Academic project in economics during my MBA course. The scope is to analyze a country based on economic metrics

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

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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.

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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.

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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