The strengthened economic fundamentals provided Malaysia the policy flexibility to implement pro-growth policies without creating imbalances in the economy. 2  BIS Review 21/2002  Fiscal policy was expansionary to stimulate domestic economic activity. As the external environment became more adverse, the Government implemented a series of fiscal stimulus programmes in March, and again in September 2001. The fiscal deficit has, however, been kept at manageable levels to ensure long-term fiscal sustainability. Revenue performance was strong in 2001 resulting in a lower fiscal deficit at 5.5% of GDP, compared with earlier estimates of 6.5% of GDP. While the 3-month Intervention Rate was maintained at 5.5% for the first nine months of the year, the low interest rates ensured that monetary conditions were conducive to reinforce other counter-cyclical measures to promote domestic activity. Following the events of September 11 and the heightened risks towards further weakness in the domestic economy, BNM reduced the Intervention Rate by 50 basis points to 5% on 20 September. Low and stable interest rates, ample liquidity and the low inflation rate contributed towards providing a positive domestic environment. In the low interest rate environment during the year, bank lending and financing via the bond market increased. Total financing through loans extended by the banking system and PDS issued by the private sector increased by RM33.5 billion or 6% in 2001. At the same time, financing to the small and medium enterprises (SMEs) was sustained.

The experience has shown that periods during which many of the countries in the region had experienced significant declines in their exchange rates, it was difficult to find clear evidence of a relationship between the degree of depreciation of the exchange rate and the growth in exports. The exchange rate has not been a dominant influence in determining export performance. More important, it is the overall competitiveness of the economy that will ensure sustained export performance. Current conditions favour monetary policy in 2002 to remain accommodative, reinforcing the continuing counter-cyclical policies. Monetary policy will build on the gains from the cumulative monetary easing initiated since 1998, to ensure that the economic recovery process becomes well entrenched. Emphasis will be placed on creating an environment of stability and predictability to  4  BIS Review 21/2002  facilitate investment decisions. With low inflation and stronger economic fundamentals, Malaysia has the ability to exercise greater policy flexibility to preserve longer-term sustainability and stability. In strengthening the resilience and competitive position of banking institutions, BNM will continue to further strengthen the regulatory and supervisory framework. The objective is to provide a conducive environment for banking institutions to be more efficient through innovation and competition amongst players in the financial market. The challenge is to manage the trade-offs between encouraging innovation in the financial system and preserving overall financial stability. Towards this end, a total of 14 recommendations under the FSMP, involving 36 projects, are targeted to be fully implemented in 2002.