KUALA LUMPUR, 25 November 2002 — Is it time for emerging countries that have pegged their currencies to the US dollar or allowed them to shadow it, to start thinking of delinking? Especially at a time when there is increased pressure on the greenback in the face of a creeping recession in the US and of growing political tensions in a post-9/11 environment between the US and especially the Muslim world over differences in the fight against international terrorism.
In the last year or so there have been increasing calls even in the Gulf states, most of whose currencies are pegged to the US dollar, for delinking to be considered as an exchange rate policy management option. However, unless the economic case for de-linking is water tight, emerging countries are in danger of scoring a flurry of own goals, which may prove economically painful and costly.
Malaysia, which pegged its currency to the US dollar in 1997, following the onset of the Asian financial crisis, has confirmed that it has no plans to de-link or re-peg its currency from and to the US dollar. Malaysian premier Mahathir Mohamad, speaking to Arab News recently, confirmed that the Malaysian dollar (the ringgit) will continue to be pegged to the US dollar. “We would like to trade in the euro and the yen. But people are still not confident enough in these currencies,” he explained.
Malaysia is one example of how an emerging currency can successfully seek refuge in the US dollar from international currency speculators and fund managers. Mahathir is adamant that the fund managers cannot speculate in the Malaysian currency anymore.
“We allowed our currency to float and the market to set the value. It worked for a long time fluctuating between 2.5 to 2.6 ringgit to one US dollar. When (George) Soros came he valued the Malaysian currency almost by half to 5 ringgit to one US dollar. Since then we have forbidden any sale of our currency — no money can be transferred to another person unless there is a proper economic transaction. The movement of pure money from one person to another is not allowed. So they cannot get hold of our currency and sell it. The ringgit is now fixed at 3.8 to one US dollar. Soros has to admit that we are right. He told everybody that I am a menace to Malaysia. Now it has been proven that he is the menace,” he stressed.
In the case of Soros, the poacher did turn gamekeeper, for he has since then stressed the greater need for regulating international capital flows, especially to combat the so-called ‘herd-instinct’ of capital flows.
Even Mahathir’s other critics concede that his policy of pegging the ringgit to the US dollar; of imposing strict capital controls and a repatriation tax on foreign funds; of restructuring the Malaysian financial sector; and of refusing to seek help from the IMF, has paid off. Only two weeks ago, the World Bank mid-term review of East Asian and Pacific countries, gave the thumbs up to Malaysia’s economic reforms and stressed that growth forecasts of 3.5 percent in 2002 and 5 percent in 2003 are well-founded. The Bank did have some concerns over falling FDI flows from $5.3 billion in 2001 to $4.5 billion in the first ten months of 2002, and the rising domestic debt of 75 percent of GDP. Kuala Lumpur’s own GDP forecast for 2003 is 6 percent rising to the target of 7 percent in 2004.
Mahathir’s economic supremo, Datuk Mustapha Mohamad, who heads the National Economic Action Council (NEAC) in the Prime Minister’s Department, gave some indication of the conditions for delinking of the ringgit from the US dollar. “We will consider repegging if the real exchange rate is 20 percent above or below the current rate of exchange over a sustained period of time.” Datuk Mustapha did not expand on the time scale, but reiterated that delinking will take “quite some time.”
To Kuala Lumpur, seeking refuge behind the US dollar to keep the speculators at bay, is a mere tool of economic, financial and political expediency. What Malaysia is really after is a reform of the international currency system, especially to give emerging currencies more protection from unscrupulous currency raiders and speculators.
Whether this is in form of a tax on fund management or the movement of capital such as the one quarter percent Tobin Tax on currency transactions every time they cross borders proposed by Professor James Tobin of Harvard Business School as early as in 1972, or any other mechanism.
Kuala Lumpur is also keen to lessen the dependence of emerging countries on the use of the US dollar for their international bilateral and multilateral trade. That it is why it pioneered the bilateral payments arrangement (BPA) in the 1980s, of which the first such agreement was signed with Chile and subsequently with Algeria and Iran. Under the BPA, trade balances are settled between the two central banks every year, thus bypassing the need for costly correspondent banking out of London, New York, or Frankfurt.
Malaysia has signed 24 BPA agreements to date and has now suggested a way to leverage the mechanism by optimizing the use of foreign exchange through denominating trade under the BPA using the concept of an Islamic gold dinar (IGD). The man who pioneered the BPA and the IGD, Tan Sri Nor Mohamed Yakcop, is optimistic that Malaysia will start using the IGD in its trade with some Muslim countries by mid-2003. Negotiations with countries such as Morocco and Bahrain have already started.
“We are proposing an Islamic gold dinar. Gold unlike paper money has an intrinsic value. You cannot devalue gold like paper money, because you can melt it into ingots or make jewelry. If the Muslim world accepts our proposal for a gold dinar bilateral payments arrangements, not for internal use, this would eliminate the use of the US dollar,” explained Mahathir.
The actual settlement of trade can be done through the transfer of equivalent amounts of gold. This will not involve physical transfer from one country to another, only beneficial ownership in respective accounts, say held with the Bank of England. Under this mechanism a relatively small amount of gold dinar is able to support a much greater trade value.
More interestingly Tan Sri Nor stressed that the BPA could eventually cover multilateral payments arrangements (MPAs). The last time Malaysia tried to propose this, albeit not denominated in the gold dinar, the IMF expressed strong opposition to the idea saying it contravened the fund membership rules, and which was abandoned after the G-77 meeting of emerging countries failed to take it up at one of their summits in New Delhi.
Mahathir, however, is not amused: “They (the IMF) said it was against the rules when we introduced our bilateral payments arrangements. We are still using these and our trade with such countries has increased by 400 percent. The IMF can say what they like. They have no say in this country. They need to seek our permission to come here.”