../../../175pxls.gif (78 bytes)
 ON THIS PAGE:    Press release    Secretariat summary    Government report
home > trade topics > trade policy reviews > list of reviews > trade policy reviews

Topics handled by WTO committees and agreements
Issues covered by the WTO’s committees and agreements

TRADE POLICY REVIEWS: FIRST PRESS RELEASE, SECRETARIAT AND GOVERNMENT SUMMARIES

PRESS RELEASE
PRESS/TPRB/180
5 December 2001
Malaysia: December 2001

The WTO Secretariat report, along with the policy statement by the Government of Malaysia, will serve as a basis for the third trade policy review of Malaysia by the Trade Policy Review Body of the WTO on 3 and 5 December 2001.

175pxls.gif (835 bytes)

See also:

Second press release
Chairperson’s concluding remarks


Malaysia's sustained recovery helped by export growth but many challenges looming   Back to top

Rising private consumption, a revival in domestic investment and a strong export growth helped Malaysia rebound from the Asian financial crisis of 1997. This rebound has produced low levels of unemployment and inflation in 2000. But many challenges are looming in the horizon and a sustained recovery of the Malaysian economy depends not just on prudent macroeconomic policies but also on structural reforms, according to a WTO report on the trade policies and practices of Malaysia.

According to the report, during the period under review (1997-2001), Malaysia's economy has remained relatively open to trade and foreign investment. This is especially true of the goods sector; by comparison, the services sector is more closed, although judging from the recently launched Eighth Malaysia Plan, the Government does envisage opening up the sector gradually.

The report recalls that in the second half of 1997, Malaysia was struck by the Asian financial crisis, which contributed to a severe deterioration in its economic performance in 1998. The outcome was that, after having grown on average by more than 8% annually since the recession of 1985, real GDP fell by 7.4% in 1998 owing to a large drop in private domestic demand caused by a sharp decline in investment and, to a lesser extent, by lower consumption. As a consequence, the unemployment rate rose, inflation doubled and the ringgit fell.

Nonetheless, the economy did rebound, with GDP growing by 6.1% in 1999 and by 8.3% in 2000 so that at the end of 2000, real output in value terms exceeded the pre-crisis level (however, per capita income was US$3,531 in 2000, around 20% lower than the pre-crisis level). This rebound can be attributed to rising private consumption and a revival in domestic investment as well as to strong export growth owing to the fact that Malaysia's trading partners kept their markets open throughout the crisis. Unemployment declined to 3.1% in 2000 and inflation slowed from 2.8% in 1999 to 1.6% in 2000.

The report says that while some trade barriers were raised “temporarily” in the wake of the Asian financial crisis, certain restrictions on foreign direct investment (FDI) were at the same time relaxed, also temporarily. In addition, the Government, by promoting corporate and financial restructuring, has taken steps to address structural weaknesses that became more evident during the crisis. Nonetheless, there are several barriers to trade and investment that still constitute potentially important distortions to competition and thus potential impediments to Malaysia's long-term development.

The tariff continues to be the main border measure on imports; it also accounts for 5.8% of total tax revenues. As a consequence of “temporary” increases in rates in 1998, the average applied MFN tariff increased from 8.1% in 1997 to 9.2% in 2001. This rise in tariff protection was facilitated by the fact that one third of tariff lines are not bound and, even for those lines that are subject to bindings, bound rates often considerably exceed applied rates. This lack of bindings, together with the gap between bound and applied rates, can impart a degree of unpredictability to Malaysia's tariff. Furthermore, the multiplicity of applied rates contributes to the complexity of the tariff. However, the decline in non-ad valorem tariffs from 4.5% of all tariff lines in 1997 to only to 0.7% in 2001 has increased the transparency of the tariff, as such duties tend to conceal tariff “peaks”. Tariff peaks apply, inter alia, to automobiles, beverages, textiles and clothing. With an increase in the number of tariffs both below 10% and above 30%, the dispersion in applied MFN rates has risen, thereby increasing the potential for the tariff to distort the allocation of resources to the detriment of Malaysia's economy.

