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Thursday, May 12, 2022

Economists disagree with Dr M’s proposal to peg ringgit to US dollar


A scene at a money changer's counter in Kuala Lumpur.
A scene at a money changer’s counter in Kuala Lumpur. (Bernama pic)

PETALING JAYA: Two economists have poured cold water on Dr Mahathir Mohamad’s proposal to peg the ringgit at RM3.80 to the US dollar like the government did at the height of the Asian financial crisis of the late 1990s.

Afzanizam Abdul Rashid.

Bank Islam’s chief economist, Afzanizam Abdul Rashid, and Sunway University economics professor Yeah Kim Leng said the current economic scenario was different from the situation of the late nineties, when Mahathir was the prime minister.

Afzanizam said the Malaysian banking system was currently well capitalised, was highly liquid and had a strong asset quality.

During the Asian financial crisis, capital flowed out of Malaysia at a massive rate. Noting this, Afzanizam said the Malaysian economy was in jeopardy and Mahathir made the right move when, in September 1998, he imposed selective capital control measures, including the fixing of the exchange rate.

The peg lasted until 2005.

“The point is that the currency peg is a form of economic policy that is based on a particular economic condition,” Afzanizam told FMT. “At the current juncture, it appears that such measures may not be necessary as economic activities have not been disrupted by volatile currency movements.”

The ringgit stood at 4.382 to the US dollar yesterday morning, whereas it was RM4.228 to the dollar a month ago.

Also yesterday, Mahathir said the slide would not have happened if the ringgit’s value had been fixed and guaranteed by the government. He added that pegging the ringgit to the greenback would prevent currency traders from devaluing the ringgit by selling it in large quantities.

Yeah Kim Leng.

Yeah said it was important to note that the current weakening of the ringgit was likely to be temporary.

He said fluctuations in the ringgit’s value were to be expected considering the war in Ukraine, China’s continuing struggles with Covid-19 and the high inflation rates in the US.

He also said the economy was not under “massive attacks” by currency speculators and that the ringgit, unlike the Russian, Turkish and Sri Lankan currencies, was not facing a collapse in its value.

He warned that foreign investors would “flee the market” if a “drastic measure”, such as pegging the ringgit to the US dollar, was implemented.

The policy could destabilise the economy, he said.

“In fact, we are seeing growth in foreign direct investment (FDI) and portfolio inflows, even in a recession,” he said. “There was a sharp dip in FDI in 2020, but we have recovered and that has allayed fears of FDI avoiding Malaysia.

“Another important indicator now is our portfolio flow and the country’s rising reserves, which are indicators we are managing the current shocks well enough.

“What is important to note here is that the country is financially and economically stable and our economic recovery will provide us the strength to regain clarity in this uncertain global financial situation.” - FMT

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