1-3

MALAYSIA

PRIVATE SAVING, 1970-92(In percent of GNP)

Source: Data provided by the Malaysian authorities, and staff estimates.


- 69 - ANNEX I

2. Employees Provident Fund

Initiated in 1952, the EPF is a compulsory saving scheme under which employees andemployers are required to contribute a portion of labor income to the EPF. EPF accounts areindividual-specific and are intended to facilitate the accumulation of saving to finance a basicretirement income. In 1991, the number of active members of the EPF (those making contributionsduring the year) totalled over 3 1/4 million, or 47 percent of total employment.

As the main purpose of the EPF is to provide benefits to members upon retirement,withdrawals from the EPF were initially permitted only in the event of retirement, incapacitation,death, or emigration. Over time, however, withdrawals under various housing schemes have beenintroduced and, at present, a portion of EPF balances may be withdrawn for the purchase oflow-cost and nonlow-cost houses, housing mortgages, and village houses.

Contribution rates to the EPF were originally set at S percent each for employees andemployers but were raised to 6 percent and 7 percent for employees and employers, respectively, in1975 and 9 percent and 11 percent, respectively, in 1980. In 1993, contribution rates were raisedto 10 percent for employees and 12 percent for employers.

3. International comparisons

Malaysia's rate of national saving compares favorably with rates achieved in a sample ofother developing economies and has been broadly comparable to rates in the NIEs (Table 2). I/The increase in Malaysia's saving rate during the 1970s and 1980s has broadly kept pace withincreases in the saving rates in the other developing countries in the sample. Consequently,Malaysia's gross national saving rate was over 6 percentage points of GNP higher than the averagefor developing countries in the sample during 1990-91.

An important factor contributing to the rise in national saving rates in many of the economiesin the sample is the rate of public saving. In Indonesia, Malaysia, and Singapore, governmentsaving as a proportion of GNP rose by 4-5 percentage points between the early 1970s and early1980s. In Korea, the rise was 1 1/2 percentage points over the same period. However, differencesin fiscal policies can «plain only part of die variation in national saving rates across countries, asthere is also substantial variation in private saving rates. In Malaysia, mareases in public savingcontributed to the rise in national saving, but a significant share of the increase in the nationalsaving rate was due to the increase in private saving.

I/ International comparisons of saving rates have to be interpreted with caution because nationalincome statistics are not directly comparable across countries owing to differences in accountingpractices.


- 70 - ANNEX I

4. Determinants flf private saving

Econometric evidence on private saving behavior in Malaysia indicates that demographiccharacteristics and economic growth were important determinants of saving. In addition, changes inthe rate of public saving did not have a significant impact on private saving, implying that increasesin public saving were fully reflected in increases in overall gross national saving. Finally, changesin mandatory saving through the EPF, in the rate of inflation, and in Malaysia's terms of trade werefound not to have a significant impact on private saving.

a. pçpnpTpic growth and demographic changes

Life-cycle theory suggests that economic growth and changing age structure of the populationare important determinants of the rate of saving. The experience in Malaysia lends support to thishypothesis. The ratio of working age population, defined as the population between the ages of15 and 64, to total population increased steadily from about 52 percent in 1970 to almost 60 percentin 1992, broadly in line with die trend increase in the rate of private saving. I/

Changes in the growth rate of private disposable income also appear to have trackeddevelopments in the rate of private saving. In particular, large reductions in income growthfollowing the oil price shock in 1975 and during the recessions of 1980-81 and 1985-86 werereflected in temporary declines in the rate of saving.

