Martin Khor: New Malaysian Capital Controls

[Robert Weissman <rob@essential.org>]

Dear Friends,

Yesterday I had posted 3 articles on the global crisis and the need
for affected developing countries to impose capital controls.  A
few hours later, the Malaysian government announced it was
introducing sweeping controls over capital flows and foreign
exchange.  These measures are designed to reduce the conditions for
currency speculation and to shield the country (somewhat) from the
turbulence of external events.  The Prime Minister criticised the
lack of international action against speculation, the policies and
motives of the IMF, and the abuses of the free-market (floating
exchange rate) system, during an interview to explain the new
measures.  Initial responses from the Malalysian public have been
positive, with the main trade unions, consumer groups and business
groups coming out in support of the measures.  Below is an article
giving some details of the new policies and the Prime Minister's
interview.

Now that Krugman has broken the intellectual taboo and Malaysia has
broken the policy taboo against capital controls as an appropriate
policy response to the Asian and global financial crisis, the
campaign against further capital liberalisation can be intensified.
 Moreover we should convince policy makers, House members and
Parliamentarians and the media that some forms of capital controls
are needed for a solution to the crisis.

Please send me any responses you may have to these measures.  Let
me know if you agree with them, approve of them, and what may be
the advantages as well as disadvantages etc.

Best wishes,  Martin Khor (Director, Third World Network, Penang,
Malaysia, twn@igc.apc.org or fax 60-4-2264505).




MALAYSIA IMPOSES SWEEPING CAPITAL AND FOREIGN EXCHANGE CONTROLS

By Martin Khor, Third World Network, Penang, Malaysia
(twn@igc.apc.org or fax 60-4-2264505).

Penang, 1 Sept 1998:

The Malaysian government today announced radical measures to
regulate the trade in its local currency and movements of foreign
exchange aimed at reducing the country's exposure to financial
speculators and the growing global financial turmoil.

In a television interview, Prime Minister Dr Mahathir Mohamad
announced that the government would fix the ringgit's exchange
rate, and that in future the ringgit would only be tradable within
Malaysia.

The rate of exchange to be determined by the financial authorities
has not yet been fixed.

Mahathir said that ringgit either as cash or in ringgit bank
accounts abroad would be allowed a period of one month to be
brought back to Malaysia.  After that, ringgit held abroad would be
considered "invalid" and would not be allowed into the country.

The Prime Minister revealed that 20 to 25 billion ringgit was
currently held in bank accounts abroad, and in addition several
million ringgit in cash was also held abroad.

(It is widely known that much of the savings are held in ringgit
accounts in banks in Singapore, which offer far higher interest
rates on these accounts that the savings rates in Malaysia).

In addition, the Bank Negera (Malaysia's Central Bank) also
announced other exchange and financial controls, including:

   * Except for payments for imports of goods and services,
residents are freely allowed to make payments to non-residents only
up to  RM10,000 or its equivalent in foreign currency  (previously
the limit was set at RM100,000).

   * Investments in any form abroad by residents and payments under
a guarantee for non-trade purposes require approval.

   * Prescribed manner of payment for exports will be in foreign
currency only (previously it was allowed to be in foreign currency
or ringgit from an External Account).

   * Domestic credit facilities to non-resident correspondent banks
and non-resident stockbroking companies are no longer allowed
(previously domestic credit up to RM5 million was allowed).

   * Residents require prior approval to make payments to non-
residents for purposes of investing abroad for amounts exceeding
RM10,000 equivalent in foreign exchange.


   * Residents are not allowed to obtain ringgit credit facilities
from non-residents.

   * Resident travellers are allowed to import ringgit notes up to
RM1,000 only and any amount of foreign currencies, and to export
only up to RM1,000 and foreign currencies only up to RM10,000
equivalent.

   * Transfers between External Accounts require prior approval for
any amount (previously freely allowed); Transfers from external
accounts to resident accounts will require approval after 30
Sepetmber; Sources of funding external accounts are limited to
proceeds from sale of ringgit instruments and other assets in
Malaysia, salaries, interest and dividend and sale of foreign
currency.

   * There are also several new rules relating to securities,
including that ringgit securities are required to be deposited with
authorised depositaries (previously there was no restriction on
secondary trading of securities registered in Malaysia).

Asked by a journalist whether the exchange control measures were
regressive, Dr Mahathir said they were not so, but instead the
present situation where currency instability and manipulation was
prevalent was regressive.

