Monetary Policy and Economic Challenges in Malaysia

MACROECONOMICS

MONETARY POLICIY AND ECONOMIC CHALLENGES 1
The monetary policies are laid down by the central banks of the country for the management
of the money supply and interest rates. These macroeconomic policies play significant role in
the stabilisation of the economies are aimed at controlling inflation, influencing the cost and
availability of credit, stabilising the exchange rate thereby increasing the growth rate of the
economy, and maintaining equilibrium in the balance of payments (Datta and
Mukhopadhyay, 2011). It is significant to note that Malaysian economy has witnessed a rapid
economic growth over the recent years, such that the case of Malaysian economy can be
studied and analyse by many developing countries while the attempts are made to improve
their respective economies. One of the main contributors to the same is the mobilisation of
savings for the, financing of investment. In the background of the economic development,
lies an appropriate banking system, together with the sound monetary policy. The following
work is aimed at exploring the various facets of the monetary policy in Malaysia, with respect
to its role, the ways in which the monetary policy has adapted to changing circumstances and
limitations. Further, the work would also shed light on the major challenges that Malaysia
will face in the year 2019.
The following segment is descriptive of the key challenges for the Malaysia in the upcoming
period of 2019. In the words of the Governor of Malaysia, Shamsiah Yunus, the expected
growth rate of the Malaysian economy is expected to be at the lower range of the forecasted
rates owing to a number of challenges such as escalation of trade tensions, sharper
moderation in global demand, weaker-than-expected commodity prices and the disruption in
global financial markets (Shukry, Chan and Chew, 2019). Accordingly, the first major
challenge that would deeply affect the economic activities of Malaysia can be stated to be
arising from the US China trade tensions. In the words of one of the lead economists of
Malaysia, Mr Richard Record, there are likely chances of external sector of the country being
negatively impacted by the virtue of rising tensions among US and China (The Star, 2019).
The plunge in the country’s exports in the first quarter of 2019 is an evidence of international
tensions taking a toll on the exporting activities of the country. It is significant to note that the
economy of Malaysia is heavily reliant on international, where the combined exports from
U.S. and China account for more than 20% of the total exports. The following table is
descriptive of the industry output that is dependent on the Chinese exports to the US as per
the data of each industry’s share of gross value added that is exposed to bilateral U.S.-China
trade. According to the said data, the top industry that would be affected by the said trade
tensions would be the electronics and the information technology. As can be seen from the

MONETARY POLICIY AND ECONOMIC CHALLENGES 2
table presented below, electronics and information technology sector would be adversely
affected for a number of countries. In case of Malaysia, the sector comprise of the major
portion and an approximate of 3.87 percent of the gross value added, thus, the trade tensions
can be easily seen in such industry.
(Source: Holland and Sam, 2019)
The second major challenge that has surrounded the Malaysian economy following the above
is the disruption in the stock market, similar to the other stock markets of the Asia Pacific
region. The reasons for the same in the words of the country, ’s finance minister can be listed
to be geopolitical concerns in the Middle East, swings in oil prices, challenging environment
for global equity markets, ongoing US-China trade war and the global monetary tightening
(Town, 2019). In addition, one of the reasons for the disruption of the stock market can be
gauged to be a possible UK recession, as alerted by the Bank of England in the wake of UK
leaving the EU without a proper deal (Abidin, 2018). This will have an impact on the world
economy, including the emerging Asian economies such as Malaysia. The said international
market shocks, if not managed properly can lead to the negative impacts involving the
erosion of the capital and a depreciation of the ringgit. The impacts would further trickle
down to declining wage growth and a spike in unemployment rates, especially among youth.
The third critical challenge that is being faced by the economy in Malaysia is to ensure that
the people from various categories are benefitted from the national growth. The challenge is
critical because in spite of an impressive growth rate over the few years, the country is still
faced by the inflation, combined with the rising costs of doing businesses, as faced by the
business communities and consistently rising cost of living as faced by the household
community. Though, the country has a relatively lower cost of living as compared to the
other countries in the ASEAN region. The higher costs of doing the businesses can be further