In an effort to quantify the impact of income growth and demographics on saving behavior, aconsumption function incorporating die effects of changes in growth and age structure was estimatedfor Malaysia over the period 1970-92 (Table 3). 2/ The estimates obtained indicate that both demo-graphic change and growth had an important effect on private saving. Inflation and changes in theterms of trade did not have a significant impact on saving, possibly because, except for the periodsimmediately following die two oil price shocks in the early 1970s and the early 1980s, Malaysiaexperienced relatively low inflation. Moreover, the impact of changes in the terms of trade was

I/ This relationship must be interpreted with caution, however. Census information on the agestructure of die population is gathered only every ten years or so, and data for intermediate yearsare constructed using interpolation techniques. Consequently, die correlation between the agestructure and die time trend is likely to be high and any apparent relationship between demographicstructure and saving could be due to the effect of a time trend.

2/ The estimated consumption function was of die form:

where c and y are the natural logarithms of real per capita private consumption and privatedisposable income, respectively, W is die percentage of the population of working age, T is die rateof inflation, T is the terms of trade, and EPF is the ratio of EPF saving to GNP. A A in front of avariable denotes a first difference. The equation was estimated over the period 1970-92 using two-stage least squares. Statistically insignificant variables, which included T, T, AW, and EPF, wereomitted from the final estimated equation. A detailed discussion of the equation is contained inAnnexuofSM/94/49.


-71- ANNEX I

likely concentrated on the agricultural and mining sectors, which accounted for a progressivelysmaller share of the economy during the course of the sample period. Finally, the increase in therate of EPF saving, broadly reflecting the trend increase in overall private saving during the sampleperiod, was found not to have had a statistically significant impact on overall saving. This waspossibly due to the relative ease with which individuals may offset changes in mandatory savingwith changes in voluntary saving. Also, the liberalization of EPF withdrawal schemes to includewithdrawals for the purchase of housing may have raised the substitutability of EPF saving withvoluntary saving.

The private sector's steady state average propensity to save (APS) in Malaysia, calculatedusing the estimated consumption function, is estimated at 36 percent of private disposable income,or 30 1/2 percent of GNP. I/ This calculation uses average values achieved in recent years as thesteady state values of the main determinants of private saving-6 percent annual real per capitaincome growth and a working age population ratio of 59 percent. By way of comparison, Lahiri(1989) estimates the steady state zero-growth APS for Indonesia, Korea, the Philippines, andSri Lanka at about 20 percent of disposable income, and for India at about 30 percent. In addition,staff estimates indicate that the APS for Singapore and Thailand is 45 percent and 34 percent,respectively, of private disposable income.

The empirical estimates for Malaysia also indicate that, on average, a 1 percentage pointincrease in the ratio of working age to total population increased the steady state APS by about3/4 percentage point of private disposable income. Thus, if the working age population ratio hadstayed at about 52 percent, the level prevailing in the early 1970s, the private sector's APS wouldhave been 6 percentage points lower, or, alternatively, die steady state ratio of private saving toGNP would have been 5 1/4 percentage points lower. Furthermore, the results indicate that a1 percentage point increase in the rate of growth of real per capita income increased the steady stateAPS by over 1/2 percentage point. Had there been no growth in per capita income, the APS wouldhave been 3 1/2 percentage points lower than actual, equivalent to 3 percentage points of GNP.

b. Substitutability of public gn j private saving

Given the substantial fiscal consolidation and restructuring that took place in the late 1980sand early 1990s, the contribution of public saving to the overall level of gross national saving inMalaysia is potentially important. Analytical models, such as that of Barro (1974), argue that anincrease in government saving, because it is accompanied by a reduction in present or futuretaxation, is offset by a reduction in private saving. This concept, known as Ricardian equivalence,

I/ In a noninflationary steady state with constant terms of trade, xt = 0, Wt = W, and <^ = yt =g, where g is the steady state rate of growth, the average propensity to consume (APC) may beexpressed as:

As long as ft < 0, 0 < & < 1, and & < 0, the long-run APS, which is simply (1 - APC), riseswith an acceleration of income or with an increase in the working age population ratio.