Tax measures are among the main instruments of Malaysia's economic development strategy. They include a wide array of investment incentives that are offered to various manufacturing activities, including exports thereof, agriculture, tourism, and other approved service sectors, research and development, training, and environmental protection. It appears that some of these incentives might have been provided as a quid pro quo for local-content requirements that the authorities sometimes attached to investments; with the removal of most of these requirements, the question arises whether such incentives are still necessary. While tax as well as non-tax incentives for investment can sometimes be justified on grounds of “market failure”, they also run the risk of subsidizing good investments, which need no such assistance and could well have been undertaken in any event, or turning otherwise dubious investments into profitable ones. Insofar as incentives have stimulated investment in the latter, they may well have contributed to over-investment, and to a distortion in the allocation of resources, thereby possibly contributing to the fall in total factor productivity that occurred in Malaysia during the early 1990s.

The Malaysian economy is relatively open to both trade in goods and foreign investment, although rice and automotive products are notable exceptions. The electronics sector appears to offer a striking example of the benefits of an open regime in fostering development. The sector has drawn significant flows of foreign direct investment (FDI), has had fairly little tariff and non-tariff protection, and has grown to account for approximately 2.5% of global electronics production: it has been among the main engines of Malaysia's growth, and its strong external competitiveness was an important element in Malaysia's recovery from Asian financial crisis, with the sector accounting for more than half of Malaysia's total exports. By contrast, the domestic automotive sector has been relatively sheltered from foreign competition; it has been protected by high tariffs and supported by various other incentives; the sector has been successful in winning a large share of the domestic market but, contrary to stated objectives, its exports are modest, suggesting perhaps a certain lack of external competitiveness.

Malaysia is a trading nation, with exports and foreign direct investment playing an important role in its economy. The recent sharp slowdown in the U.S. economy, and Japan's further weakening, pose major challenges for Malaysia's trade and investment outlook and thus to Malaysia's short- and medium-term economic prospects. Indeed, the Central Bank predicts that growth will fall to between 5% and 6% in 2001, mainly due to the slowdown in exports to the United States (the Asian Development Bank has forecast growth of 4.9% in 2001), notwithstanding stimulative fiscal measures adopted in March 2001. This raises the question of whether Malaysia's economic policy has perhaps over-emphasised exports at the expense of domestic demand (i.e. national saving is excessive), making it too dependent on foreign markets (and a narrow range of products, namely electronics).

The Government has made considerable progress in addressing structural weaknesses that became more evident during the Asian crisis, by promoting corporate and financial restructuring. A more liberal trade and investment regime could also contribute greatly not just to a sustained economic recovery, but also to Malaysia's long-term economic development.


Note to Editors

Trade Policy Reviews are an exercise, mandated in the WTO agreements, in which member countries’ trade and related policies are examined and evaluated at regular intervals. Significant developments which may have an impact on the global trading system are also monitored. For each review, two documents are prepared: a policy statement by the government of the member under review, and a detailed report written independently by the WTO Secretariat. These two documents are then discussed by the WTO’s full membership in the Trade Policy Review Body (TPRB). These documents and the proceedings of the TPRB’s meetings are published shortly afterwards. Since 1995, when the WTO came into force, services and trade-related aspects of intellectual property rights have also been covered.

For this review, the WTO’s Secretariat report, together with a policy statement prepared by the Government of Malaysia, will be discussed by the Trade Policy Review Body on 3 and 5 December 2001. The Secretariat report covers the development of all aspects of Malaysia trade policies since the previous review, including domestic laws and regulations, the institutional framework, trade policies by measure, and developments in selected sectors.

Attached to this press release is the Overview to the Secretariat report and parts of the government policy statement. The Secretariat and the government reports are available under the country name in the full list of trade policy reviews. These two documents and the minutes of the TPRB’s discussion and the Chairman’s summing up, will be published in hardback in due course and will be available from the Secretariat, Centre William Rappard, 154 rue de Lausanne, 1211 Geneva 21.

