Economic Analysis of Malaysia
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The document is an economics project on Malaysia, detailing its historical background, geography, political structure, and economic data. It covers various aspects such as government policies, socio-economic factors, and performance metrics like GDP growth, trade balance, and inflation. The project highlights Malaysia's development goals and ongoing challenges in achieving economic sustainability and equality.
Economic Analysis of Malaysia
- 1. 1 Economics Project On Malaysia Submitted by Rahul Mandre (M15089) MMS 2015-2017 Sydenham Institute of Management Studies, Research and Entrepreneurship Education
- 2. 2 Acknowledgment I would like to thank Prof. Menezes for providing the opportunity to work on such an interesting and challenging project. It’s been a great learning curve and I gained a lot of new knowledge after doing the project.
- 3. 3 Index Table of Contents Acknowledgment....................................................................................................................................2 Index........................................................................................................................................................3 A. Introduction ....................................................................................................................................4 General Information ...........................................................................................................................4 Geography...........................................................................................................................................4 Political................................................................................................................................................4 B. Malaysian Economy Data................................................................................................................5 Gross Domestic Product......................................................................................................................5 Sectoral Performance .........................................................................................................................7 C. Policies of Government...................................................................................................................9 Government Revenue and Fiscal Policies ...........................................................................................9 Overview.........................................................................................................................................9 Tax collection ..................................................................................................................................9 Expenditure...................................................................................................................................10 Borrowing......................................................................................................................................10 Trade and Balance of Payments....................................................................................................11 Current Account Surplus...............................................................................................................12 Monetary Policy................................................................................................................................12 Overview.......................................................................................................................................12 Inflation.........................................................................................................................................14 D. Socio Economical Aspects of Malaysia..........................................................................................16 Government Structure......................................................................................................................16 Millennium Development goals, Human Development and Gender Quality...................................16 National Development Strategies.....................................................................................................17 International Relations .....................................................................................................................17 E. State: Kerala..................................................................................................................................18 F. References ....................................................................................................................................19
- 4. 4 Malaysia A. Introduction General Information Malaysia traces back its origin in Malay Kingdoms but in 18th century Britans colonized Malaysia. Malaysia got Independence on 31st Aug 1957 from the British empire. Capital: Kuala Lumpur Population: 3,08,56,000 Official Language: Bahasa Malaysia Currency: Ringgit(1 Ringgit = 0.23 USD) King (Yang di-Pertuan agong): Abdul Halim Prime Minister: Najib Razzak (Barison Nasional) Geography Malaysia with a land area of 1, 27,335 mi2 (329847 km2 ) is the 67th largest country in the world. It shares its land border with Thailand in West, and Indonesia and Brunei in East. Malaysia is a federation of 3 federal territories and 13 states. These are divided between two regions, with 11 states and two federal territories on Peninsular Malaysia i.e. west Malaysia and the other two states and one federal territory in East Malaysia. Each state is further divided into districts, which are then divided into mukim. Political Malaysia is only federation in SE Asia with federal constitutional monarchy. The Governance system closely resembles the Westminster parliamentary system as being colonized by British. The Yang di- Pertuan agong (also referred as King ) is the head of state. Legislative power is divided between federal and state legislatures. The bicameral federal parliament consists of the lower house, the House of Representatives and the upper house, the Senate. Prime Minister is the head of the Government.