- 72 - ANNEX I

suggests that changes in public saving have little or no impact on national saving. In practice,however, many of the assumptions required for Ricardian equivalence to hold need not be valid,and a number of studies have focused on explanations for possible deviations from Ricardianequivalence. I/

A measure of the impact of changes in public saving was obtained by adapting a frameworkdeveloped by Aschauer (1985) for quantifying the substitutability of public and privateconsumption. 2/ The equation estimated to obtain such a measure was of the form:

(1)

where C is private consumption, G is government consumption, D is the overall fiscal balance ofthe consolidated central government, and all variables are expressed in real per capita terms. Underintertemporal optimization, the following parameter restrictions may be imposed:

(2)

where ß is the private sector's discount rate, and the parameter G measures the degree to whichgovernment spending substitutes for private consumption. The joint hypothesis of rationalexpectations and Ricardian equivalence implies thai past values of government deficits should nothave explanatory power for private consumption apart from their role in forecastingcontemporaneous public spending. This yields the additional restriction:

Two versions of the consumption function wore estimated using an iterative nonlineartwo-stage least squares procedure. I/ In the first, a constrained version under which Ricardianequivalence and rational expectations were hypothesized to hold, the restrictions in equations (2)and (3) were imposed. In the unconstrained version, only the restrictions in equation (2) wereemployed. The results, presented in Table 4, indicate that the estimated coefficients from the twoversions are of tibe same sign and the coefficients that are statistically significant from zero are ofsimilar magnitude. A log-likelihood ratio test, used to test the null hypothesis, yielded a test

I/ Leiderman and Blejer (1988) provide a comprehensive survey of these studies.2/ A discussion of the framework and its adaptation is contained in Annex in of SM/94/49.y In order to avoid problems of nonstationarity, the equations were estimated in first differences.

(3)


- 73 - ANNEX I

statistic of 3.94, which may be compared to its critical value of 6.25. Consequently, the joint nullhypothesis of rational expectations and Ricardian equivalence was not rejected. I/

However, the estimation results indicate that public consumption did not substitute for privateconsumption in Malaysia. This implies that increases in public saving, to the extent they werebrought about by reductions in public consumption, did not have an impact on private saving andconsumption decisions aid were fully reflected in a rise in national saving. Thus, the increase inpublic saving that took place in the late 1980s, amounting to about 6 percentage points of GNP,raised national saving by an equal amount.

I/ By way of comparison, staff estimates for Singapore indicate a high degree of substitutabilitybetween public and private consumption and do not reject the joint null hypothesis. Estimates forThailand indicate little or no substitutability and reject the joint null hypothesis.


-74- ANNEXI

Table 2. Malaysia: Gross National Savingin Selected Countries, 1970-74/1990-91

^Period average: in percent of GNP)

1970-74 1975-79 1980-84 1985-89 1990-91

G-3Germany, Federal

Republic of I/JapanUnited States

NIEsHong Kong 2/KoreaSingaporeTaiwan Province of China

Developing countriesIndiaIndonesiaMalaysiaPakistanPhilippinesThailand

27.4

27.338.216.9

25.126.319.024.430.9

18.216.214.124.314.222.222.0

24.3

22.732.417.7

29.629.424.631.233.1

23.526.221.232.617.925.022.3

23.2

21.930.916.9

32.429.324.242.233.8

26.732.026.933.224.625.823.4

23.8

24.732.614.1

35.032.434.339.733.5

27.230.529.237.023.219.830.3

24.6

26.834.212.8

35.532.535.943.629.8 y

27.6...

33.433.921.618.835.7

Source: IMF, International Financial Statistics

I/ With effect from October 1990, data for the Federal Republic of Germany and the GermanDemocratic Rqpublic have been merged and published under the Republic of Germany.

2/ In percent of GDP.I/ Data covers 1990 only.


