KUALA LUMPUR: Promoting economic sustainability will be the focus of monetary policy in 2010 for Bank Negara Malaysia (BNM).

In its 2009 annual report, it said the recovery process appeared to be uneven across countries, which implies that the timing and magnitude of the exit stimulus policies implemented during the recent crisis may vary across countries. Monetary policy involves the central bank's decisions on interest rates.

"The Government has announced plans for a gradual consolidation in its fiscal position in 2010. Nevertheless, the overall fiscal policy remains expansionary and will continue to lend support to the recovery process," said BNM.

The raising of the key overnight policy rate by 25 basis points in this month, was move towards "normalising monetary conditions", it said.

"A very high degree of monetary stimulus was considered no longer warranted following the robust recovery and improved economic outlook. The concern was that maintaining interest rates at too low a level over an extended period could encourage excessive risk taking behaviour, and the unhealthy build up of leverage," it said.

However, given the lingering uncertainties surrounding the future growth path of the global economy, the central bank said that "an accommodative monetary policy stance will be maintained", to support and strengthen private investment and consumption demand and thus overall economic growth.

On fiscal policy, also known as government expenditure, BNM said as the economy continues to recover in 2010, fiscal policy will remain geared towards preparing the foundation for a stronger recovery of private sector demand.

Government efforts to strengthen private investment and increase the participation of the private sector in the economy were reflected in the measures announced in the 2010 Budget.

BNM's annual report said these include privatization initiatives, and measures that provide a more conducive business environment, adding, "Moreover, to encourage private sector involvement in the economy, the Government is also providing incentives to several high growth sectors."

Among the sectors identified are tourism, information TECHNOLOGY [] and communication (ICT), finance and Islamic banking, halal products and green technologies.

To further support growth of private consumption, the Government has reduced the personal income tax, and raised individual tax relief to increase the disposable income of consumers, said the central bank's report.

With the emphasis placed in the 2010 Budget on improving the effectiveness and efficiency of the government's expenditure and revenue, Bank Negara said the measures that will be implemented and prioritised include the restructuring of the fuel subsidy system which accounts for a significant portion of the government's annual outlays as well as a review of the whole system of subsidies and price controls.

"To maintain a sustainable fiscal position without compromising the overall growth and development objectives, the Government will also intensify its public-private partnership programme for several high impact projects. Some of these projects include the high speed broadband, regional development corridors and public transportation infrastructure projects," it said.

On the revenue gathering side, Bank Negara said that goods and services tax (GST) would broaden the revenue base and be "thus better insulated from the adverse cyclical swing in oil prices."

In addition the Government has also announced plans to review the tax assessment system, especially for petroleum related activities, which are currently assessed with a lag of up to a year.

With the implementation of these measures, the Federal Government fiscal deficit is expected to narrow to 5.6% of GDP in 2010, and operating expenditure will be lower by 12% from RM157 billion in 2009 to RM138 billion, Bank Negara said.

Development expenditure will remain high at RM51.2 billion. "Most of the development expenditure will be channeled towards the economic services and education services sectors," it said.

"Going forward, apart from raising funds through the issuance of government securities, the Government will also issue an RM3 billion retail bond known as 1Malaysia Sukuk, said BNM adding, "The issuance will also serve as an alternative investment avenue for Malaysians to receive better returns in an environment of low domestic interest rates."