Since December 1989, the following reports have been completed: Argentina (1992 and 1999), Australia (1989, 1994 and 1998), Austria (1992), Bahrain (2000) Bangladesh (1992 and 2000), Benin (1997), Bolivia (1993 and 1999), Botswana (1998), Brazil (1992, 1996 and 2000), Brunei Darussalam (2001), Burkina Faso (1998), Cameroon (1995 and 2001), Canada (1990, 1992, 1994, 1996, 1998 and 2000), Chile (1991 and 1997), Colombia (1990 and 1996), Costa Rica (1995 and 2001), Côte d’Ivoire (1995), Cyprus (1997), the Czech Republic (1996 and 2001), the Dominican Republic (1996), Egypt (1992 and 1999), El Salvador (1996), the European Communities (1991, 1993, 1995, 1997 and 2000), Fiji (1997), Finland (1992), Gabon (2001), Ghana (1992 and 2001), Guinea (1999), Hong Kong (1990, 1994 and 1998), Hungary (1991 and 1998), Iceland (1994 and 2000), India (1993 and 1998), Indonesia (1991, 1994 and 1998), Israel (1994 and 1999), Jamaica (1998), Japan (1990, 1992, 1995,1998 and 2000), Kenya (1993 and 2000), Korea, Rep. of (1992, 1996 and 2001), Lesotho (1998), Macao (1994 and 2001), Madagascar (2001), Malaysia (1993, 1997 and 2001), Mali (1998), Mauritius (1995 and 2001), Mexico (1993 and 1997), Morocco (1989 and 1996), Mozambique (2001), New Zealand (1990 and 1996), Namibia (1998), Nicaragua (1999), Nigeria (1991 and 1998), Norway (1991, 1996 and 2000), OECS (2001), Pakistan (1995), Papua New Guinea (1999), Paraguay (1997), Peru (1994 and 2000), the Philippines (1993 and 1999), Poland (1993 and 2000), Romania (1992 and 1999), Senegal (1994), Singapore (1992, 1996 and 2000), Slovak Republic (1995 and 2001), the Solomon Islands (1998), South Africa (1993 and 1998), Sri Lanka (1995), Swaziland (1998), Sweden (1990 and 1994), Switzerland (1991, 1996 and 2000 (jointly with Liechtenstein)), Tanzania (2000), Thailand (1991, 1995 and 1999), Togo (1999), Trinidad and Tobago (1998), Tunisia (1994), Turkey (1994 and 1998), the United States (1989, 1992, 1994, 1996, 1999 and 2001), Uganda (1995), Uruguay (1992 and 1998), Venezuela (1996), Zambia (1996) and Zimbabwe (1994).

  
  
The Secretariat’s report: summary  Back to top

TRADE POLICY REVIEW BODY: MALAYSIA
Report by the Secretariat — Summary Observations

Economic environment

During the period under review (1997-2001), Malaysia's economy has remained relatively open to trade and foreign investment. This is especially true of the goods sector; by comparison, the services sector is more closed, although judging from the recently launched Eighth Malaysia Plan, the Government does envisage opening up the sector gradually. Imports and exports of goods and services were equivalent to 106% and 117% of GDP on average during the period 1997-2000. Inbound foreign direct investment (FDI) typically accounts for between one quarter and one third of private investment in each year, while the stock of inbound foreign direct investment (FDI) currently amounts to nearly half of GDP. Moreover, according to a globalization index used in a recent independent survey, Malaysia is in the top 20 of the most globalized economies.

In the second half of 1997, Malaysia was struck by the Asian financial crisis, which contributed to a severe deterioration in its economic performance in 1998. This deterioration occurred despite apparently strong economic fundamentals (including full employment, low inflation, a high national saving rate, a prudent fiscal position, and a reasonably sound banking system). Nonetheless, both capital and total factor productivity (TFP) growth had dropped markedly (from an annual average rate of 2.4% in 1990-1995 to 0.9% in 1995-2000), perhaps reflecting over-investment, if not an increasingly inefficient allocation of capital. The outcome was that, after having grown on average by more than 8% annually since the recession of 1985, real GDP fell by 7.4% in 1998 owing to a large drop in private domestic demand caused by a sharp decline in investment and, to a lesser extent, by lower consumption. As a consequence, the unemployment rate rose to 3.3% in 1998, up from 2.5% in the previous year. Inflation doubled, from 2.6% in 1997 to 5.3% in 1998, partly due to higher import prices resulting from the depreciation of the ringgit, which fell from about RM 2.8/US$ in the third quarter of 1997 to RM 3.8/US$ a year later.