He said that when the world moved away from the Bretton Woods
fixed-exchange system, it thought the floating rate system was a
better way to evaluate currencies.  "But the market is now abused
by currency traders who regard currencies as commodities which they
trade in.

"They buy and sell currencies according to their own system and
make profits from it but they cause poverty and damage to whole
nations. That is very regressive and the world is not moving ahead
but backwards."

He added the Malaysian measures were a last resort.  "We had asked
the international agencies to regulate currency trading but they
did not care, so we ourselves have to regulate our own currency.

"If the international community agrees to regulate currency trading
and limit the range of currency fluctuations and enables countries
to grow again, then we can return to the floating exchange rate
system.   But now we can see the damage this system has done
throughout the world.

"It has destroyed the hard work of countries to cater to the
interests of speculators as if their interests are so important
that millions of people must suffer.  This is regressive."

Explaining the move to make the use of offshore ringgit invalid,
Mahathir said normally it was offshore ringgit that was used by
speculators to manipulate the currency.  The speculators hold the
ringgit in foreign banks abroad and have corresponding amounts in
banks in Malaysia.

These accounts in the Malaysian banks would be frozen and the
actual ringgit in the country would not be sold at all.

"Trading outside Malaysia will be meaningless as the offshore
ringgit cannot enter the country.  Since the ringgit is legal
tender only in Malaysia after one month from now, they would be
holding accounts or papers with no value then."

Mahathir said the measures would not affect genuine foreign
investors as they could bring in foreign funds, convert these into
ringgit for local investment, and can apply to the Central Bank to
exchange the ringgit to foreign currency to meet their needs, for
example to import components.

The premier said investments would not be affected except
investment in shares, which had to remain in the country for at
least a year.

"Genuine longterm investors will have their investments protected
as they will know what the exchange rate is and they can plan how
much funds to bring in as the rate is fixed...Serious investors
will realise that with a fixed exchange rate they can make good
profit with minimum investment."

Mahathir also said that with the introduction of exchange controls,
it would be possible to cut the link between interest rate and the
exchange rate.  "We can reduce interest rates without speculators
devaluing our currency.  Our companies can revive.  If our currency
is revalued upwards, the companies can buy imports as they don't
have to pay so much."

He added the country would not be affected so much by external
developments such as the crisis in Russia.

Asked if the IMF would be unhappy with the measures, Dr Mahathir
said the agency's actions had benefitted the foreign companies but
were not to the country's interests.  "They see our troubles as a
means to get us to accept certain regimes, to open our market to
foreign companies to do business without any conditions.

"It says it will give you money if you open up your economy, but
doing so will cause all our banks, companies and industries to
belong to foreigners."

He said the IMF should help developing countries but instead used
the financial crisis to enable giant companies from the rich
countries to take over their economies.

"They call for reform but this may result in millions thrown out of
work.  I told the top official of IMF that if companies were to
close, workers will be retrenched, but he said this didn't matter
as bad companies must be closed.

"I told him the companies became bad because of external factors,
so you can't bankrupt them as it was not their fault.  But the IMF
wants the companies to go bankrupt.

"Speculators say they want to see blood, by which they mean the
companies must be killed. Then only are we serious about reform.
I don't agree."

He said the Malaysian measures were aimed at putting a spanner in
the works of speculators, to take speculators out of currency
trade.  He added the period of highest economic growth was during
the Bretton Woods fixed exchange system.  But the free market
system that followed the Bretton Woods system has failed because of
abuses.

There are signs that people are now losing faith in this free
market system, he said, citing Hongkong's intervention in the stock
market, Taiwan's warning not to accept trade from Soros' funds,
China's refusal to allow its currency to be convertible, Russia
having second thoughts and may even return to central planning,.
Chile's regulations on capital inflows.

"But some countries benefit from the abuses, their people make more
money, so they don't see why the abuses should be curbed."

To a question whether the measures would be considered regressive
by the WTO, Mahathir said:  "In fact our participation in the WTO
would be meaningless if we are bankrupt, as we then cannot
contribute to world trade.  But a prosperous Malaysia can
contribute to world trade and the WTO."

The Bank Negara, in a press release, said the new measures were
aimed at limiting the contagion effects of external developments on
Malaysia and to ensure that a stable exchange rate can facilitate
recovery.