KUALA LUMPUR: The Malaysian economy remains resilient to external headwinds given its solid microeconomic management, says the World Bank in its latest edition of the 'Malaysia Economic Monitor'.

The optimism is based on Malaysia's Gross Domestic Product (GDP) projection of 4.2 per cent for 2016 and 4.3 per cent for 2017, which is expected to remain broadly constant.

Economic growth is expected to rise to 4.5 per cent in 2018, said the report.

However, the World Bank pointed out that Malaysia would continue to face challenges arising from external developments and risks.

"Rising productivity will become the main engine of economic and income growth for Malaysia in the future as traditional drivers are expected to moderate," it said.

The report also highlighted that exchange rate flexibility should remain the primary mechanism for absorbing external economic shocks while monetary policies would continue to operate in an environment of financial volatility driven likely by an acceleration in normalisation of the US monetary system.

The introduction of the Goods and Service Tax (GST) had also enabled Malaysia to continue its good performance on fiscal outcomes, important in building policy framework confidence, the report said.

The government's fiscal consolidation programme remained on track to achieve the targeted GDP growth of 3.1 per cent for this year, it said, adding that the government's tightening expenditure combined with improved GST collection and dividend payments from Petronas accelerated progress toward its fiscal deficit target in the second half of 2016.

"Supported by low unemployment, government income-support measures and a reduction in the overnight policy rate in July, private consumption is expected to continue to drive economic growth.

"Private investment growth is expected to be moderate as commodity prices and global economic activity remain subdued," it added.