THE International Monetary Fund (IMF) has revised its growth forecast for Malaysia to five per cent for 2013 from its previous projection of 4.7 per cent.
Growth will be underpinned by the domestic demand, with low unemployment and subdued inflation.
In its latest medium-term outlook, which was released following its Article IV Consultation recently, IMF projected growth until 2017 to be between 5.1 per cent and 5.2 per cent.
"Although the domestic demand growth pace is lower than that recorded in 2012, it is still sizeable at over six per cent from 11.6 per cent last year," IMF resident representative Dr Ravi Balakrishnan told the Business Times from Singapore yesterday.
Higher spending by households, firms and the government on consumer and capital goods has offset weak exports to Europe and the rest of the world.
Consumption has been supported by low interest rates, a strong labour market and fiscal transfers to households.
Balakrishnan said Malaysia has done remarkably well and displayed resilience like its neighbours in the face of the global crisis, chalking a 5.6 per cent growth for 2012.
The rebalancing of Malaysia's economy towards greater domestic demand - from its dependence on trade - has led to a significant deterioration in Malaysia's external current account balance, to a surplus of about six per cent of gross domestic product (GDP) last year, compared to 11 per cent in 2011.
The IMF released the details of its annual assessment last Friday together with its first financial sector assessment programme for Malaysia, which endorsed the resilience of the well-capitalised financial sector.
Malaysia's growth story was better than what the IMF expected.
"We are happy with the developments for the near term but there are challenges on the fiscal front for the economy to realise the growth level of 2020."
The government's revenue base needs to shift from the oil and gas receipts, which account for about a third of the total.
The planned goods and services tax would help broaden the revenue base, while the gradual rationalisation of the subsidies programme would help reduce spending pressures while staggering the impact on inflation and incomes.
In the case of investments, he said to sustain the current levels, there must be concerted efforts towards structural reforms, including education to help reduce its skills gap and increase the contribution of human capital.
The report said the Fund welcomed the introduction of a minimum wage this year, which should support the incomes of poorer workers, and recommends considering the introduction over time of unemployment insurance and reforms to the pension system to further strengthen social protection.
Government debt is expected to decline gradually relative to GDP over the next five years, reaching about 51 per cent of GDP by 2017.
The Fund has recommended that there be more "front-loaded" consolidation efforts to reduce the probability of breaching the debt ceiling and ensure the government's goal of reducing debt to 40 per cent of GDP by 2020.
Balakrishnan said while the target to reduce debt is lauded, it is also important that there be more transparency in the concrete measures that Malaysia plans to undertake.