Window for economic reform is open

 

Last month, Apurva Sanghi, the World Bank Lead Economist for Malaysia, suggested that the current weakness of the ringgit is a symptom of the long-term decline in Malaysia’s competitiveness.

This observation is not new, but he is correct to say there has been a long-term weakness in competitiveness which is reflected in the ringgit. In 2011 for example the rate was RM3 to the US dollar.

The reasons are also well known. On the external side beyond the control of Malaysian policymakers, other countries are more attractive for investors. Vietnam is three times and Indonesia is nine times the population of Malaysia. Both are liberalising and opening up to international investors and are growing fast.

Malaysia has lost its competitive advantage as a gateway to Asia because investors go to these countries directly. Although investment as a share of GDP has fallen, there is no crisis of confidence in Malaysia, investors are just more interested in higher returns and larger markets. This is the challenge.

On the domestic side, government interference in business has made Malaysia less competitive and less agile over many decades. Economic policy plans of previous administrations have not delivered the innovation, productivity improvements or entrepreneurial growth that was hoped for.

Against this background, Bank Negara Malaysia (BNM) is following its mandate of price stability, financial sector stability and sustainable economic growth and has been successful. Malaysia has low inflation, stable growth and a strong financial market especially in Islamic finance where it is a world leader.

BNM does not target the exchange rate, the floating system acts as a shock absorber and automatic stabiliser. BNM intervention is to keep the market liquid and maintain inflows and outflows. This is the right policy.

The recent BNM dialogue with Malaysian investors to repatriate profits has been effective in stabilising the ringgit which has strengthened after this intervention.

There is nothing to be gained from a more interventionist approach or even a dollar peg as suggested by former prime minister Mahathir Mohamad. This would just fix Malaysian interest rates to the Federal Reserve and the OPR would be 5.5% instead of 3%. This would destroy the economy here.

The ringgit has already strengthened but the momentum will depend on external factors and strong policy reforms here. If the Fed starts cutting rates it will appreciate during the year.

So BNM governor Abdul Rasheed Ghaffour is right to highlight that there is now a good window of opportunity to focus on reforms. Investment and competitiveness must be part of that.

Malaysia is not facing a crisis of confidence among investors or trading partners. Recently, the high investment approvals show international investors are interested in Malaysia but historically only 26% of approvals turn into actual investments.

Improving the conversion process from approvals to actual investment must be the focus of the Ministry of Investment, Trade and Industry (MITI) and Malaysian Investment Development Authority (MIDA) now.

This focus on short-term facilitation reform is essential because long-term programmes such as the National Energy Transition Roadmap (NETR) and the New Industrial Master Plan (NIMP) will not change things quickly or at all. The NIMP in particular does not have the transformative element necessary for major impact.

A new policy of low-tax, low-regulation reforms would be much better at transforming the economy, improving competitiveness and attracting foreign and domestic investment. Countries which have this agile, competitive, innovative environment grow faster and more sustainably.

This is the root to reversing decades of competitive decline and charting a new route toward productivity improvements and entrepreneurial growth which will underpin short-term and long-term economic growth and prosperity. - FMT

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.