Although saying the economy remains resilient, the latest World Bank report notes the problems facing the economy, and suggests some solutions.
KUALA LUMPUR: The World Bank expects the Malaysian economy to be resilient in the face of the current economic slowdown and drop in prices of crude oil and commodities.
In its latest Malaysia Economic Monitor, it says productivity will be the main driver of economic development.
It projects GDP growth to be around 4.2% in 2016 and 4.3% in 2017.
Private consumption, the report says, will continue driving economic growth, supported by low unemployment and government income-support measures. Fiscal consolidation, it notes, remains on track despite lower oil-related revenues.
However, private investment growth is expected to be moderate, as commodity prices and global economic activity remain subdued.
It also lists out the risks the country faces from what is happening elsewhere. This includes a further decline in prices of crude oil and export commodities, uncertainties over the performance of the Chinese economy, and uncertainties over the impact of US economic policies under a new administration.
The World Bank report says uncertainty in global financial markets could affect investor and business sentiment.
As capital and labour are expected to slow down, rising productivity growth, greater female labour-force participation, and continued investment in physical and human capital will be necessary for Malaysia to achieve high-income status.
It notes that Malaysia has performed relatively well on key aspects of productivity, such as in the quality of infrastructure, and non-technical innovations.
Saying Malaysia’s existing institutional architecture has sustained consistent productivity growth for more than two decades, the report says challenges in the skills gap, quality of infrastructure, and research and development system need to be addressed in order to refocus attention on productivity growth.
Overcoming skill gaps, building innovation capacity, and addressing distortion in markets where firms sell their goods and services, could help accelerate productivity growth further, it suggests.
Rising productivity, the report says, will become the main engine of economic and income growth in Malaysia in the future.
It notes that traditional drivers of growth are expected to moderate, with capital accumulation facing headwinds and the labour force growth gradually slowing down as the Malaysian population ages.
Therefore, raising productivity will be the key to future economic growth and prosperity in Malaysia, says Ulrich Zachau, World Bank country director for Southeast Asia.
“Malaysia has an opportunity to reach high income country status and catch up with the advanced economies with a combination of policies and investments that focus on productivity – including policies to upgrade skills, promote innovation, further strengthen competition and trade to increase firm level efficiency, and support women in the workforce,” he adds.
The Malaysia Economic Monitor series provides an analytical perspective on the policy challenges facing Malaysia as it grows into a high-income economy.