-75- ANNEXI

Table 3. Malaysia: Two-Stage Least Square Estimatesof Consumption Functions

Constant 0.2295(1.47)

Rate of growth of private disposable income 0.4065(4.84)

Lagged consumption to income ratio -0.6225(6.12)

Percentage of population aged 15-64 -0.0079(2.47)

Dummy for 1985-87 recession -0.0704(4.20)

R2 0.8547Standard error 0.0239Sum of squared residuals 0.0103

Note: The dependent variable is the first difference of the natural logarithm of real percapita private consumption expenditure. The instruments used in the first stage were:contemporaneous working age population ratio, level and change; lagged consumption toincome ratio; lagged rates of growth of real per capita private consumption and privatedisposable income; lagged natural logarithm of real per capita money balances; lagged ratiosof public saving to GNP and EPF saving to GNP; lagged inflation; lagged change in theterms of trade; and a dummy for the 1985-87 recession. The sample period is 1970-92.The values in parentheses are t-statistics. Diagnostic checks showed no evidence of serialcorrelation of the errors.


- 76 - ANNEXI

Table 4. Malaysia: Iterative Nonlinear Two-stageLeast Squares Estimates of Consumption Function

I/ Coefficients obtained by substitution of constrained coefficient estimates into the set ofrestrictions in expression (2).

Note: The dependent variable is the first difference of real per capita private consumptionexpenditure. The instruments used were: first and second lags of the first differences of realper capita private consumption, government consumption, and the overall and current fiscalbalances of the consolidated federal government. The equations were estimated over the period1971-92. The values in parentheses are t-statistics. No evidence of first order serialcorrelation was found in either version of the estimated equation.

Constrained Unconstrained

a 0.4796 0.4198(1.40) (1.19)

ß 0.4353(2.19)

G -0.1767(0.23)

/t, 0.4353 i/ 0.5398(1.73)

/la -0.0769 i/ -0.4602(0.54)

M3 -0.1767 i/ -0.4804(0.44)

M4 ... -0.1599(0.61)

Ih ... -0.2471(1-31)

R2 0.223 0.350Standard error 1.473 1.467Log likelihood -38.119 -36.150


-77- ANNEX H

- Guidelines and Incentives for Investment in Malaysia

This annex discusses the regulations governing industrial investments in Malaysia anddescribes the current package of investment incentives.

1. Industrial investing prQçg4wr?

Potential investors in Malaysia must obtain a manufacturing license and comply with theguidelines on the distribution of ownership. In general, export-oriented companies are subject tofewer restrictions on their activities.

a. The Industrial Co-ordination Act, 1975

Under the 1975 Industrial Co-ordination Act (Amended), a manufacturing license,specifying the type and quantity of goods to be produced, must be obtained from the Ministry ofInternational Trade and Industry. Only manufacturing companies with less than RM 2.5 million inshareholders9 funds, or less than 75 full-time employees, are exempted from this licensingrequirement. Issuance of a license may be conditioned upon satisfying conditions related to thecomposition of employment and the distribution of equity ownership. In general, expansion ofexisting production capacity or diversification of the product line is permitted, as long as theconditions governing the initial investment are respected.

b. Guidelines on the distribution of equity

Foreign participation in manufacturing projects is governed by a set of guidelines based onthe export propensity of the project. While joint-ventures are preferred, no foreign equityrestrictions exist if 80 perçoit or more of the project's output is destined for the export market. Ingeneral, the required proportion of local equity participation increases with the share of output to besold in the domestic market, although other considerations—including size of the investment, levelof technology, value added, local input content-raise the permissible share of foreign ownership.

Where foreign ownership is less than complete, the allocation of residual equity isdetermined by the nationality or ethnicity of the party initiating the investment, as follows:

(1) For projects initiated by foreigners, where no local partners have beenidentified:

(a) If 70 percent or more of the equity is held by foreigners, the balance will bereserved for bumiputeras (indigenous Malaysians).

(b) If less than 70 percent of the equity is held by foreigners, 30 percent will bereserved for bumiputeras and the balance may be allocated to nonbumiputeras.

(2) For projects initiated by bumiputeras, any equity not taken up by foreignersshould be held by the bumiputeras concerned.

