By Netty Idayu Ismail

April 7 (Bloomberg) -- Malaysia’s central bank has told the government the country’s 2010 economic growth can exceed the current forecast through the right “policy intervention,” Prime Minister Najib Razak said.

Gross domestic product can expand by “1 to 2 percent more” than the central bank’s March forecast of at least 4.5 percent, Najib told the Foreign Correspondents Association in Singapore yesterday, translating into economic growth of as much as 6.5 percent.

Measures including developing the Islamic finance industry will aid economic growth, he said, adding that the government will probably issue Shariah-compliant bonds denominated in dollars for its next global debt sale.

Najib is seeking to boost economic growth to an average 6.5 percent annually and turn Malaysia into a high-income and developed economy by 2020. Since taking office last April, he has vowed to roll back policies favoring the country’s biggest ethnic group to lure investment, moving away from 39-year-old measures that the government now says may impede growth.

“The government has started to acknowledge in a refreshingly frank manner all the medium-term issues that are facing the economy,” said Kit Wei Zheng, a Singapore-based economist at Citigroup Inc. Still, “at this stage it’s too early to turn decisively bullish.”

Ringgit Climbs

The ringgit has risen more than 7 percent against the dollar this year, making it the best performer among 10 Asian currencies outside Japan. Malaysia’s FTSE Bursa Malaysia KLCI Index yesterday rose for an 11th day, its longest winning streak since August 1994.

Malaysia’s economy may expand 4.5 percent to 5.5 percent this year after shrinking 1.7 percent in 2009, the central bank said in a March 24 report.

The government plans to unveil new areas in the coming months to help spur growth that will “indicate a shift in our thinking,” Najib said. Malaysia has already targeted industries such as green technology, oil and gas, palm oil and Islamic finance as key to drive the economy, he said.

“To get to the next stage of growth requires us to reexamine our policies,” Najib said, adding that Malaysia is still committed to the goal of becoming a developed nation by 2020. Malaysia’s aim to more than double per capita income to ,000 in 10 years is ambitious yet “attainable,” he said.

Reducing Subsidies

Najib said last week he would revise Malaysia’s affirmative action policies to target the nation’s poorest across all ethnic groups. The new measures will be fair and transparent, focusing on the bottom 40 percent of households by income, he said in a speech on March 30.

Najib said yesterday he believed members of his ruling United Malays National Organisation have accepted the need to change the policies.

The government will also find ways of reducing its subsidies on fuel and other essential goods that are acceptable to the population, Najib said. Malaysia spends about 73 billion ringgit ( billion) a year to keep the price of gasoline, flour, sugar and other items low, he said. “It’s not sustainable; it cannot go on,” Najib said.

“It has distorted the allocation of resources; we cannot be competitive unless we move towards more market prices,” Najib said. While removing subsidies will be “tough” politically, people may accept a gradual reduction that still protects the more vulnerable groups in society, he said.

Islamic Bonds

Malaysia, which has the world’s largest Islamic bond market, has eased foreign ownership rules and approved new products as part of efforts to become a hub for financial services that comply with Muslim tenets. The country last year increased the foreign ownership limits at local Islamic banks, investment banks and insurance companies to 70 percent from 49 percent.

Southeast Asia’s third-largest economy will “most probably” sell dollar-denominated Islamic bonds to set new benchmark borrowing costs for the nation’s companies, Najib said. That would mark Malaysia’s return to the global bond market for the first time in almost eight years.

The government hasn’t sold foreign-currency bonds since July 2002, when it raised 0 million from the sale of five- year Islamic bonds, or sukuk. The finance ministry continued to rely on local funding even as the government’s budget deficit widened to a 22-year high of 7.4 percent of gross domestic product in 2009.

Islamic law bans the payment of interest and stipulates agreements be based on the transfer of goods or services. More than 60 percent of Malaysia’s 28 million people are Muslim.

Najib also said Malaysia aims to conclude an economic partnership agreement with India by the end of this year.

~~Bloomberg~~