BANK Negara’s recent measures and guidelines to deepen the domestic ringgit market, stabilise the ringgit while ensuring an orderly functioning of the foreign exchange market to facilitate trade, investment and financial transactions have drawn mixed reactions and responses from various quarters.
It is inevitable that there are bound to have some teething problems including technical and operational issues during the transition period.
But, Bank Negara’s continuous and open minded engagement with investors and business sectors should ensure the smooth implementation of the new initiatives ahead. Ultimately, the measures mean nothing without getting “buy-in” from all stakeholders.
Some measurable improvements were seen in the FX market in terms of the ringgit’s stability as well as in the balancing of foreign exchange transactions between exports and imports.
It is the stability of ringgit and orderly development of the onshore ringgit market would benefit all Malaysians, including domestic businesses and foreign investors.
Some were apprehensive about the rules requiring all settlements for goods and services between residents or resident companies to be made only in ringgit.
In order to enhance the usability of local currency, the prevalent practices of using the US dollar for the payment of domestic transactions should be discouraged as the high degree of substitution of domestic currency with foreign currency will weaken the effectiveness of our policy tools.
In the best interest of sustaining domestic macroeconomic and financial stability, it is legitimate to curtail the use of foreign currencies as a medium of exchange in the local economy.
It is the ringgit and not foreign currencies (rather the US dollar) that should be used to pay for domestic goods and services between residents or resident companies.
We are not a dollarised economy, and hence no compelling reasons to only use the US dollar for the settlement of domestic transactions between residents or resident companies. Also, should domestic residents keep foreign currencies over and above that required for the settlement of international transactions?
The foreign currency account is meant for the drawdown of foreign exchange to pay for imports in international transactions with non-residents or companies and for foreign debt service obligations.
Allowing a high degree of “dollarisation” in the local economy can complicate the management of economic and financial policies. These include constraints to the central bank’s capacity to conduct monetary policy and act as the lender-of-last resort to stabilise domestic FX.
The high proportion of substitution of domestic currency with foreign currencies render the monetary policy ineffective or prevent the central bank from having a more flexible monetary policy to influence prices, output and investment.
In times of higher US interest rates and a strong US dollar, a dollarised economy restrains the central bank’s ability to intervene effectively during times of economic slowdown and hence, has an adverse effect on exports as a strong domestic currency makes exports less competitive.
High dollarisation may also increase the risk of destabilising the financial sector as well as hamper both central bank’s and banks’ liquidity management.
It may amplify the influence of foreign currencies on the domestic exchange rate and will exert the impact of exchange rate movements on corporates and banks’ balance sheets.
It was observed that the lessons learned during periods of crisis and macroeconomic instability, high dollarisation was a key factor explaining vulnerabilities and currency crises, which have long been observed in Latin America, parts of Asia, and eastern Europe.
While the ringgit will remain susceptible to negative sentiment and the policy outcome associated with the Fed Reserve, the ringgit should eventually stabilise to reflect its fundamental value.
Policymakers must remain vigilant, holding tight the reins on credible economic and financial management policies to keep the economy going.
The government and relevant institutions must take all necessary actions and initiatives to strengthen our economic fundamentals, restore confidence and reduce the growing public trust deficit.
We must be proactive to clear misconceptions about economic issues that would affect Malaysians as well as investors’ perception. Prompt intervention helps to restore investor confidence.
It is commendable that Bank Negara continues to engage with investors and the business sector to fine-tune as well as to ease market uncertainties about the foreign exchange administrative rules. Addressing these uncertainties can build up credibility and enhance confidence in the ringgit.
- Lee Heng Guie is executive director of Socio-Economic Research Centre