Initially, Malaysia responded to the crisis by tightening financial policies, but with the further worsening of the economic situation, the Government changed its policy stance towards the end of 1998, cutting interest rates and raising government spending in order to stimulate the economy. In addition, with a view to supporting the domestic financial markets, and to provide scope for the easing of monetary and fiscal policies, temporary controls were imposed on selected capital account transactions and the ringgit was pegged at RM 3.80 per U.S. dollar.

The issue of whether these macroeconomic policies, especially the imposition of capital controls, helped Malaysia to recover more quickly from the crisis has been highly debated. Indeed, at the time the capital controls were put in place, markets both in Malaysia and elsewhere in South East Asia appeared to have already stabilized. Nonetheless, the economy did rebound, with GDP growing by 6.1% in 1999 and by 8.3% in 2000 so that at the end of 2000, real output in value terms exceeded the pre-crisis level (however, per capita income was US$3,531 in 2000, around 20% lower than the pre-crisis level). This rebound can be attributed to rising private consumption and a revival in domestic investment as well as to strong export growth owing to the fact that Malaysia's trading partners kept their markets open throughout the crisis. Unemployment declined to 3.1% in 2000 and inflation slowed from 2.8% in 1999 to 1.6% in 2000.

A sustained recovery of the Malaysian economy depends not just on prudent macroeconomic policies, but also on structural reforms. The Asian crisis revealed weaknesses in several areas, including in corporate structure and governance as well as in the financial system. Accordingly, the Government has taken steps or announced plans to restructure the corporate and financial sectors. These are in addition to a long-standing privatization programme and labour market reforms. The Government has also adopted measures to diversify the economy by further widening and deepening the industrial base, enhancing the contribution of the agriculture to GDP, and by fostering the development of the services sector.

  
Developments concerning institutional framework

There have been a few noteworthy changes in Malaysia's trade-related institutional framework since its previous Trade Policy Review. In January 1998, the National Economic Action Council (NEAC) was established as a consultative body to the Cabinet with a view to dealing with economic problems arising from the Asian financial crisis, and in July 1998, the NEAC announced the National Economic Recovery Plan (NERP). Further, with a view to strengthening the resilience of Malaysia's financial market, Danaharta (the national asset management company), Danamodal (a special purpose vehicle to revitalize the banking sector), and the Corporate Debt Restructuring Committee (CDRC) were established under NERP. In 1997, the National Consumer Affairs Council was also formed under the chairmanship of the Minister of Domestic Trade and Consumer Affairs, to deal with consumer protection issues.

WTO Agreements continue to play a pivotal role in the formulation of Malaysia's trade and trade-related policies. Regional arrangements are also important, notably those involving the Association of South East Asian Nations (ASEAN) and the Asia Pacific Economic Cooperation forum, and various bilateral agreements, including in areas not covered by WTO Agreements. Malaysia coordinates its policies on WTO matters with other ASEAN members, and, at the same time, it endeavours to ensure that its participation in regional trade arrangements is consistent with the main principles underlying the WTO Agreements.

  
Trade and trade-related policies, practices and measures

During the period under review, Malaysia's economy has remained relatively open as far as international trade in goods and foreign investment are concerned. While some trade barriers were raised “temporarily” in the wake of the Asian financial crisis, certain restrictions on foreign direct investment (FDI) were at the same time relaxed, also temporarily. In addition, the Government, by promoting corporate and financial restructuring, has taken steps to address structural weaknesses that became more evident during the crisis. Nonetheless, there are several barriers to trade and investment that still constitute potentially important distortions to competition and thus potential impediments to Malaysia's long-term development.

