By Abhrajit Gangopadhyay
KUALA LUMPUR--The World Bank Monday forecast Malaysia's economy to grow 5.1% annually through 2014, powered by strong investments and consumption.
The expansion pace is a deceleration from last year's 5.6% following weak external conditions.
"While domestic demand will decelerate in 2013 from the buoyant levels of 2012, it will remain Malaysia's main source of growth," the World Bank said in its Malaysia Economic Monitor report.
The multilateral agency expects this year's growth to be supported by strong momentum in investments, accommodative fiscal and monetary policies and higher household income amid low unemployment level.
A pick-up in exports in 2014 will offset slowing domestic demand, which may set in with tighter fiscal and monetary policies next year, the report said.
Malaysia has often been criticized for its practice of spending billions of dollars to shield consumers from global price shocks by subsidizing fuel and food. It also offers cash handouts to low-income groups and hasn't yet introduced a consumption-based tax to broaden the tax base and raise government revenue.
While the government's steps have been growth-supportive, the central bank has kept the policy interest rate steady at 3.0% for past 12 successive monetary reviews.
Analysts have been calling for Southeast Asia's third largest economy to retool its subsidy system and introduce Goods and Services Tax among others to boost fiscal discipline and help cut its gaping budget deficit, which has refused to go since the Asian Financial Crisis battered the economy in the late 1990s.
The government spends over MYR2 billion a month on fuel subsidies alone. Many economists consider the subsidies wasteful, as beneficiaries include middle-to high-income consumers who could afford costlier cooking fuel and gasoline.
The World Bank expects the government to initiate subsidy reforms and start taking gradual steps to implement goods and services tax from the next year.
"The sustainability of Malaysia's favorable near-term outlook into 2015 and beyond hinges on the implementation of structural reforms," the World Bank said.
Apart from fuel subsidy reforms, Malaysia needs to cut its reliance on commodities revenue to become a high-income economy by 2020, it added.
"There is a modest risk that Malaysia's current account position could turn to a deficit in the event of a sharp decline in commodity prices," it said.
According to latest data, Malaysia's April trade surplus, a key component of current account surplus, was hammered to the smallest in more than 15 years as exports contracted for three consecutive months, dragged down by lower prices of palm oil and crude oil.
Write to Abhrajit Gangopadhyay at [email protected]