The administration of former prime minister Dr Mahathir Mohamad gambled away Malaysia’s foreign reserves in 1992-1993, writes Awang Abdillah of FMT.
Former prime minister Dr Mahathir Mohamad is an ambitious man who believes in the theory of mega economics.
He believed and still believes that by adopting a mega-based economic model, Malaysia not only could become a developed country by 2020 but would also become a strong nation at par with the Western powers economically and politically.
Hence, he was prepared to go international and take on the Western powers.
One of the fields that he was keen on was the global foreign exchange (forex) market where there is big money.
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In fact Bank Negara, under the Mahathir administration, was involved in covert global speculative activities as early as in the 1980s possibly to test the waters.
Throughout the period from 1990 to 1992, Britain’s economy was in recession where national output began to slide and unemployment rose.
Domestic demand fell including demand for imports. In 1992, the exchange rate of the British pound sterling was fixed under the European Exchange Rate Mechanism (ERM).
Unlike the Asian economic crisis of 1997-1998 where Asian currencies were weak or vulnerable, in the case of the British pound, despite the economic slump, the currency still commanded a comparatively strong exchange rate.
However, pressure was mounting from many quarters for Britain to float its currency in line with the current (at the time) market situation.
Many quarters wanted Britain to adjust the value of the pound accordingly because the European countries believed the pound was overvalued.
Britain’s forex market appeared to be the focus of many speculators who wanted to profit from the market instability.
Speculators would make or lose in a “free-for-all” market situation.
A very greedy politician would think this opportunity was too good to be missed.
Mahathir, the then prime minister of Malaysia-cum-mega speculator, allegedly ordered Bank Negara to speculate on the British pound sterling.
George Soros, the global forex player, was also speculating on the same currency but for different reasons.
But both shared a common desire. They went for the kill. The battleground was the London foreign exchange market.
Both believed that they were going to make money from the British.
One believed he could make fast and big money, the other wanted to profit from the expected fall of the pound.
The one that believed the pound would appreciate took billions of US currency from Bank Negara foreign reserves fund (actual figure unknown).
The “wiser” speculator who believed the British pound would fall was not using his own funds. He borrowed from British banks to the tune of 10bn pounds and changed the money to German Mark.
The moment of truth came when, on 16 September 1992, Britain left the ERM.
Unable to stand the economic and market pressure on its overvalued pound, Britian, instead of floating the pound, officially devalued its currency causing the pound to fall.
It was not what the European countries and Mahathir had expected. Luckily for Mahathir the currency did not crash.
The British government had a two-pronged strategy – firstly to devalue the pound to stimulate the economy through cheaper and hence higher exports and more costly imports thereby reducing imports in order to regulate the country’s general economic fundamentals.
Secondly after the devaluation, the sterling was automatically floated to regulate the market fundamentals.
Had Britain directly floated the pound, the erratic rise and fall would disrupt Britain’s plan to stimulate the economy although it may have helped the pound to appreciate which speculator Mahathir had expected.
Bank Negara losses never revealed
Consequently Soros, who took the loan from the British banks, repaid it in pounds which was then cheaper and pocketed the difference of more than US$1bn.
While the Malaysian gambler lost about US$4bn.
Later in 1993, Bank Negara again lost another US$2.2bn in speculative activities.
Malaysia’s total loss by this time stood at US$6.2bn equivalent to RM15.5bn (based on the exchange rate as at September 1992. US$1=RM2.5).
However, the actual figure for Bank Negara losses was never revealed.
Instead, the central bank, when put under scrutiny for its dubious activities, gave conflicting and confusing data to make it difficult for the opposition to get to the bottom of the mess.
Bank Negara had abused the foreign reserves which were meant to finance imports, stabilise the ringgit and pay off foreign debts.
The British government made the right decision. The devaluation made the pound cheaper thereby stimulating exports and made imports expensive.
Mahathir gambled away nation’s money
The fall based on devaluation is different from a fall by floating.
The former is an economic adjustment to regulate the macro-economic fundamentals such as national output, employment, among others, while the latter is a market adjustment to regulate market forces such as the exchange rate of a local currency vis-a-vis foreign currencies and the share prices in the stock market .
Hence, once the nation’s currency has been devalued, it can be floated without the possibility of a currency crash because the effect of devaluation has already stabilised the country’s general economic fundamentals.
Mega gambler Mahathir had allegedly committed a serious crime by secretly compelling Bank Negara to use its scarce foreign reserves for unethical and unauthorised purposes.
What was more serious was that he had allegedly gambled away the nation’s hard-earned money worth billions of ringgit in high-risk global speculative activities.
He should be held accountable for this alleged squandering.
Malaysia did not have the expertise in global forex speculation the likes of global forex player Soros. What should Malaysians do to this man who always denies any wrongdoing?
Bank Negara, in this case, was allegedly in cahoots with Mahathir.
Mahathir must pay
Bank Negara is supposed to be the regulator of the financial market, not player/speculator.
Bank Negara can use its own foreign reserves to go into the forex market in Malaysia in order to regulate and stabilise the ringgit, but it should not speculate in forex markets outside Malaysia.
As such, its action was unethical. The foreign reserves of a country are a crucial item to service imports, regulate the country’s currency value and to pay off foreign debts.
The Bank Negara governor at that time was Jaffar Hussein and the head of the forex trading unit was Nor Mohamed Yakcop. Both resigned after the speculation fiasco.
The golden rule is if any Malaysian wants to bet in any foreign exchange market he should use his own funds, not that of the nation.
Mahathir must be held accountable for his action.
Awang Abdillah is a political analyst, writer and FMT columnist.