NEAC steers the economy out of recession

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.