Reviving ringgit peg? Economists say Dr Mahathir’s proposal regressive, unnecessary at present

Malay Mail
Malay Mail

KUALA LUMPUR, Sept 19 — Tun Dr Mahathir Mohamad’s proposal for Malaysia to reintroduce the currency peg his administration had imposed during the Asian Financial Crisis (AFC) is regressive and unnecessary under the present circumstances, economists have said.

Instead, they noted that Malaysia was neither in an economic crisis nor experiencing a situation comparable to almost three decades ago that led to the currency peg, with Universiti Tun Abdul Razak Professor Emeritus Barjoyai Bardai likening Dr Mahathir’s latest proposal to “a step back” and that Malaysia must instead move forward with the times.

“After all the currency is not reflective of the economy, it’s reflective of the liquidity aspect of the economy,” he told Malay Mail.

Barjoyai said there was no need for concerns about the currency fluctuation since the ringgit has been performing decently, but rather shifting our focus towards the country’s economic development especially in the aspect of importation to lessen currency depreciation.

Barjoyai compared this with some countries like China, that deliberately devalued their currency in order to increase their net export value.

“The main objective [of pegging] is to stabilise the currency to retain the confidence of the people in the market, consumers, industries, households. In fact, the business industries are cognisant about this, if the currency weakens, they get money out of their export but what is most concerning is households.

“So, we need to come up with different perspectives to actually influence household perception and confidence instead of just focusing on the currency exchange rate,” he said.

This, he said, was achievable by highlighting the country’s export and output growth, and increasing household income on the federal government’s part.

He said prolonged comparison with the US dollar and currency peg would only serve to reinforce the perception of Malaysia’s dependency on a foreign currency when it is not the case.

“We should closely monitor the foreign exchange rate and always compare the ringgit to not just the US dollar, but with other currencies as well such as the Euro, British pound, Japanese Yen, Singapore dollar, which we will then realise our currency is not doing so badly as claimed,” he said.

Writing on Facebook recently, Dr Mahathir said “many people” believed the ringgit to be undervalued, and that its current depreciation was due to currency traders betting against the Malaysian note for profit.

Dr Mahathir’s idea for the federal government to reintroduce the pegging of the ringgit to a foreign currency is not unusual as he had floated similar suggestions amid the ringgit’s declining and fluctuating value last year.

Sharing a similar sentiment, Universiti Teknologi Mara Sabah’s senior lecturer of political economy Firdausi Suffian said pegging the ringgit would be an “unfavourable” response as state intervention will further worsen the situation.

“We have to admit that most governments around the world have tightened monetary policy, the US has raised their interest rate. Contractionary monetary policy is a response to inflation earlier this year to avoid overheating of the economy which meant a slowdown in trading due to increased interest rates.

“Hence pegging is not the answer to make our ringgit more competitive against the backdrop of such a phenomenon,” he said.

Firdausi said the currency must consequently follow the natural movement of the policy band in monetary policy, echoing Barjoyai’s stance of needing to focus on expanding the country’s export industries instead through clear state policies.

Such policies include the New Industrial Master Plan 2030, Madani Economy, the National Energy Transition Roadmap and the 12th Malaysia Plan Mid-Term Review, he said,

Meanwhile, Socio-Economic Research Centre executive director Lee Heng Guie said Malaysia must continue to maintain a flexible exchange rate to cope with the current exchange rate volatility rather than resorting to capital controls or re-pegging of the ringgit.

Lee said a pegging of the ringgit would restrict the independence of domestic monetary policy.

“The flexible ringgit exchange rate plays an external shock absorber whereby the economy can absorb the exchange rate weakening though the magnitude of impact on prices and demand varies.

“The pegging of the ringgit to the US dollar would erode investors’ confidence as the pegging of the ringgit will be accompanied by some form of capital controls. This would dampen investors’ sentiment and may trigger more capital outflows,” he said.

Thus, the priority now was for the country to sustain its economic growth, further strengthen domestic economic fundamentals through structural reforms and policies to increase economic growth that will support the ringgit, Lee added.

At the height of the AFC in 1998, the first Mahathir administration pegged the value of the ringgit to RM3.80 to the US dollar in an effort to isolate the Malaysian economy from the financial instability sweeping over the region at the time.

This was introduced in conjunction with several other capital control measures to limit the outflow of so-called “hot money” at the time.

The peg was eventually lifted in 2005 and replaced with a managed float system, which Bank Negara Malaysia was to better position Malaysia to respond and benefit from the structural changes occurring in the region and in the international environment.

The ringgit ended at 4.68 to the US dollar yesterday, down from a peak of 4.24 in January.

In May, Bank Negara Malaysia said the sharp depreciation of the ringgit versus the US dollar was in line with a larger decline of regional currencies against the greenback. It said the ringgit’s decline was due to developments in the US and Europe that caused investors flocked to the dollar as a safe haven.