The Star says...
IT IS gratifying to note that the International Monetary Fund has once again commended Malaysia for its economic and financial reforms to fight the Asian financial crisis.
IMF director-general Horst Kohler singled out Malaysia, Brazil and Mexico for implementing structural reforms to meet their respective economic challenges, adding that other countries could learn from their experiences.
The IMF and its sister agency, the World Bank, had come round to accepting the wisdom of Malaysia’s so-called “unorthodox” measures some time ago, but the forum in which Kohler made his remarks was important: he spoke at the enlarged G8 dialogue at the French resort of Evian, in the presence of Prime Minister Datuk Seri Dr Mahathir Mohamad and leaders of the richest developed nations.
Malaysia therefore feels vindicated by such comments, but there is no reason to gloat that these international financial organisations had got it wrong.
In retrospect, it can be said that Malaysia took “unorthodox” measures to resolve the financial crisis because it was “unorthodox” in nature and not one found in economics textbooks.
But over time, the critics have come to realise that those measures taken –selective foreign exchange controls and pegging of the ringgit to the US dollar – were not so “unorthodox” after all. Many countries, including European countries, had introduced such measures at some time or other during the past 50 years.
Not many people, particularly foreigners, realised this: the institutions set up by the government to deal with the banking and corporate crisis (Corporate Debt Restructuring Committee, Danamodal and Danaharta) were actually institutions copied from the West.
As the economy stabilised and recovered, the Malaysian Government progressively dismantled those foreign exchange controls so that today, only two of these measures remained: the non-convertibility of the ringgit and the ringgit-US dollar peg.
The question is: should these two measures be removed as well so that we are back to the time before the 1997-98 Asian currency crisis, where the ringgit is freely traded on forex markets at a rate determined by market forces?
While this would be widely welcomed by foreign investors and institutions, the Malaysian government feels there is no compelling reason to do so just yet. Western governments are still unwilling to rein in the currency speculators.
The Malaysian economy is stable and its financial and banking system strong. There is improved governance and transparency in the corporate sector, and the Government is moving towards liberalising the economy and the financial system according to the timetable set down under its Financial and Capital Markets Masterplans.
It’s true that the US dollar has fallen substantially in the past 18 months (by as much as 30% against the euro), and therefore the ringgit has also fallen by the same percentage.
But, as Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz explained recently, the euro has merely gone back to the level when it was first introduced i.e. at the beginning of 1999. It goes to show the ringgit has been pegged at a realistic level and is able to withstand the exchange rate fluctuations.
The current controls and ringgit peg have served the economy well. Trade is being conducted smoothly; foreign investors can invest freely in the country and repatriate profits and even their capital anytime they want, while approval is normally given to Malaysian businessmen wishing to invest abroad. Permission is also freely given to the tens of thousands of Malaysian parents sending money to their children studying overseas.
Nevertheless, removing the last two “unorthodox” measures would give Malaysia greater economic flexibility and is likely to improve Malaysia’s attractiveness as an investment centre. The government is not unmindful of these benefits but for the time being the benefits of financial and economic stability are more compelling.
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