To peg the Ringgit now and then
“To peg the ringgit to the US dollar may potentially push the country into a financial crisis,” says Dr Sukhdave Singh. The former Deputy Governor of Bank Negara Malaysia (BNM) cautioned against calls to peg the ringgit in a LinkedIn post.
He warned that pegging the exchange rate is not a decision that should be taken lightly. This point is extremely true since such actions have significant consequences for the economy and Malaysia’s financial markets.
“What they (those who moot the idea) often forget to mention is that once we have pegged the ringgit to the US dollar, we will have to defend that peg,” Dr Sukhdave added.
He was most likely referring to former PM of Malaysia, Tun Dr Mahathir Mohamad’s recent calls to peg the ringgit.
Tun Dr Mahathir recently tweeted that pegging the ringgit in 1998 helped with Malaysia’s economic recovery. He also tweeted that the International Monetary Fund and World Bank later also agreed it was a sound decision.
The former prime minister added the financial situation of the country then was worse than now.
Current BNM Governor Tan Sri Nor Shamsiah Mohd Yunus said that pegging the ringgit to the US dollar is not in Malaysia’s interest. She made this statement at a press conference on the 13th of May. “A flexible foreign exchange policy is able to absorb economic shocks. It is able to maintain Malaysia’s competitiveness in a challenging global environment,” she added.
Why peg ringgit then and not now?
In 1998, Malaysia’s foreign currency reserves were slightly more than a measly USD $20 billion. Malaysia’s foreign currency reserve is more than 6 times that now at USD 100 plus billion.
Malaysia’s currency value also nose-dived within a few months during the 1998 financial crisis. Previously, the Malaysian ringgit traded between RM 2.40 to $2.50 range per USD. It suddenly dropped by almost 200% to RM 4.70 per USD. This drop occurred within just six short months, from July 1997 to Jan 1998. With such small reserves and such a swift drop, Malaysia had little choice but to peg the ringgit.
However, pegging the ringgit was not the only measure Malaysia took back then. Malaysia also introduced severe capital outflow measures to prevent speculation and capital flight. Another control measure introduced then was demonization. Malaysia removed the $1000 and $500 ringgit notes from circulation.
Malaysia pegged the ringgit at RM 3.80 per USD for almost 7 years till mid-2005.
On the other hand, in 2022, the ringgit is not the only currency to falter against the almighty US dollar. Many other currencies are falling short. Even the euro is almost at parity with the US dollar.
The ringgit has been rather stable across the past decade or so. The ringgit’s decrease against the US dollar has been slow and measured with brief moments of fluctuation but never volatility. It’s been ebbing and flowing at the RM 4 plus per USD range for almost 5 years.
Does a lower currency mean a bad economy?
Contrary to popular online rumours, a lower currency value does not mean a country is going bankrupt. Malaysia’s lower currency value has also kept its exports attractive. Malaysia’s export growth has tripled in the last decade, from USD 40 billion to USD 120 billion.
Malaysia and other nations are not exactly free from the effects of a strong US dollar and its consequences. 2022 will be a challenging year for Malaysia. However, Malaysia enjoys a robust economy and strong foundations. Calls that Malaysia is headed to a Sri Lanka level economic meltdown are completely unfounded. Pegging the ringgit now would be the single most disastrous decision for Malaysia to ride out the economic storm this year.