The Malaysian Economy

The Malaysian Economy

Malaysia is a country rich in culture, languages, commerce and natural resources. The population is a diverse mix of ethnic Malays, Chinese, Malaysians of Indian descent, and Indigenous people. Although the Islamic faith is the dominant religion in the country, the cultural and socio-political environment is one of harmony and people of different religions are free to worship. The heterogeneity and open collective nature of Malaysia's socio-political landscape makes it an ideal stable country for new business ventures.

Malaysia has a wealth of natural resources. Malaysia's main exports include palm oil, natural rubber, cocoa and tobacco. Mineral resources are also integral to the Malaysian economy, primarily tin, oil and natural gas. In 2004, Malaysia's oil reserves were estimated at 4.8 billion barrels and natural gas reserves at 89 trillion cubic feet.

The current economic focus in Malaysia has shifted from one that is commodity-based to that of manufacturing and information. Malaysian exports have become their central growth factor. The country showed consistent and stable growth throughout the last two decades; Malaysia's real GDP growth exceeded 7% coupled with a low inflation rate. The value of Malaysia's exports is approximately $127 billion; major export markets are with U.S. at 21%, Singapore at 17%, and Japan's share at 11%. The value of imports is about $99.2 billion which includes machinery, chemicals, fuels and manufactured goods. Major import markets to Malaysia are US (15%), Japan (15%) and Singapore (11%). While Canada is a relatively small trading partner, Canada-Malaysia bilateral trade was approximately $2,227 million in 2001.

The government of Malaysia is supportive of foreign direct investments (FDI). In the 2004 World Competitiveness Yearbook, Malaysia was ranked "fifth most competitive country in the world, ahead of countries such as Germany, UK, Japan, and China". The US remains a central source of new investment in Malaysia. Canada's FDI in Malaysia have also grown substantially over the last two decades, accounting for $651 million in 2004. A large proportion of Canadian FDI is channeled into manufacturing, but the service sector is attracting a growing portion of investment.

The fiscal and monetary policies in Malaysia aided its speedy economic recovery following the region's financial crisis in 1997. Despite the previous five years (1993 Ð'- 97) budgetary surplus, the federal budget incurred deficits from 1998 to 2001 due to expansionary fiscal policy designed to promote economic recovery and growth. Although expansionary in focus, Malaysia maintains fiscal flexibility through careful management, and growth at a sustainable level. Interest payments for debt servicing by the government is low; approximately 16% of operating expenditure. In addition, the federal budget incorporated tax reforms to stimulate expansion of domestic demand while increasing the country's competitiveness and resilience.

In an effort to mitigate the effects of the declining value of the Ringgit and discourage speculative currency trading, the government imposed capital controls and fixed the exchange rate of the Ringgit at RM3.8 to U.S. $1 in 1998. However FDI, dividends, wages, and interest earned in Malaysia were exempted from these controls. In 2005, the Central Bank converted the Ringgit back to a managed float against an undisclosed basket of currencies. This move would maintain the stability of the currency in support of the nation's export-based economy. Malaysia's effective implementation of monetary controls is reflected by the strong current account surplus, high level of reserves and low inflation rate. The lack of inflationary pressures enabled an accommodative and responsive policy, supported by low and stable interest rates.

In terms of trade barriers, there are two central key factors: Tariffs and Licensing. Import tariffs range from 0% to 50%; typically lower on raw materials and higher for finished goods. An illuminating example is the import tax on CBU versus CKD vehicles. Malaysia encourages import of commercial vehicles in CKD format by imposing much higher taxes on CBU units; CBU 30% vs. CKD 0%. Tariff rates are reviewed regularly by the government in achieving an open economy; the applied tariff rates have decreased over the past decade.

Malaysia operates