The IMF, in a paper presented at a business conference in the capital, said Malaysia's openness to trade was exceptional by regional standards.

It said Malaysia's exports represented 95 per cent of gross domestic product (GDP) in 1997, far higher than export-to-GDP ratios in Indonesia (30 per cent), South Korea (38), the Philippines (40) and Thailand (47).

However, the IMF said Malaysia was particularly vulnerable if world economic activity turned out to be weaker than anticipated, noting that the risks to current world economic growth forecasts "appear to be predominantly on the downside."

"Weaker world activity would dampen demand for Malaysian exports, and by potentially considerable amounts," the IMF said in the paper, presented by Kanitta Meesook, division chief of the IMF's Asiaand Pacific department.

"An even greater source of external vulnerability is a potential drop in export prices."

It said for every 1 per cent less output in Malaysia's major trading partners, Malaysia could suffer a $1 billion decline in merchandise exports.

The nominal value of Malaysia's exports could fall by $2 billion for every 5 per cent drop in export prices.

Malaysia's current account balance would in turn worsen as its fixed exchange rate and capital controls leave little room for policy options to offset declining demand, it said.

"Malaysia's current monetary and exchange arrangements better insulate the economy from short-term financial market volatility, but could magnify the impact on the domestic economy of adverse developments in Malaysia's export markets," it said.

The IMF repeated its familiar criticism of Malaysia's capital controls and said political turmoil had damaged investor confidence.

"Sweeping changes at the highest level of political and technocratic leadership alsohave contributed to perceptions of policy unpredictability and high country risk," the IMF said.

"In the absence of external financing, the envisaged fiscal stimulus and bank recapitalisation could be in jeopardy."

Malaysia imposed selective capital controls on September 1, taking a giant step away from the free market polices of then finance minister Anwar Ibrahim.

Prime minister Mahathir Mohamad sacked Anwar on September 2, calling him morally unfit.

Anwar's sacking and subsequent arrest sparked unprecedented anti-government demonstrations in the capital. The former cabinet minister has pleaded not guilty to five counts each of corruption and sodomy.

The IMF said Malaysia's attempts to push down interest rates would likely have only limited success due to a collapse in investment spending and of demand for credit. It said artificially low interest rates would likely hinder corporate restructuring.

The IMF said Malaysia might have to reconsider the exchange controls.

"Therefore, Malaysia wouldneed to consider how to modify its current exchange rate arrangements if external developments brought internal and external balance objectives into conflict," it said.