BNM Says Ringgit Pegging Is Not In Malaysia's Interest

Nur Adilah Ramli

18th May 2022 - 3 min read

Bank Negara Malaysia (BNM) governor Tan Sri Nor Shamsiah Mohd Yunus has commented that pegging the ringgit to the US dollar will not benefit Malaysia as it will only expose the country to great risks in the current challenging global landscape.

According to Tan Sri Nor Shamsiah, the global economy has been impacted by various factors thus far, including the ongoing Russia-Ukraine war, China’s strict Covid-19 movement restrictions, and prospective hikes in the US interest rates to fight inflation. This has also resulted in the weakening of the ringgit against the US dollar.

Given the situation, the governor believes that a flexible foreign exchange policy will be better suited to help Malaysia cushion economic shocks, and sustain its competitiveness amid the difficult global environment.

Tan Sri Nor Shamsiah further explained that the pegging of the ringgit to the US dollar will come with certain consequences, such as the loss of monetary policy independence. To illustrate, if the US decides to raise its interest rates during the period of the peg, Malaysia will have to raise its own rates as well – in order to maintain the peg.

“Malaysians, in this case, will have to bear the highest borrowing costs, even though the economy is weaker than the US [at this point]. We will also have to resort to capital controls. We have to acknowledge the key factor that contributed to [the] successful pegging [of] the ringgit in 1998 was the capital control that was introduced then, which came at a cost,” said the governor, referring to the currency peg that was put in place in 1998.

Back then, Malaysia had pegged the ringgit to the US dollar at a rate of RM3.80 in a bid to stabilise the fluctuation of the ringgit and to assist with the country’s recovery from the Asian financial crisis. The move was widely criticised by various international bodies at first, but was eventually acknowledged to be an effective one. The peg was subsequently lifted in 2005.

Aside from that, Tan Sri Nor Shamsiah also highlighted that pegging the ringgit will have a detrimental effect on investors’ sentiments. It will affect not only foreign direct investments (FDIs) coming into Malaysia, but also exaggerate capital outflows from the country, she said.

Tan Sri Nor Shamsiah’s comments were made in response to a recent proposal by former prime minister Tun Dr Mahathir Mohammad, who suggested for the government to re-implement the currency peg. He said that this will help in managing the fluctuating ringgit.

(Source: The Edge Markets)

5 1 vote

Article Rating