NEAC steers the economy out of recession

The National Economic Action Council (NEAC) was established in January 1998, six months after the onset of the crisis in mid- July following speculative attacks on the Thai baht.

The setting up of the NEAC reflects firm commitment and also determination on the part of the government to deal with the worst-ever economic and financial crisis afflicting Malaysia and other countries in the region.

In the early phase of the crisis, Malaysia adopted the International Monetary Fund's (IMF) style of austerity measures, including a tight monetary policy.

High interest rates, a tight credit environment and reduced public sector expenditure further contributed to the contraction in the economy.

The downward spiral of the economy had also been exaggerated by a sharp depreciation of the ringgit and an across-the-board decline in share prices.

Taking action

Following meetings and discussions with over 200 organizations and individuals from both the public and private sectors, including foreign experts and analysts, a completely new independent approach was taken with more proactive, preemptive and prudential measures to deal with the crisis.

The recommended policy measures and lines of action were spelled out clearly in the National Economy Recovery Plan (NERP) which was released in July 1998. Public and investor confidence had to be restored, the currency and capital markets stabilized, while the country's economic fundamentals, which were initially strong, needed new strength and support.

Thus, a fiscal stimulus package was implemented coupled with an easy monetary policy through a reduction in the statutory reserve ratio (SSR) and the interest rates.

While the expansionary fiscal and monetary policies helped to stabilize the economy in the short run, structural adjustment and reform measures continued to be implemented as part of the medium and long-term strategies to strengthen the structural foundation of the economy.

In early September 1998, the NEAC introduced additional measures largely to regain monetary independence and to terminate offshore trading of the ringgit through selective exchange controls and also the pegging of the ringgit at RM 3.80 to the U.S. dollar.

The selective exchange control policy and pegging the ringgit to the dollar helped to create an environment of certainty and stability. These measures also helped to reinforce ongoing structural adjustment and reform efforts, including programs aimed at improving corporate governance, corporate restructuring and financial consolidation.

Independent

Malaysia preferred to pursue an independent course of action to avoid heavy social and political costs experienced by the other crisis-hit countries.

Criticism to the imposition of the selective exchange control policy, however, subsided significantly with the rapid and broad- based recovery of the economy, rebound in stock market activity and continued inflow of foreign funds, including portfolio investment.

On the external front, the current account of the balance of payments has turned around with substantial surpluses recorded in 1998 and 1999 (RM 36.8 billion and RM 47.4 billion respectively).

With strong trade surplus and continued inflow of foreign direct investment (FDI), portfolio and other capital inflows, total international reserves improved substantially to reach US$34.3 billion as of May 15, 2000.

Real GDP growth rate, which contracted by 7.5 percent in 1998, showed a V-shaped recovery by registering a growth rate of 5.4 percent in 1999, well above the earlier estimate of only 1.0 percent.

Real GDP growth for the year 2000 is estimated at 5.8 percent but could be higher as predicted by many private analysts.

The first quarter growth was 11.7 percent. Other key economic indicators have also shown that the Malaysian economy has recovered completely from the crisis and is currently growing at a sustainable rate with relatively low inflation, a robust external sector and few signs of inflationary pressure and lower external debt.

A low rate of inflation, rising labor income, improved employment prospects, substantial wealth effects from the buoyant stock market as well as ample liquidity have together encouraged private consumption expenditure.

Private investment expenditure is expected to take center stage with continued low interest rates, higher capacity utilization and fresh capacity expansion to meet new orders.

The current account of the balance of payments is expected to remain strong this year at 14.2 percent of GNP.

The firm commitment and seriousness in managing the crisis has enabled a quick recovery to take place with less resolution costs than originally estimated.

Most important of all, Malaysia did not lose sovereign rights to manage its own domestic economic and political affairs.

The social fabric and political stability of the country remain intact.

Back on track

With solid economic recovery and projected growth in the coming years, the Malaysia economy is poised to be back on track again for continued growth and prosperity.

Nevertheless, Malaysia has to be vigilant against any signs of external imbalances and inflationary pressure.

The Malaysian unorthodox approach in managing the crisis did not contravene any established international rule or regulation.

Many have acknowledged that there is no standard prescription to the crisis.

As the economy began its recovery and the objectives of the capital control policy were attained, the Central Bank revised the measures.

Exchange controls were liberalized on September 21, 1999, and now only a flat 10 percent levy is charged on repatriation of profits on portfolio investment.

Going forward, new items on the economic agenda for Malaysia include preparing for the Third Outline Perspective Plan (2001- 2010), The Eighth Malaysia Plan (2001-2005), the Capital Market Master Plan and the Master Plan for the Financial System.

Corporate restructuring and financial sector reforms, including bank consolidation, will continue to be given priority to ensure the previous episodes of insufficient corporate governance and the weak banking system does not recur again.

Measures to ensure efficiency and competitiveness of the nation will be emphasized, while new sources of economic growth identified.

The next phase of economic development includes moving into a new economy with strong emphasis on knowledge skills, innovation and new ideas as part of the strategy for proinnovation growth policy and productivity-driven growth.

The K-Economy Master Plan is expected to be ready by the end of the year to spearhead development toward a knowledge-based economy.

Although Malaysia has successfully pursued a balanced and consistent set of macroeconomic policies and expedited its economic and financial sector restructuring, the economy is still vulnerable to external developments, especially the volatile and unregulated capital flows and interest rate changes overseas.

Malaysia expects to maintain the current exchange rate regime for some time more, as long as it is consistent with macroeconomic fundamentals and there is also no severe misalignment.

On the international front, there is an urgent need to reform the international financial architecture to deal with volatile and destabilizing short-term capital flows and largely nontransparent trading in currencies, particularly by highly leveraged institutions, hedge funds and speculators.

Malaysia is actively involved in discussing these important globalization issues, including the setting up of the Asian Monetary Fund, and implementation of a new international financial architecture. Malaysia is also building a closer relationship with developing countries under the South-south Cooperation and with the Islamic countries in the OIC.