The government today set a new growth target of 7.0 percent for 2004, the highest in four years, after a stronger-than-expected first half, although this pace will then slow to 6.0 percent for 2005.

The Finance Ministry in its annual economic report also projected an overall deficit in the 2005 budget of 3.8 percent of gross domestic product (GDP), down from 4.5 percent this year as development expenditure is cut by 9.0 percent.

The 7.0 percent growth target surpasses the initial official estimates for 2004 of 6.0-6.5 percent and is within market expectations, economists said.

Despite higher global oil prices, rising interest rates and a tighter fiscal policy stance, Prime Minister Abdullah Ahmad Badawi said growth would remain strong after 7.8 percent in the first half and 5.3 percent in 2003.

Strong rebound in private investment

Abdullah, who is also finance minister, said a strong rebound in private investment, better corporate results and lower non-performing loans would ease the government's fiscal consolidation and pledged monetary policy would remain easy to support growth.

"While the growth momentum is anticipated to continue for 2005, there is a need for growth to be driven by increased productivity and efficiency," he said in a preface to the report.

"It is imperative that we make concerted efforts to reduce wastage, optimise the use of available resources and enhance the economic and aesthetic value of our physical assets through proper use and maintenance."

Abdullah said the country must move up the value-added chain and lay the foundation for the Ninth Malaysia Plan, a new five-year development blueprint starting 2006, to face up to increasing globalisation and trade liberalisation.

He warned there was "no room for complacency" and called for a "mindset shift to change attitudes and revolutionise the way of doing things so that we can become a first-class nation."

Manufacturing still the growth engine

The report, issued along with the first national budget presented by Abdullah, said manufacturing would remain the growth engine but at a slower pace of 7.6 percent in 2005, down from 10.5 percent this year, as electronic demand tapered off in the global semiconductor cycle.

The services sector is forecast to grow 5.8 percent and contribute 57 percent to GDP in 2005. Agriculture will ease to 2.4 percent from 2.8 percent this year, but mining is seen improving to 5.5 from 5.0 percent, and construction up to 1.8 percent from 0.5.

The report said private investment was projected to grow 14.8 percent this year and 11.9 percent in 2005, compared to a drop of 6.6 and 8.1 percent respectively in government spending.

Export growth is forecast to slow to 9.9 percent from the 17.3 percent seen for this year, with imports growth down to 10.2 percent from 22.1 percent.

With a population of 26 million, Malaysia's per capita income is projected at RM16,693 in 2005, up from RM16,098 ringgit this year, while inflation is expected to remain tame after 1.1 percent this year.