The tariff continues to be the main border measure on imports; it also accounts for 5.8% of total tax revenues. As a consequence of “temporary” increases in rates in 1998, the average applied MFN tariff increased from 8.1% in 1997 to 9.2% in 2001. This rise in tariff protection was facilitated by the fact that one third of tariff lines are not bound and, even for those lines that are subject to bindings, bound rates often considerably exceed applied rates. This lack of bindings, together with the gap between bound and applied rates, can impart a degree of unpredictability to Malaysia's tariff. Furthermore, the multiplicity of applied rates contributes to the complexity of the tariff. However, the decline in non-ad valorem tariffs from 4.5% of all tariff lines in 1997 to only to 0.7% in 2001 has increased the transparency of the tariff, as such duties tend to conceal tariff “peaks”. Tariff peaks apply, inter alia, to automobiles, beverages, textiles and clothing. With an increase in the number of tariffs both below 10% and above 30%, the dispersion in applied MFN rates has risen, thereby increasing the potential for the tariff to distort the allocation of resources to the detriment of Malaysia's economy.

The average level of tariff protection is lower than that indicated by the simple applied MFN average owing to tariff concessions, often for capital and intermediate inputs, as well preferential rates, particularly those favouring ASEAN countries; indeed the average rate of duty collected on total imports was 1.3% in 2000 (compared with 3% in 1997). The widening gap between the average level of applied MFN tariffs and the average level of the preferential AFTA tariff has increased the potential for trade diversion. ASEAN's share of Malaysia's imports rose substantially between 1996 and 1999, although this trend may be due more to the depreciation of ASEAN countries' currencies in the wake of the Asian financial crisis than to the AFTA. Insofar as trade diversion does occur owing to the AFTA, and outweighs trade creation, it could possibly be detrimental to Malaysia's non-ASEAN trading partners.

Apart from import prohibitions implemented for national security, religious, and environmental reasons, various non-tariff border measures barriers are also used as instruments of Malaysia's trade and development policy. In particular, an increasing proportion of tariff lines is subject to import licensing; for some agricultural and industrial products, such licencing can seemingly provide the authorities with scope for administrative discretion. On the other hand, Malaysia is not a major user of contingency measures; during the review period, it has taken few anti-dumping (AD) actions and no countervailing (CV) or safeguard measures.

Local-content requirements were abolished in 2000, except in the case of the automobile industry. Government procurement procedures, notably preference margins, tend to favour locally owned businesses, particularly where relatively small amounts are involved. Foreign suppliers are usually excluded for contracts of larger amounts unless the supplies or services are not available locally; for works contracts, foreign contractors are allowed to participate if there is no local expertise. Malaysia is not a party to the GPA, although it does participate in the WTO working group on transparency in government procurement. Furthermore, restrictions on foreign ownership encourage local participation in companies operating in Malaysia, although these restrictions tend to be relaxed for companies with higher exports.

Some items, notably forest products, crude oil, and selected palm oil products, are subject to export duties, which account for around 2% of total tax revenues. A few products are also subject to prohibitions, restraints, and licensing requirements. At the same time, assistance is provided to exports through, inter alia, tariff concessions, tax relief, export processing zones, concessionary credits, insurance, and guarantees as well as promotion and marketing assistance.

Tax measures are among the main instruments of Malaysia's economic development strategy. They include a wide array of investment incentives that are offered to various manufacturing activities, including exports thereof, agriculture, tourism, and other approved service sectors, research and development, training, and environmental protection. It appears that some of these incentives might have been provided as a quid pro quo for local-content requirements that the authorities sometimes attached to investments; with the removal of most of these requirements, the question arises whether such incentives are still necessary. Tax incentives are often costly (in terms of tax revenues forgone) and their effectiveness is not always clear. While tax as well as non-tax incentives for investment can sometimes be justified on grounds of “market failure”, they also run the risk of subsidizing good investments, which need no such assistance and could well have been undertaken in any event, or turning otherwise dubious investments into profitable ones. Insofar as incentives have stimulated investment in the latter, they may well have contributed to over-investment, and to a distortion in the allocation of resources, thereby possibly contributing to the fall in total factor productivity that occurred in Malaysia during the early 1990s.

Malaysia is gradually bringing domestic standards into line with international norms. Although 31% of the 2,862 Malaysian standards currently in force are aligned with or based on international standards, 80% of the new standards developed by Malaysia in 1998 and 1999 correspond to international standards.