- 5. 5 B. Malaysian Economy Data Gross Domestic Product Malaysia recorded steady growth of 6 % in 2014 despite unfavourable economic conditions which is the strongest rate of growth since 2010. The steady growth can be attributed to good domestic consumption and investment and was well backed by exports. 2010 2011 2012 2013 2014 Population (million) 28.6 29.1 29.5 29.9 30.3 GDP per capita (USD) 8,176 9,984 10,555 10,616 10,566 GDP (USD bn) 247 291 306 314 329 Economic Growth (GDP, annual variation in %) 7.4 5.2 5.6 4.7 6 Consumption (annual variation in %) 6.9 6.9 8.2 7.2 7.1 Investment (annual variation in %) 11.9 6.3 19.2 8.5 4.7 Industrial Production (annual variation in %) 7.2 1.2 2.8 3.4 5.1 Unemployment Rate 3.2 3 3 3 3 Fiscal Balance (% of GDP) -5.4 -4.8 -4.5 -3.9 -3.5 Public Debt (% of GDP) 51.1 51.5 53.3 54.7 54.5 Money (annual variation in %) 7.2 14.7 9.7 7.7 7.5 Inflation Rate (CPI, annual variation in %, eop) 2 3 1.3 3.2 2.7 Inflation Rate (CPI, annual variation in %) 1.6 3.2 1.7 2.1 3.1 Inflation (PPI, annual variation in %) 5.6 9 0 -2 1.2 Policy Interest Rate (%) 2.75 3 3 3 3.25 Stock Market (annual variation in %) 42.4 20.7 0.1 7 10.8 Exchange Rate (vs USD) 3.08 3.17 3.06 3.28 3.5 Exchange Rate (vs USD, aop) 3.22 3.06 3.09 3.15 3.27 Current Account (% of GDP) 10.9 11.6 5.8 4 4.6 Current Account Balance (USD bn) 26.9 33.7 17.8 12.6 15.2 Trade Balance (USD billion) 34.1 40.5 31.1 22.4 25.3 Exports (USD billion) 199 228 228 229 234 Imports (USD billion) 165 187 197 206 209 Exports (annual variation in %) 26.5 14.4 0 0.4 2.5 Imports (annual variation in %) 33.3 13.5 5 4.9 1.4 International Reserves (USD) 107 134 140 135 116 External Debt (% of GDP) 56.9 58.4 64.3 67.8 64.8
- 6. 6 As can be seen from the above figure, it’s clear that construction sector is a major contributor to the economic growth with manufacturing and services also growing steadily however Mining sector has really picked in the current year which recorded negative growth last year. Agriculture sector, Malaysia’s historic pillar for growth is a worrying factor for policy makers as focus on manufacturing and mining has hampered the agricultural growth which is clearly reflected in the figure. Strong domestic demand and private consumption Increase in investment – major contributor to increase in Real Gross Domestic Product
- 7. 7 Sectoral Performance As stated above, services and manufacturing are the strong drivers of the GDP with Mining picking up and exports staying constant. Production reached lowest during 2012, however thereafter showed strong growth supported by strong sales and exports. First quarter saw maximum production levels, the slowdown thereafter in sales and exports needs to be corrected, When we look at intermediated services, Information and communication (@9.8 %) has grown strongly with the technological advancements whereas Finance and insurance industry (@2.4 %) recorded slowest growth. In terms of final services, Wholesale and retail services (@9.4 %) and Food sector (@ 7.5 %) are the key drivers.
- 8. 8 Agricultural output is showing declining trend since last four years which can be attributed to the lower production of palm due to floods in ease cost and large scale forestry and logging activities.
- 9. 9 C. Policies of Government Government Revenue and Fiscal Policies Overview Government revenue increased to RM 51.5 billion (4.5 % growth) in the first quarter of 2015 Of total revenue, tax collection comprised of 71 % at RM 37.1 billion Tax collection Direct Taxes Grew by 1.2 % to RM 27.6 billion compared to decline in last quarter of 2014 Major contributor was corporate income tax Decline of 27 % in individual and petroleum income tax (which can be attributed to lower crude oil prices) Indirect Taxes Grew by 17 % to RM 9.5 billion Major contributor was sales tax (66 % at RM 3.6 billion) Import duty rose by 3 % to 0.6 billion and service tax rose by 9.2 % to RM 1.5 billion There was a marginal decrease in excise duty at RM 2.8 billion
- 10. 10 Expenditure Total Expenditure grew by 1.8 % to RM62.8 billion in the first quarter of 2015 Operating expenditure comprising 87 % of the total expenditure recorder marginal increase when there was substantial reduction in fuel subsidies payments despite higher emoluments Emoluments, largest component of operating expenditure grew by 5 % to RM 18 billion Decrease in fuel subsidies – implementation of managed float file fuel price mechanism effective from December 1, 2014 Lower spending on supplies and services compared to 2014 Development expenditure grew by 12 % with all sectors registering positive growth Transport subsector was the largest component of development expenditure followed by trade Borrowing Total gross borrowing in the first quarter of 2015 was RM 26.7 billion- Mainly MGS and Government investment issues Government debt stood at RM 596.8 billion – 52.1 % of GDP OF total debt, domestic debt was 97 %
- 11. 11 Trade and Balance of Payments Highlights Trade surplus at RM 21.3 billion although total trade declined by 1.2 % Gross Exports Gross imports Declined by 2.5 % to RM 183.2 billion Amounted to RM 161.9 billion Less agricultural receipts(which mainly comprise of rubber and palm) and mining exports Large component of capital goods which grew by 8.5 % Manufactured goods (77 % of total exports) contracted to 142 billion (decease by 4 %) Include telecommunication and transport related equipment Receipts from crude oil and LNG decreased by 17 % and 4.7 % Intermediate goods account for 52 % of total imports
- 12. 12 Current Account Surplus RM 10 billion or 3.7 % of GNI in first quarter of 2015 Mainly due to smaller deficits in the service and primary income accounts Monetary Policy Overview Bank Negara Malaysia is the Central Bank of Malaysia. Bank commenced its operations on 26 January 1959. Bank Negara Malaysia was established by Central Bank of Malaysia Act 1958 and is governed by the Central Bank of Malaysia Act 2009. Bank Negara Malaysia being the central bank of the Nation its primary role is to promote monetary and financial stability. Tools used by BNM are Overnight Policy Rate (OPR), Statutory Reserve Requirement.
