Its Executive Board report issued in Washington on Wednesay said that while the controls
                       introduced in September last year were greeted with considerable scepticism internationally, the
                       breathing space they accorded had allowed Malaysia to implement measures for its economic
                       recovery.

                       "Directors therefore commended the authorities for using the breathing space, to push ahead with
                       a well-designed and effectively implemented strategy for financial sector restructuring."

                       There were concerns initially that the "breathing space" offered by the controls and the pegging of
                       the ringgit to the US dollar might lead to a delay in addressing problems in the financial and
                       corporate sectors.

                       The report was a result of consultation with Malaysia, in which the Fund's staff visited the country
                       for an information gathering exercise on financial and economic matters.

                       The consultation, done annually, was intended to strenghten IMF surveillance over the economic
                       policies of member countries.

                       The report said the Executive Board welcomed the changes on the controls in February,
                       describing them as "pragmatic and flexible", especially in replacing the restrictions on the
                       repatriation of portfolio investments by an exit tax levy on profits.

                       Some of the 24 directors expressed support for Malaysia's intention to maintain the control
                       measures while preparing for an orderly exit from them.

                       But others were more sceptical about the capital controls, as they felt that the costs, in term of the
                       adverse impact on the prospects for recovery, might become more visible in the future.

                       They therefore recommended that the exit levy on profits for portfolio investments be removed.
                       Since Malaysia is in a position of strength, an early exit from the controls would boost investor
                       confidence and attract long-term capital.

                       It said while Malaysia's economy was severely affected by the Asian crisis, its traditional
                       strengths, including low external debt, strong fiscal position, a well-developed financial regulatory
                       framework, and a history of low inflation, had helped it avoid more extreme financial difficulties.

                       "... the same strengths should facilitate a sustainable economic recovery," it said.

                       With regard to macroeconomic policies, the Executive Board supported the current expansionary
                       stance, which they considered appropriate to reverse the sharp contraction of economic activity.

                       The directors also commended the improvements in the prudential and supervisory frameworks
                       for the financial system, adding that the continuation of the financial system reforms and corporate
                       sector restructuring would help the recovery process.

                       They also welcomed the progress made in relieving the banking system of non-performing loans
                       (NPL) and in providing needed capital to viable institutions in the banking system.

                       However, they stressed the need to dispose quickly of acquired NPLs and to consider the sale of
                       Government stakes in recapitalised institutions.

                       The directors noted that thus far the pegging of the exchange rate to the US dollar had been
                       positive for the economy. Nevertheless, they observed that the undervaluation of the exchange
                       rate had implications for the inflation outlook over the medium term.

                       Some directors considered that the current monetary framework, based on the currency peg, was
                       more appropriate for Malaysia than one based on a more flexible exchange rate, as it provided a
                       clearer nominal anchor for inflation expectations.

                       Many other directors, however, recommended that Malaysia consider seriously the need to
                       develop a monetary policy conducive to a sustained low inflation environment, combined with a
                       more flexible exchange rate regime that would help insulate the economy from external shocks.

                       "Clearly, this was a key issue that needed to be kept under review," it said.

                       While welcoming the various measures taken by the authorities to speed up the use of budget
                       allocations and expedite project implementation, a few directors cautioned against overreliance
                       on large projects with long gestation periods.

                       "Directors encouraged the authorities to continue to give high priority to enhancing social
                       expenditures in order to mitigate the impact of adjustment on the most vulnerable groups of
                       society."

                       For the medium term, most directors emphasised the desirability of introducing greater flexibility
                       in fiscal policy in order to be able to respond more rapidly to changes in economic conditions.

                       The IMF report also said that for the medium-term, directors recommended the introduction of a
                       value-added tax to improve the tax system's efficiency.