Since its previous Review (in 1997), Malaysia has enacted two new laws and amended four others to strengthen the protection of intellectual property rights and bring domestic legislation into conformity with the TRIPS Agreement. It has also stepped up enforcement of IPR laws, especially those pertaining to copyrights.

State-owned enterprises continue to play an important role in the Malaysian economy, especially in petroleum, electricity, transportation, telecommunications, and postal activities. Aside from their own operations, some of these enterprises provide finance not just to each other, but also to private companies. For example, PETRONAS, the highly profitable state-owned oil company has purchased stakes in, inter alia, automobile and shipping companies, and Khazanah Holdings, a state-owned investment fund, has purchased shares in a private company's telecom unit. However, the Government has a long-standing privatization programme, although the onset of the Asian crisis has seemingly slowed its progress. Indeed, the Government has bought back stakes in some companies.

Currently, Malaysia does not have a comprehensive competition law. It does, however, have various other laws that regulate the activities of enterprises and protect consumer interests. Moreover, with a view to fostering competition in telecommunications, the Government has recently established competition guidelines for this sector. Steps are being taken to improve corporate governance in Malaysia.

  
Sectoral issues

The Malaysian economy is relatively open to both trade in goods and foreign investment, although rice and automotive products are notable exceptions. The electronics sector appears to offer a striking example of the benefits of an open regime in fostering development. The sector has drawn significant flows of foreign direct investment (FDI), has had fairly little tariff and non-tariff protection, and has grown to account for approximately 2.5% of global electronics production: it has been among the main engines of Malaysia's growth, and its strong external competitiveness was an important element in Malaysia's recovery from Asian financial crisis, with the sector accounting for more than half of Malaysia's total exports. By contrast, the domestic automotive sector has been relatively sheltered from foreign competition; it has been protected by high tariffs and supported by various other incentives; the sector has been successful in winning a large share of the domestic market but, contrary to stated objectives, its exports are modest, suggesting perhaps a certain lack of external competitiveness.

The Government's recently launched the Eighth Malaysia Plan envisages a further gradual opening of the services sector, which accounts for over half of Malaysia's GDP, but is not yet as open to trade as agriculture and manufacturing. This is largely because of restrictions on foreign direct investment, which is necessary for the establishment of commercial presence, the main mode of delivery for most services. Commercial presence is generally confined to joint ventures, in which combined foreign ownership cannot exceed 30%. Insofar as barriers to commercial presence restrict competition in the provision of services, they tend to impair efficiency in the sector, so that the prices paid for these services, both by businesses and households, are higher than would be the case in a more competitive market. The resulting higher costs of doing business could hamper the competitiveness of all firms in Malaysia that require essential services (such as energy, finance, telecommunications, and transportation) as inputs in their production and delivery of goods and services.

The Government's plans to further open the financial services sector to international competition, reform measures undertaken by the Securities Commission, and steps taken to promote corporate governance and corporate retructuring are all mutually supporting.

  
Outlook

Malaysia is a trading nation, with exports and foreign direct investment playing an important role in its economy. The recent sharp slowdown in the U.S. economy, and Japan's further weakening, pose major challenges for Malaysia's trade and investment outlook and thus to Malaysia's short- and medium-term economic prospects. Indeed, the Central Bank predicts that growth will fall to between 5% and 6% in 2001, mainly due to the slowdown in exports to the United States (the Asian Development Bank has forecast growth of 4.9% in 2001), notwithstanding stimulative fiscal measures adopted in March 2001. This raises the question of whether Malaysia's economic policy has perhaps over-emphasised exports at the expense of domestic demand (i.e. national saving is excessive), making it too dependent on foreign markets (and a narrow range of products, namely electronics).

Another major challenge looming on the horizon is the impending accession of China to the WTO. China is a formidable competitor in Malaysia's export markets, including electronics, it also competes strongly with Malaysia for FDI. Indeed, China has recently attracted a lion's share of inbound FDI in the region.

The Government has made considerable progress in addressing structural weaknesses that became more evident during the Asian crisis, by promoting corporate and financial restructuring. A more liberal trade and investment regime could also contribute greatly not just to a sustained economic recovery, but also to Malaysia's long-term economic development.

