Sunday, March 27, 2005

Who benefits from the current pegged ringgit?

Title: Who benefits from the current pegged ringgit?
There is growing chorus nationwide calling to an end of the ringgit peg. Even both former Prime Minister and Deputy Prime Minister agree on this issue – its time to let the ringgit free float. The head of MIER said that the current regime only benefits a few, indirectly implying the exporters. Lately even the IMF joined the fray in calling for the ringgit float.
Meanwhile cabinet ministers and Bank Negara officials are adamant on the status quo, quoting each other that the current exchange rate is not far below equilibrium, less than 5%.
Given the medium term trend of depreciation of US dollar, the ringgit has depreciated around 20% against our major trading partners’ currencies, except United States. Our goods and assets have become cheaper to them, which is reflected in the merchandise trade balance and in the current account. Money continues to flow in, foreign reserves at record high; liquidity is high and interest rate very low. This cheap money fuels economic growth, at 7% last year.
In this fixed exchange rate regime, the government is using fiscal expansion, the only effective way in this situation. A lot of government projects have been revived and undertaken.

So what is wrong with this picture?
First of all, in any fiscal policy setting, the government is in control – where to spend, whom to spend on. Compare this to a fully monetary expansion – where the central bank, Bank Negara, controls the liquidity and the interest rates. The people are in control; borrow money, and spend or invest it on what is best for them.

The advantages for the government in the current below par fixed exchange rate are:
1. be able to spend money (fiscal expansion) without crowding out investment and increasing interest rates (Yes, give projects/licenses to favoured firms, let them borrow money at low interest rate and make profits)
2. because fiscal expansion does not result in higher interest rate(to a certain extent, in this environment), government can spend on where it want, and whom it want.

So what is happening in this environment?
Government is doling out licenses to print money to favoured firms, read: monopolistic non-competitive business ventures. E.g. Electricity generation, satellite TV, internet service provider, mobile phone carrier, commercial bank etc. Yes, these monopolies need large capital start up; this is where low interest rate and large captive financial market (we cannot easily send money out of the country until recently) is useful. Low interest rate, cheap financing means juicy profits for these monopolies.
Ask yourself, who are these people behind the monopolies.
Of course, without doubt, those exporters also benefit; borrow money cheaply, build factories, export their products and bring in foreign exchange.

At whose expense?
As a general rule, when the currency is below its equilibrium value, export become profitable, so more resources and investment would be devoted to export sector. Foreigners would gleefully buy our products and assets – benefiting them, while we are getting less than true value (arbitrarily) when we exchange our exports for our imports. Because we devote more resources and investment towards exports, less resources and investment would be devoted for our own consumption, (things that we produce for our own use like food, clothing and housing) making them more expensive in he future, creating future inflation.
Investments in new technology for products for domestic consumption will result in greater efficiency, hence lower overall prices in the future. By neglecting this sector in favour of export sector, defence or whatever, we will be facing higher inflation.
So we all together, the whole populace will face higher prices in the future. We are being ripped off on either sides, low interest rate or return on our savings, and high prices for our consumption. Next time you look at the rich list in the business pages, you can be assured that you contributed to their riches. All those high prices you paid for pay TV, gas, electricity, telephone (and some of us, weekly Sports Toto), we all paid the price.

Last week’s loosening of financial regulation by Bank Negara will help ease the flow of capital in and out of the country. Depositors with large amounts of cash can negotiate interest rates as well. All those loosening up of the financial rules and regulations, combined with easier hurdle to get merchant bank licences; will help squeeze the usually fat margin of local banks and financial institutions.
We suggest complete deregulation of financial markets, with the first step; unpegging the ringgit – sooner rather than later. Anyone, be they local or foreign could apply for banking, brokerage and insurance licenses. This way the financial markets will be competitive and strong. The cost of capital will be lower – which will spur investments, better productivity for our future competitive advantage.
Everyone will benefit, not just the big boys.


Anonymous said...

nice article, will bookmark you for this :)

nooryahaya said...

thanks, i just do my bit. pass it on...