(3) For projects initiated by nonbumiputeras:


-78- ANNEX H

(a) If 70 percent or more of the equity is taken up by foreigners, the balance ofthe equity may be allocated to the nonbumiputeras concerned.

(b) If less than 70 percent of the equity is held by foreigners, 30 percent maybe allocated to the nonbumiputeras concerned, while the balance will be reserved for bumiputeras.

Subsequent expansion or diversification of the company must preserve the initialequity (foreign/local, bumiputera/nonbumiputera) composition.

2. Investment incentives

As discussed in Chapter I, investment promotion incentives were initiated in 1958 with theintroduction of the Pioneer Industries Ordinance, which granted relief from corporate income tax toqualifying firms. As Malaysia developed, the types of industries and activities eligible to receive"pioneer" status and other incentives also evolved. In particular, promotion of import-substitutingindustries was replaced by targeted incentives to export-oriented activities. In addition, the capitalintensity and technology level of targeted investments has increased over time.

The principal incentives available to the manufacturing, agriculture, and tourism sectors arecontained in the Promotion of Investments Act (1986) and the Income Tax Act (1967), which aredesigned to grant relief from corporate income tax. Measured in value terms, more than 50 percentof manufacturing investment projects approved in 1993 received tax relief under the auspices ofthese Acts. Incentives are also available for the promotion of exports, R&D, human capitaldevelopment, development of small-scale companies, and the establishment of operationalheadquarters. Hie attached table presents the main investment incentives (and associatedconditions) currently available in Malaysia.


Table. Malaysia: Manufacturing Incentives and Eligibility Criteria

Promoted Activity/Incentive Eligibility Criteria Concession

General investment i

• Pioneer status. I/ - Production of a good or engagement in an - Corporate tax is payable on only 30 percent ofactivity promoted by the Ministry of net income. The tax exemption is for a period ofInternational Trade and Industry. 5 years, following commencement of production.Consideration is also given to value added,local content, level of technology, andindustrial linkages generated by the project.

- A project of strategic importance, - Up to 100 percent tax relief is available for aincluding those with heavy capital investment period of 5 years,and a high level of technology, deemed tohave a significant impact on the Malaysianeconomy.

- Investment tax allowance (alternative - Same as pioneer status. - An allowance equivalent to 60 percent ofto Pioneer status). I/ qualifying capital expenditure can be used to

offset, for the purpose of tax assessment,70 percent of net income. The remaining30 percent is taxable at the prevailing rate. Anyunused balance may be carried forward tosubsequent years.

- Reinvestment allowance. 2J - Qualifying capital expenditure incurred - An allowance equivalent to 40 percent ofprior to December 31, 1995 for the capital expenditure,expansion of capacity, modernization andupgrading of production facilities; anddiversification into related products.




• Industrial building allowance. - Expenditure on approved buildings for - An initial allowance of 10 percent and anpurposes of warehousing, bulk storage of annual allowance of 2 percent to be used to offsetgoods for export, approved industrial net income,training, approved research, and hotelbusiness.

Exports

- Export credit refinancing facility. U - Goods must have a minimum value added - Short-term credit, up to 100 percent of theof 20 percent and a minimum domestic value of exports, is available for up to sixresource content of 30 percent. However, months, at a preferential rate of interest (athese criteria are appliedflexibly. maximum of 6 percent in January 1994).

- Double deduction for the promotion of - Activities related to the promotion of - Double deduction of eligible expenses,exports, y exports of Malaysian products. including those related to: overseas advertising;

supply of free samples abroad; export-marketresearch; participation in trade exhibitions;employees* overseas travel and accommodation;maintaining sales offices abroad.

Pcsearch and develooment 21 - Establishment of companies to undertake - Full tax exemption for a period of 5 years, andR&D, and new technology-based companies, carry forward accumulated losses incurred during

the tax relief period to the post-relief period.

- R&D activities within industrial firms. - Double deduction for expenses incurred onresearch approved by the Minister of Finance,and plant, machinery, and buildings used forapproved research are eligible for capitalallowances.