- 13. 13 Monetary Policies is broadly divided into different phases: 1975-1986: Managing High Inflation and Economic Recession: The global slowdown in the late 1970s meant that monetary policy during the 1975-84 period was directed primarily at maintaining price stability and ensuring a stable currency. By 1985, the Malaysian economy was in recession. To cope with the situation monetary policy during 1984-86 was eased and in addition, to complement the monetary easing, the ringgit was allowed to depreciate in small steps which provided impetus to countries exports. 1987-1996: Managing Economic Success: This was the phase when company was enjoying good success, growing at the rate of nearly 9% every year. Due to high growth rate the countries inflation was also increasing and hence BNM took a defensive stance by adopting tight monetary policy. 1997-2005: Managing Financial and Economic Crisis: The period experienced extreme volatility in the financial markets and huge contraction in GDP. The crisis had severe and wide-ranging effects on financial and economic activities. The sharp easing of monetary policy and the introduction of the exchange control measures provided an environment of low interest rates to support the economic recovery. 2005-2010: Managing Sustainable Economic Growth: After Monetary easing to overcome the 1997 regional financial crisis, BNM hiked interest rate after long time for the first time in Nov 2005 by 25 bps. And further in next two meetings again increased it by 50bps. As economy shown good sign of growth during 2003-05, this rate hike cycle was to balance the risk to price stability and sustainable economic growth. Post 2010: Managing Financial Imbalances After 2006 the change in rates were done directly in 2010 with the need to ensure need to ensure that the stance of monetary policy is appropriate to prevent the build-up of financial imbalances that could arise from interest rates being too low for a prolonged period of time. Rates were increased in tranches by 100 bps from Mar 2010 to May 2011.
- 14. 14 Inflation Malaysia experienced high inflation immediately after independence, then after that phase it is one of the countries in the world that have low inflation. The inflation rate for Malaysia is averaged 2.9% per annum historically. Although Malaysia has experienced low inflation, nevertheless it had four instances of high inflation, which are mid- 1970s, early 1980s, late 1990s, and late 2000s. Reason for Inflation in 1970s and 1980s: In this period prices increased significantly because of disruption in the supply of oil and food. Global oil prices increased dramatically because of the Egypt-Israeli War in 1973, Iranian Revolution in 1979, and Iran-Iraq War during early 1980s. The domestic inflation increased by 17.3% and 9.7% in 1974 and 1981 respectively. Reasons for inflation in 1997-1999: In 1998 inflation in the country reached above 5% mainly because of substantial rise in food prices, the price increases were broad-based determined by both supply and demand factors. The prices of the import increases as ringgit depreciated against USD by 28 %. Reasons for inflation in late 2000s: Inflation started rising from 2005 and reached its peak in 2008 around 8.3%. This increase was mainly due surge in global commodity prices which ultimately resulted in the increase in the domestic prices. Also global slowdown took time for the economy to recover from this phase. Steps taken by Government to Mitigate Inflation: 1. Reduces the Government spending: Reduction in Government expenditure will directly affect the aggregate demand which decreases aggregate production, income and hence the inflation.
- 15. 15 The Government cut the salary of all civil servants and postpones its development projects to reduce purchasing power of public. Government also decreased its transfer payment, subsidies etc on various items to bring prices under control. 2. Increase in taxes: Increase in taxes leaves household sector with less disposable income and hence their purchasing power reduces. A highly regressive tax structure has successfully reduced the impact of inflation on the economy.
