Our baseline scenario assumes that the course of the pandemic in the coming months will require similar restrictions to those in the early months of the year, but that the gradual administration of vaccinations will enable these restrictions to be lifted during the second half of the year. One key aspect is the forecast path of tourism. Under the baseline scenario, it is assumed that the incompleteness of the vaccination process in the coming quarters will give rise to tourist flows that do not reach a high degree of normalisation until 2022. As to the damage to the productive system,6 until last February the number of active firms had fallen by 3.6% relative to February 2020. This figure was lower than that of the first two years of the previous crisis – 2008 and 2009 – and comparable to 2012, despite the fact that the decline in activity was much greater last year. Behind this reduction is the fall in business start-ups, but not a rise in business deaths, which might be attributable to the support measures adopted, including the moratoria on insolvency procedures. In any event, the future is uncertain, in particular once this support should disappear. The baseline scenario of the projections assumes only moderate destruction of the productive system. There are likewise doubts about the behaviour of household saving,7 which increased significantly last year and has built up largely in bank deposits.
Takaful companies will also be given the flexibility to enter into strategic tie-ups with foreign partners through higher foreign equity limit of up to 70%, to further strengthen resilience and competitiveness. In addition, international Islamic financial institutions can be established to offer the full range of Islamic financial services to residents and non-residents in international currencies. Another further measure announced is the liberalization of legal profession to allow up to five top international law firms with expertise in international Islamic finance to offer legal services in international Islamic finance in Malaysia. Internationalisation of Islamic finance Several factors are important in sustaining the internationalisation of Islamic finance. Firstly, is the development of international Islamic financial markets to enhance the liquidity of the instruments and the risk management capacity of the players. This is important to promoting the efficient functioning of the markets and thus facilitate cross border capital flows thereby strengthening global financial integration. However, it can be observed that in most jurisdictions that have Islamic financial institutions, Islamic money and capital markets remain relatively less developed. Consequently, Islamic banking institutions face the challenge in their day to day management of cash, arising from the lack of a comprehensive Islamic interbank market with highly rated short-term tradable instruments. Without access to such a market, it is difficult for these institutions to manage their short-term liquidity needs in an efficient and effective manner. This would in turn require them to maintain a larger amount of liquidity compared to their conventional counterparts.