Summary

Malaysia experienced its worst recession in 1998 when the economy contracted by 7.4%. During most of the 1990s, Malaysia had enjoyed its strongest Gross Domestic Production (GDP) growth averaging about 8.5% annually, although there were some weaknesses namely large current account deficits and substantial saving-investment gaps. The economic recession in Malaysia was due to the regional contagion effect, which began with the devaluation of Thai Baht in July 1997 but was aggravated by domestic flaws and vulnerability such as a high domestic private sector’s indebtedness. Malaysia’s response to the crisis did not follow the standard prescription as advocated by the IMF. Instead, it pegged its currency exchange rate, introduced capital controls and boosted the domestic economy through lower interest rates and fiscal stimulus programmes. The resulting rapid recovery and the relatively lower socio-economic costs to the population have made the Malaysian crisis management experience as an alternative response for countries facing a similar economic crisis.

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