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.

The significant progress that was achieved in financial sector reform and restructuring in 2001 has enabled BNM to shift its focus from managing banking sector problems to the medium and longer-term issues of developing a more competitive and resilient banking sector. The Financial Sector Masterplan that was launched in March 2001 aims to provide the blueprint for the development of financial sector over the next ten years. To date, 9 out of the 119 recommendations under the FSMP have been fully implemented. In addition, 22 recommendations are being implemented on an on-going basis. Outlook and Prospects for the Malaysian Economy in 2002 As we enter the year 2002, indications are that world trade is expected to recover to about 2.5% in 2002. Growth in the major industrial countries as a group is expected to stabilise at 1.1%, reflecting a stronger growth of 1.4% in the US economy. Malaysia is well positioned to benefit from the emerging recovery in the global economy. Real GDP growth in the Malaysian economy is projected to recover to 3.5% in 2002. The projection is based on stronger growth in private consumption, a modest recovery in private investment, sustained public sector expenditure and moderate growth in exports. Current domestic indicators suggest that the Malaysian economy is in the early stages of recovery. The index of leading indicators has shown positive growth for six consecutive months. Both the decline in exports and manufacturing production have also begun to moderate.