Washington, DC – February 27, 2026 On February 20, 2026, the Executive Board of the International Monetary Fund (IMF) completed the Article IV Consultation for Malaysia.[1]
Malaysia’s economy has shown notable resilience against global trade tensions and policy uncertainty. The economy continued to grow healthily, estimated at 4.9 percent in 2025, supported by strong domestic demand and a global tech-sector upcycle.[2] Inflation has been low and stable, with average headline inflation at 1.4 percent in 2025, amid declining food and fuel price inflation. The strong performance in part reflects sound and prudent macroeconomic policies. Fiscal consolidation has advanced under the Public Finance and Fiscal Responsibility Act, with the fiscal deficit estimated to be reduced from 4.1 percent of GDP in 2024 to 3.8 percent of GDP in 2025. Bank Negara Malaysia (BNM) reduced the Overnight Policy Rate to 2.75 percent in July 2025 and kept it unchanged since then. The authorities’ 13th Malaysia Plan, released in July 2025, emphasizes the importance of fiscal discipline and stronger governance, and promotes social mobility, affordable housing, health and pension reform, and resilience against climate shocks.
Growth is expected to be resilient in the near term, supported by strong domestic demand, while slowing marginally to 4.6 percent in 2026 due to higher U.S. tariffs and a moderately contractionary fiscal policy stance. Inflation is projected to remain low and stable at 1.9 percent in 2026. Risks to growth are tilted to the downside, stemming mainly from external factors. Growth could be negatively affected by an escalation in protectionist trade measures, global financial market volatility, and a potential bust of the AI boom. However, upside risks can also materialize, including breakthroughs in global trade negotiations and faster implementation of structural reforms. Inflation risks are balanced.
Executive Board Assessment[3]
Executive Directors commended the notable resilience of Malaysia’s economy against global uncertainty. Growth is expected to be supported by strong domestic demand, and inflation is projected to remain low and stable. Directors agreed that risks to growth are tilted to the downside, stemming mainly from external factors, although upside risks can also materialize.
Directors welcomed steady progress with fiscal consolidation under the Public Finance and Fiscal Responsibility Act. They generally encouraged the authorities to reduce the fiscal deficit further to 2.5 percent of GDP by 2028 to build fiscal buffers, anchored by high-quality and sustainable revenue and expenditure measures. Some Directors, however, assessed that the authorities’ consolidation strategy is already well calibrated.
Directors agreed that the current monetary policy stance is appropriate and that monetary policy should stay data-dependent to continue to anchor inflation expectations and preserve growth. They welcomed continued efforts to deepen the foreign exchange market and build reserves. Directors also agreed on the importance of preserving exchange rate flexibility, which—alongside strengthening social safety nets and swiftly implementing structural reforms—would help reduce external imbalances.
Directors concurred that systemic financial sector risks remain contained. They noted that banks maintain ample capital and liquidity buffers, household balance sheets are healthy, and the housing market remains stable. Directors emphasized the importance of continued vigilance against pockets of vulnerabilities, such as highly leveraged households.
Directors encouraged the authorities to stand ready to respond agilely to possible external shocks. In the event of an adverse shock, they agreed that fiscal policy should cushion the negative impact on vulnerable households and affected firms, while any monetary policy response would have to depend on implications of the shock for inflation and output. While a flexible exchange rate would help mitigate the shock, a risk-off event could warrant the use of foreign exchange intervention to ease policy trade-offs. Directors agreed that if upside risks materialize, the authorities should use the opportunity to build macroeconomic buffers.
Directors agreed that swift implementation of structural reforms under the 13th Malaysia Plan is key for further domestic-driven and inclusive growth. They emphasized that labor market reforms aimed at increasing wages, reducing skill-related underemployment, and raising female labor force participation can help achieve the goals under the Plan. Deeper trade and financial integration within ASEAN can boost Malaysia’s growth potenti
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