Capital controls should only be a last resort, says economist

PETALING JAYA: Capital controls should only be imposed as a last resort in the event the country faces existential economic threats, said an economist.

Pegging the currency will restrict capital flows moving in and out of the country, and this could be damaging to the Malaysian economy, said Sunway University economics professor Dr Yeah Kim Leng (pic).

“Capital controls are more costly in the long run as they make it more difficult for the economy to make structural adjustments,” he said.

Prof Yeah said a flexible exchange rate would help the economy absorb external shocks rather than for the need to adjust domestic wages or prices.

He said Malaysia was not under any undue pressure to exert such measures as the fundamentals to support the strength of the ringgit was still intact, and that the current exchange rate was still conducive for economic growth.

Prime Minister Tun Dr Mahathir Mohamad had said to a question posed to him recently that the government might impose measures to protect the ringgit again if speculators continue to attack the currency.

As the fourth Prime Minister then, Dr Mahathir made an unprecedented move to peg the ringgit to the US dollar at RM3.80 during the Asian Financial Crisis in September 1998.

The peg was removed in 2005.

Adli Amirullah, an economist at the Institute for Democracy and Economic Affairs (Ideas), said currency pegging would reduce the international reserve of the central bank significantly, which is important for our emergency usage during a crisis.

He said this would limit the central bank’s tools in performing monetary policy.

“Meaning once they pegged the currency, they will have lesser control on the interest rate which will create pressure on economic growth as well as price level in the domestic market,” he said.

On the positive side, Adli said a stable currency would provide greater certainty for Malaysia’s trading activities, especially if a business is involved in importing products.

Adli also said fixing the currency was not the only policy that the government and the central bank could impose to prevent the depreciation of the currency.

Improving the business confidence and sentiment towards the domestic economy is much more important for the government to ensure more capital inflows and ultimately will stabilise the currency in the long run, he said.

“Fluctuation in the currency is normal when a country is practising flexible or managed floating exchange rate. There are tons of factors affecting the fluctuation of a currency ranging from international affairs to domestic affairs,” said Adli.