  
  
Government report Back to top

TRADE POLICY REVIEW BODY: MALAYSIA
Report by the Government — Economic Development

With an average growth rate of 7.8% per annum, the period 1991-1997 witnessed the continuation of rapid economic progress, which started in the mid-1980’s. Due to the financial crisis, Malaysia's GDP contracted by 7.4% in 1998. However, the economy quickly recovered in the second quarter of 1999 leading to an average growth rate of 7.2% during the 1999-2000 period.

The quick recovery can be attributed to the Government’s efforts, beginning mid-1998, in easing monetary policy and providing fiscal stimulus to reactivate domestic demand, and the strong growth in exports registered in 1999 and 2000. The per capita income in current terms, which declined in 1998 rebounded to RM 13,359 in 2000, higher than the pre-crisis level of RM 11,234 (US$4, 493) in 1996 though, in US$ terms it recorded a lower value of US$ 3,515.

The unemployment rate averaged at 2.9% for the 1997 to 2000 period with the highest level of 3.3% in 1998, and the lowest at 2.5% in 1997. The inflationary rate based on the consumer price index was maintained at an average of 3.1%, with the highest record of 5.3% in 1998 and the lowest at 1.6% in 2000.

The manufacturing and services sectors together contributed the major portion of the total GDP increasing from 81.8% in 1997 to 83.7% in 1998, to 85.1% in 1999 and to 86.1% in 2000. The manufacturing sector’s contribution ranged from 27.9% to 33.4% while the services sector’s contribution ranged from 51.9% to 55.8% for the same period. The agricultural sector’s contribution to the economy was consistently above 9% except in 2000 with a decline to 8.4%. The construction sector saw a declining contribution from 4.8% in 1997 to 3.3% in 2000.

During the period, the domestic investment based on approved projects dropped sharply to RM 4.7 billion in 1999 from a high RM 14.3 billion in 1997 and RM 13.2 billion in 1998 before bouncing back to RM 13.7 billion in 2000. However FDI remained strong at RM 11.4 billion in 1997, RM 13.0 billion in 1998, RM 12.2 billion in 1999 and RM 19.8 billion in 2000.

Domestic investment for the period 1997-2000 was mainly in seven sectors namely petroleum products (including petrochemicals), electronics and electrical products, basic metal products, natural gas, chemicals and chemical products, transport equipment and non-metallic mineral products. These seven industries together accounted for 76% of total domestic investment in approved manufacturing projects during the period 1997-2000.

After registering exports of US$77.3 billion in 1997, Malaysia’s exports fell by 7.2% to US$71.8 billion in 1998. However, exports grew by 1.6% and 17% in 1999 and 2000 respectively mainly because of sustained demand for electrical and electronic goods. The share of primary commodity exports declined largely due to lower prices and lower export volume for palm oil. Nevertheless, higher prices of crude petroleum and LNG helped to offset export growth in this sector. The imports followed the same trend for the period recording a negative 26% in 1998, an increase by 12.9% in 1999 and a further increase by 34.4% in 2000. The decline of imports in 1998 can be attributed largely to slowdown in business activities, deferment of major infrastructure projects and weak consumer demand. Import items that registered declines were machinery and equipment, transport equipment and iron and steel products. In 2000, Malaysia was ranked the 18th largest exporter and 18th largest importer in world trade.

Concerning balance of payments, external reserves rose to US$30.9 billion at end 1999, equivalent to 5.9 months of retained imports. However, external reserves declined to US$29.9 billion at end 2000, equivalent to 4.5 months of retained imports, largely due to a narrowing merchandize surplus balance as growth in imports outpaced the growth in exports. In addition, despite the Government continuing to maintain a fiscal stimulus for year 2000, the fiscal deficit remained sustainable at 6.3% of GNP.

Malaysia introduced selective exchange control measures on 1 September 1998 to restore stability to the financial markets and the economy. The stability accorded by the controls has enabled the country to accelerate the restructuring of the financial and corporate sector. At present, the only remaining rules affecting short-term inflows are measures preventing the internationalization of the Ringgit.