- 16. 16 D. Socio Economical Aspects of Malaysia It is an upper middle-income Southeast Asian country with a many cultures and languages and a population of about 30 million people. Government Structure Led by Barisal nasional (National Front) since independence in 1957, Malaysia is divided into 13 states and 3 federal territories. There are two main laws in country, civil law and syriah law (Islamic law). Recently the efforts to liberalize the country have taken a centre stage and are well supported by Government Transformation Programme launched in 2010 Millennium Development goals, Human Development and Gender Quality Malaysia announced to achieve MDG by 2015, and so far it has been able to achieve some of the goals like reducing the poverty which was 17 % at 1990 to 4 % in 2010 and a further reduction to 1.7 % in 2012. When it comes to human development Ranked 62nd (out of 187 countries) by UNDP in 2013 with a score of 0.773 There is 30 % increase in HDI score since 1980 with annual average of 0.89 % Challenge of Inequality Despite overall impressive growth at national level, some geographical areas have remained away from growth which includes Sapah, Kelantan and Sarawak with poverty rates significantly above national average Some of the ethnic groups are also facing difficulties with most important example of Olang (Malaysian Indigenous people in Peninsular Malaysia) which are socio economically backward and there is 31 % poverty rate In terms of gender inequality, a rank of 39th in 149 countries with a score of 0.210 should explain the state
- 17. 17 National Development Strategies There are five year plans for development In 1991, vision 2020 was launched according to which, “A society which is democratic, liberal and tolerant, caring, economically just and equitable, progressive and prosperous, and in full possession of an economy that is competitive, dynamic, robust and resilient.” Five key thrusts identified as i. to move the economy up the value chain; ii. to raise capacity for knowledge and innovation and nurture “first-class mentality;” iii. to address persistent socio-economic inequalities constructively and productively; iv. to improve the standard and sustainability of quality of life; v. and to strengthen the institutional and implementation capacity In 2010, two new programmes were launched as Government Transformation Programme and Economic Transformation Programme. Goal of ETP was to attain developed nation status by 2020 with GNI of USD 15000 per capita, Target of USD 444 billion of investment inflow with 3.3 million new jobs GTP is aimed towards changing the structure and functionality of government The tenth Malaysian Plan (2010-2015) aims at achieving targets to achieve abovementioned goals with an average annual growth rate of 6 %. International Relations Part of United Nations since 1957 Important role in peacekeeping activities particularly in the Republic of Congo in 1960 In 1967, formed ASEAN (Association of South East Nations) with four other countries ODA(Official Development Assistance) is sharply declining with $15 million (0.005 % of GNI) in 2012 as one would expect for upper middle class economy
- 18. 18 E. State: Kerala Comparing the country with most of the states it seems that it resembles majority of characteristics with Kerala. Common Factors: 1. Climate: Kerala and Malaysia have similar climatic condition having hot and humid temperature throughout the year with average temperature around 27o -29o C, humidity around 90%, and rainfall around 300mm. Both have huge coastline. 2. GDP: Tertiary Factors (Trade, Hotels & Restaurant, BFSI) are the major contributor to the GDP with contribution around 55-60% in Kerala and 50-55% in Malaysia. As both Kerala and Malaysia are preferred tourist destination, tourism has good contribution in the GDP. Also both have important and big ports which facilitate smooth trade. Secondary Factors (Manufacturing, Constructions, etc) contributes 35-40% in Kerala and 40- 45% in Malaysia. In both Kerala and Malaysia special policies are being implemented to promote manufacturing. Primary Factors (Agriculture, Forestry, Mining) contributes least to the GDP around 10-15% in both Kerala and Malaysia. In past this factor was the major contributor to the GDP but eventually both lost their dominant share. As Kerala and Malaysia share almost similar climate there are some common crop under cultivation like rubber, rice, coconut, cocoa, various fruits, etc. 3. Literacy Rate: Both Malaysia and Kerala have literacy rate of 93.12% and 94% respectively, such a high literacy rate is the main reason behind their overwhelming success in the service sectors and hence its high contribution to the GDP.
- 19. 19 F. References 1. Assessment of Development Reports: Malaysia, UNDP 2. Development in Malaysia: Economics and Politics of an Idea, Akademika 64, Lee Hwok Aun 3. Economic Performance prospects, BNM 4. Malaysian Economic Development, Issues and Debates, Har Wai Mun 5. Malaysian Economy, First Quarter 2015, Ministry of Finance, Malaysia