Sunday, December 19, 2010

THE CURRENCY


As posted by Dr. Mahathir Mohamad at Che Det on November 26, 2010 11:50 AM

1. The Malaysian Ringgit has appreciated after control was removed. It is now stronger against the US Dollar by approximately 20 per cent.

2. What does this mean to the people? It should result in imports becoming cheaper if not by 20 per cent at least by some percentage below that.

3. But I don't think Malaysian imports paid for in US Dollars is noticeably cheaper in Ringgit. Why is this so?

4. When the currency appreciates through market forces, it is neither constant nor does it do so at specific rates. It may appreciate a little, then depreciates. Then it may appreciate again.

5. It takes a long time before the strengthening is substantial as to affect costs of imports or exports.

6. Under this circumstance the depreciation in price of imports cannot be monitored. Despite an appreciation of the Ringgit against the US Dollar by 20 per cent, there may not be any change in the price of imports in Ringgit. In some cases the price might increase.

7. It is only when Malaysians travel abroad that they may feel richer due to the appreciation of the Ringgit.

8. But if the rate of exchange is controlled, then it will be possible to monitor the prices of major imports and their retail prices. Sugar, flour, components for manufacturing industry, petroleum products and even manufactured goods should be cheaper in Malaysian Ringgit when it appreciates and dearer when it depreciates. If through control we strengthen the Ringgit by 20 per cent then we should be able to enjoy imports cheaper by about that percentage.

9. If the Ringgit is controlled, how should the Government determine the exchange rate of the Ringgit at a given time. In 1998 the Ringgit was fixed at RM3.80 to the US Dollar because that was roughly the rate of exchange of the currencies of our neighbours against the US Dollar. We did not want our Ringgit to be too strong compared to the currencies of our neighbours. We wanted to remain competitive.

10. An appreciation of 20 per cent to the 1998 exchange rate would be about equal that of the current appreciation of the Thai Baht.

11. When to fix the new rate is dependent on the behaviour of the currency of our competitors. We should avoid small increases or decreases but should wait until the gain or loss would be around 10 per cent. Prior to doing this we should monitor the prices of our imports and exports. When we announce the new rate we can determine the gain or loss by the importers, wholesalers and retailers. The prices can then be calculated and any gain passed on to the consumers.

12. That is the advantage of currency control over free float even when managed.

13. It is strange that at the time when many countries have decided on currency control Malaysia is thinking of freeing the Ringgit from any control.