Upgrading skills and improving laborproductivity and quality

- Double deduction of expenses incurred - Employee training at approved institutions - Double deduction of training costs.on approved training. or in-house, available to companies with less

than 50 Malaysian workers.

Industrial adjustment

- Industrial adjustment allowance. - Companies in operation prior to - A tax allowance of up to 100 percent ofDecember 31, 1990 in the wood-based, qualifying capital expenditure,textile, machinery and engineering sectorsundertaking an activity to improvetechnology, increase productivity and raise

¡ self-sufficiency.

- Industrial adjustment fund. - Restructuring activities. - Concessional credit lines.

Development of small-scale companies - Small-scale manufacturing companies with - 50 percent reinvestment allowance, and fullshareholders' funds of less than exemption from customs duty on raw materials,RM 0.5 million, incorporated in Malaysia, components, machinery and equipment that arewith at least 70 percent Malaysian-owned not produced locally. Alternatively, the companyequity. may be eligible for pioneer status if it supplies the

domestic manufacturing industry, 50 percent ormore of its output is exported, or local contentexceeds 50 percent and the product is a substitutefor an imported good.



Source: Malaysia: Investment in the Manufacturing Sector. Malaysian Industrial Development Authority, January 1994.•

I/ Applicable to the manufacturing, agriculture, and tourism sectors.y Applicable to the manufacturing and agriculture sectors.


Operational headquarters - Foreign-owned multinational companies - For a period of 5 to 10 years, a 10 percent tax(excluding those in the finance sector) rate will apply to management fees arising fromoperating in Malaysia, and that carry out the services rendered, interest earned on fundsfollowing activities in the region: channeled through financial institutions inadministration; sourcing of inputs; R&D; Malaysia and royalties arising from R&D carriedtechnical support and maintenance; out in Malaysia. Income after tax is distributedmarketing; regional training and personnel to shareholders as tax-exempt dividends for amanagement. period of 10 years.


References

Aschauer, David A., "Fiscal Policy and Aggregate Demand," American Economic Review. Vol. 75(March 1985), pp. 117-127.

Barro, Robert J., "Are Government Bonds Net Wealth?," Journal of Political Economy, Vol. 82(December 1974), pp. 1,095-1,117.

Fong, Chan Onn, "The Malaysian Economic Challenge in the 1990s: Transformation for Growth,"Longman, Singapore, 1989.

, "New Economic Dynamo: Structures and Investment Opportunities in the MalaysianEconomy," Allen and Unwin, Sydney, 1986.

International Monetary Fund, "Malaysia: Recent Economic Developments," SM/93/195,August 24, 1993.

, "Singapore: Selected Background Issues," SM/94/49, February 25, 1994.

, "Thailand: Recent Economic Developments," SM/94/132, May 31, 1994.

, "Thailand: Recent Economic Developments," SM/93/99, May 11, 1993.

Lahiri, Ashok K., "Dynamics of Asian Savings: The Role of Growth and Age Structure,"Staff Papers. Vol. 36 (March 1989), pp. 228-261.

Leiderman, Leonardo, and Mario I. Blejer, "Modeling and Testing Ricardian Equivalence,"Staff Papers, Vol. 35 (March 1988), pp. 1-35.

Malaysia, Bank Negara Malaysia, Annual Report, various issues.v-

Malaysia, Economic Planning Unit, Privatization Master Plan. 1991.

Malaysia, MIDA, "Malaysia: Investment in the Manufacturing Sector," 1994.

Malaysia, Ministry of Finance, "Department of Inland Revenue Annual Report," 1991.

, Economic Report, various issues.

, "Estimates of Malaysia's Federal Revenue for the Year 1994," 1993.


Documents

November 1994 IMF Staff Country Report No. 94/4 · 2019. 12. 11. · 21. Operations of tibe Employees' Provident Fund, 1989-93 39 22. Outstanding Federal Government Debt, 1989-93