Malaysia institutes radical exchange, capital controls

In explaining his government's decision to impose wide-ranging exchange controls, Malaysian Prime Minister, Dr Mahathir bin Mohamad, has declared that it was a last resort to limit his country's exposure to speculators and financial turmoil, in view of the international community's inertia in taking steps to regulate currency trading.

by Martin Khor

PENANG, MALAYSIA: The Government of Malaysia on 1 September announced radical measures to regulate the trade in its local currency, the ringgit, and movements of foreign exchange aimed at reducing the country's exposure to financial speculators and the growing global financial turmoil.

In a television interview, Prime Minister Dr Mahathir bin Mohamad announced that the government would fix the ringgit's exchange rate, and that in future, the ringgit would only be tradable within Malaysia.

The rate of exchange has been fixed at 3.80 to the US dollar.

Dr Mahathir said that the ringgit, either as cash or in ringgit bank accounts abroad, would be allowed a period of one month to be brought back to Malaysia. After that, ringgit held abroad, would be considered "invalid" and would not be allowed into the country.

The Prime Minister revealed that 20 to 25 billion ringgit was currently held in bank accounts abroad, in addition to several million ringgit in cash also being held abroad.

[It is widely known here that much of these savings are held in ringgit accounts in banks in Singapore, which offer far higher interest rates on these accounts than the rates for accounts in Malaysia.]

In addition, the Bank Negara (Malaysia's Central Bank) also announced other exchange and financial controls, including:

  • Except for payments for imports of goods and services, residents are freely allowed to make payments to non-residents only up to RM10,000 or its equivalent in foreign currency.

Previously, this limit was set at RM100,000.

  • Investments in any form abroad by residents and payments under a guarantee for non-trade purposes require approval.

  • The prescribed manner of payment for exports will be in foreign currency only.

Previously, payment was allowed in foreign currency or ringgit from an external account.

  • Domestic credit facilities to non-resident correspondent banks and non-resident stockbroking companies are no longer allowed.

Previously, domestic credit up to RM5 million was allowed.

  • Residents require prior approval to make payments to non- residents for purposes of investing abroad for amounts exceeding RM10,000 equivalent in foreign exchange.

  • Residents are not allowed to obtain ringgit credit facilities from non-residents.

  • Resident travellers are allowed to import ringgit notes up to RM1,000 only and any amount of foreign currencies, and to export only up to RM1,000 and foreign currencies only up to RM10,000 equivalent.

  • Transfers between external accounts require prior approval for any amount (previously freely allowed); transfers from external accounts to resident accounts will require approval after 30 September; sources of funding for external accounts are limited to proceeds from sale of ringgit instruments and other assets in Malaysia, salaries, interest and dividend and sale of foreign currency.

  • There are also several new rules relating to securities, including that ringgit securities are required to be deposited with authorized depositaries.

Previously, there was no restriction on secondary trading of securities registered in Malaysia.

Asked by a journalist whether the exchange control measures were regressive, Dr Mahathir said they were not so. But the present situation where currency instability and manipulation was prevalent was regressive.

He said that when the world moved away from the Bretton Woods fixed-exchange rate system, it thought the floating-rate system was a better way to value currencies.

Currency trading

"But the market is now abused by currency traders who regard currencies as commodities which they trade in."

"They buy and sell currencies according to their own system and make profits from it. But they cause poverty and damage to whole nations. That is very regressive and the world is not moving ahead but backwards."

He added the Malaysian measures were a last resort.

"We had asked the international agencies to regulate currency trading but they did not care, so we ourselves have to regulate our own currency."

"If the international community agrees to regulate currency trading and limit the range of currency fluctuations and enables countries to grow again, then we can return to the floating exchange rate system. But now we can see the damage this system has done throughout the world."

"It has destroyed the hard work of countries in order to cater to the interests of speculators - as if their interests are so important that millions of people must suffer. This is regressive."

Explaining the move to make the use of offshore ringgit invalid, Mahathir said normally it was offshore ringgit that was used by speculators to manipulate the currency. The speculators hold the ringgit in foreign banks abroad and have corresponding amounts in banks in Malaysia.

These accounts in Malaysian banks would be frozen and the ringgit in the country would not be sold at all.

"Trading outside Malaysia will be meaningless as the offshore ringgit cannot enter the country. Since the ringgit [will be] legal tender only in Malaysia after one month from now, they would be holding accounts or papers with no value then."

Mahathir said the measures would not affect genuine foreign investors as they could bring in foreign funds, convert these into ringgit for local investment, and can apply to the Central Bank to exchange the ringgit for foreign currency to meet their needs, for example to import components.

The premier said investments would not be affected except for investment in shares, which had to remain in the country for at least a year.

"Genuine long-term investors will have their investments protected as they will know what the exchange rate is and they can plan how much funds to bring in as the rate is fixed... Serious investors will realize that with a fixed exchange rate, they can make good profit with minimum investment."

Mahathir also said that with the introduction of exchange controls, it would be possible to cut the link between interest rates and the exchange rate.

"We can reduce interest rates without speculators devaluing our currency. Our companies can revive. If our currency is revalued upwards, the companies can buy imports as they don't have to pay so much."

He added the country would not be affected so much by external developments such as the crisis in Russia.

IMF reforms

Asked if the IMF would be unhappy with the measures, Dr Mahathir said the agency's actions had benefitted the foreign companies but were not to the country's interests.

"They see our troubles as a means to get us to accept certain regimes, to open our market to foreign companies to do business without any conditions."

"It (IMF) says it will give you money if you open up your economy, but doing so will cause all our banks, companies and industries to belong to foreigners."

Dr Mahathir said the IMF should help developing countries but instead used the financial crisis to enable giant companies from the rich countries to take over developing- country economies.

"They call for reform but this may result in millions thrown out of work. I told the top official of [the] IMF that if companies were to close, workers will be retrenched, but he said this didn't matter as bad companies must be closed."

"I told him the companies became bad because of external factors, so you can't bankrupt them as it was not their fault. But the IMF wants the companies to go bankrupt."

"Speculators say they want to see blood, by which they mean the companies must be killed. Then only are we (considered to be) serious about reform. I don't agree."

The Malaysian measures, Dr Mahathir said, were aimed at putting a spanner in the works of speculators, to take speculators out of currency trade. He added the period of highest economic growth was during the Bretton Woods fixed- exchange rate system. But the (floating exchange rate) free- market system that followed the Bretton Woods system has failed because of abuses.

There are signs that people are now losing faith in this free-market system, he said, citing Hong Kong's intervention in the stock market, Taiwan's warning not to accept trade from Soros' funds, China's refusal to allow its currency to be convertible, Russia's having second thoughts and its possible return to central planning, and Chile's regulations on capital inflows.

"But some countries benefit from the abuses, their people make more money, so they don't see why the abuses should be curbed."

To a question whether the measures would be considered regressive by the WTO, Dr Mahathir said: "In fact, our participation in the WTO would be meaningless if we are bankrupt, as we then cannot contribute to world trade. But a prosperous Malaysia can contribute to world trade and the WTO."

The Bank Negara, in a press release, said the new measures were aimed at limiting the contagion effects of external developments on Malaysia and ensuring that a stable exchange rate can facilitate recovery. (Third World Economics, No. 192, 1-15 September 1998)

Martin Khor is the Director of Third World Network.