Policymakers, including experts must not be “in denial” in addressing potential problems that could arise as a direct result of the depreciation of the ringgit against the US dollar.
Veteran economist Tan Sri Ramon Navaratnam said the tendency to be defensive over the hardships faced by Malaysians as a result of the depreciating ringgit must stop.
The ringgit yesterday dipped to a 24-year low against the US dollar, the lowest against the greenback following the Asian Financial crisis.
It is now valued at RM4.50 against the dollar.
Bank Negara today also announced its overnight policy rate (OPR) hike by 25 basis points to 2.5 per cent, in its third consecutive rate hike this year. In May, the rates were raised to 2 per cent, from 1.75 per cent, and in July, it was raised to 2.25 per cent.
“The consistent decline (of the ringgit) is an indication of a decline in our economy. The declining exchange rate also may not necessarily increase our capacity to export, as it is based on competition,” said Navaratnam.
“The declining rate of the ringgit will result in higher import prices, and this means greater inflation. You can try and (cushion the impact) and increase the OPR to tame inflation, but how far can you go?”
He said raising interest rates will also affect productivity, including that of Small and Medium Enterprises (SMEs).
“How can one produce more, or offer more goods and services, when the cost of borrowing is going up?”
He also said it was likely that prices of goods will increase, and this will give rise to further inflation.
“When the cost of borrowing goes up, the cost of debt also increases … it’s all related. It is due to the basic weakness in the economy and the continuing weakening of the ringgit as reflected in the exchange rate.”
Navaratnam added it was imperative that decision-makers started asking questions about whether our economy was strong, given the inefficiencies, including rampant corruption that is taking place.
“We must also not forget about policies that have remained under the New Economic Policy (NEP) that are still part of the system.”
Navaratnam, former deputy secretary-general of the Treasury said the increase in the OPR also shows that “we are desperate to get funds to prevent capital outflow.”
“Yet, there are experts and decision-makers who seem to be complacent or are trying to be ‘soft’ in their criticisms and are not being realistic about what is happening.
“If we do not address the matter (declining value of the ringgit), we’re going to be facing a crisis in the next 10 years. What we are facing now is akin to a festering wound on the surface. If we do not address it fast, we are going to be facing serious problems.”
He also opined it was “too late” to peg the ringgit to the US dollar.
“You only peg the currency if your currency is strong. Our currency is now weak. We were stronger than we are now when we pegged the ringgit to the US dollar (in 1998).”
Navaratnam said one measure that should be taken by Malaysia immediately to strengthen the ringgit is to be competitive.
“We must start now as the world is not going to wait for us. We must give better and more attractive incentives to investors.
“The one thing that makes us less attractive compared to nations like Singapore and Vietnam, is policies under the NEP.”
However, he added that a looming general election will also cause the economy to be stagnant, as many will be adopting the “wait and see approach”.
“The government should use Budget 2023 as a platform to address and offer solutions to the problems we are facing right now,” he added.
