KUCHING: Universiti Malaysia Sarawak (Unimas) economist Jerome Kueh has suggested adopting a managed floating exchange rate policy to counter the persistent depreciation of the ringgit.
According to Kueh, this approach should be considered as a delicate dance where the government occasionally steps in to guide the currency, just like a dance instructor who intervenes to correct the dance steps when needed.
To prevent excessive currency fluctuations, Bank Negara Malaysia’s (BNM) Financial Markets Committee has also stated its commitment to intervening when necessary.
However, Kueh warned that implementing this solution is not as simple as flipping a switch.
It could potentially deplete Malaysia’s international reserves, he said, advising that it should be viewed as a short-term fix, like a band-aid for a cut, rather than a long-term solution.
Currently the amount is US$111 billion, down 1.4 per cent from the US$113 billion (RM527 billion) recorded on June 15.
Kueh explained that managing currency value is a complex puzzle as it involves more than just adjusting interest rates.
Each piece of the puzzle affects the overall picture differently and at varying speeds, he said.
To illustrate this, Kueh used a DJ analogy, where BNM is the DJ and interest rates are the volume knob. The central bank, he said, needs to carefully tune it to keep the party (the economy) going without causing discomfort (economic instability).
He said that Malaysia is currently in a situation where BNM has increased interest rates to fight inflation and stabilise the ringgit.
However, the United States and the United Kingdom have raised their rates even more, making their markets more attractive to investors and causing an outflow of money from Malaysia.
“In this situation, it becomes important to implement other macro-level policies to reduce the continuous drop in the value of the Ringgit. That’s why I suggest adopting a managed floating exchange rate policy, which involves some level of intervention instead of relying solely on market forces,” added Kueh.
Checks by New Sarawak Tribune found that from February to June, the ringgit declined by 9.51 per cent against the US dollar, 12.98 per cent against the British pound, and 10.63 per cent against the euro.
It also struggled against neighbouring currencies, losing 6.75 per cent against the Singapore dollar, 9.76 per cent against the Indonesian rupiah, and 8.25 per cent against the Philippine peso.
To address this situation, Kueh proposed a two-pronged approach, focusing on both internal and external factors.
Internally, ongoing economic reforms are comparable to a long voyage for a ship. The effects of these reforms, such as targeted subsidies and stimulus programmes, will take time to materialise, and foreign investors will be closely watching.
When asked if increasing interest rates could attract foreign investment and help stabilise the currency, Kueh said it can be considered but that its effectiveness depends on various factors, particularly external ones.
“Interest rates should be adjusted based on each country’s specific economic circumstances, as a big jump can harm economic growth,” he warned.
This, he implied, is the tightrope policymakers must walk to stabilise the currency and keep the Malaysian economy on a steady course.
In a recent dialogue session with university students, Prime Minister Datuk Seri Anwar Ibrahim talked about striking a balance between interest rates and halting the ringgit’s decline.
He noted that low interest rates had played a role in the weakening of the currency. However, he also acknowledged that high interest rates could burden small and medium-sized enterprises while discouraging foreign investors from investing in Malaysia.
