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How Mahathir managed 1997 Financial Crisis

Mahathir took the road less travelled by, and made all the difference. He tried what no one other dared, and saved his nation. This is the story of a true visionary leader in a time of crisis, and example for all the countries facing speculative currency attacks.

Excerpt from his book, 'A Doctor in the House: The Memoirs of Tun Dr Mahathir Mohamad':

Chapter 52: Currency Crumble I was not familiar with the international monetary or financial system when it faltered and soon after threatened to implode on us in 1997. As a boy, I had experienced high inflation rates during the Japanese Occupation, when things were priced in thousands of dollars and people had to carry gunny sacks of the so-called banana currency to buy anything. There were no banks then and all transactions were carried out in cash. Everything was in short supply during the Occupation and prices tended to go up very rapidly. The Japanese Military Administration overcame this problem by merely printing more currency notes in higher denominations, and even resorted to printing over new figures on the smaller denomination notes to meet the ever more inflated cost of paying their local employees and for their supplies. Somehow, we managed. In my family, I was better off than my brothers because I chose to sell bananas and other items at Pekan Rabu, the weekly Wednesday Market. I soon learned to raise my selling price in order to pay the expected higher cost of my supplies. My brothers held salaried jobs with the Government and its agencies, but their pay increases always lagged behind rising prices and came too late to meet increased costs. All of us were involved in the black market, and we sold old clothing, jewellery and some of our few possessions. When we could get Japanese cigarettes from the soldiers, we would sell them too. By 1944, the war was not going well for the Japanese and I believed the British would return sooner or later. In anticipation, I paid a huge amount of Japanese banana money for 100 dollars of the old Straits Settlement and Malay States currency notes, as I was sure they would become legal tender again when the British returned. The way prices went down to pre-war levels as soon as the old currency came back into circulation again was quite miraculous. Government servants were given three months pay to compensate them for not having been paid when the British left Malaya and in this way, the old currency was decisively returned into circulation. It flooded back into a battered economy that had been operating for some time without any effective, stable and credible currency. People then were not very sophisticated. They unquestioningly accepted the currency that the British Military Administration issued and got rid of the Japanese banana currency, which soon became worthless. Thats the thing about paper currencyits not worth anything in itself. It has value because, and only for as long as, people believe it does. Thats how money works. Unfortunately, the restoration of the Malayan economy and the reintroduction of the Malayan dollar to replace the Japanese currency has never been properly studied and documented. Perhaps we could learn something from that experience and about how to handle currencies and currency crises. I worked as a temporary clerk at the office of the Custodian of Enemy Property early in 1947 and was paid 80 dollars per month. Permanent clerks were paid 60 dollars per month, the same pay for clerks before the invasion. It was as if there had been zero inflation during the Japanese Occupation. There was also very little inflation during the early years of the British Military Administration, the Malayan Union and then the Federation of Malaya. Supplies improved but unemployment was high, and the Colonial Government quickly introduced price controls. That kind of measure is often taken in wartime, but the Colonial Government found it a good way to reduce inflation. Even today Malaysia still controls the prices of essential

goods, as we do not think this contravenes free market rules. The idea that demand and supply must always determine prices is not completely correct as traders can always cause artificial shortages or oversupply and so influence, even manipulate, prices. The market is not always a pure and impersonal mechanism that can be relied upon to deliver the uncontaminated truth about proper price levels. In fact, we were to learn 50 years later that free market principles permitted the unregulated freedom to manipulate prices, whether of basic domestic commodities or national currencies at the global level. I learnt a few lessons about dealing with high inflation during my wartime forays into small business, and I learnt bookkeeping in school. But none of this equipped me with the knowledge to handle the currency crisis which hit Malaysia in 1997. In May of that year I decided to take two months leave, leaving Datuk Seri Anwar Ibrahim in charge as acting Prime Minister. I saw it as a good opportunity to observe how he performed as I was already thinking of stepping down in 1998. I wanted to be sure that when Anwar took over from me, he would be able to administer the country well. While I was in Bledisloe in the Cotswolds in England, I received news about the Thai baht coming under attack by currency traders. Thai businessmen had apparently been borrowing a great deal of foreign currency at low interest rates compared with those of baht loans. Quick profits could be made from the differences between these interest ratesbut only if the value of the baht remained stable. International currency traders, people who make a living from noting and exploiting such anomalies and vulnerabilities, thought the situation was suitable for their kind of trading. They spread the word that the baht was overvalued and that the Thai economy would prove unsustainable. The currency traders then sold large qualities of baht, causing it to depreciate against the US dollar, and throwing Thais who had borrowed US dollars into difficulties. They had to find more baht to repay their foreign currency borrowings for if their trading profits were insufficient, they risked defaulting on their loans. If they defaulted, then the currency traders allegation that the Thai economy was weak would appear vindicated. The traders then dumped more baht and the currency weakened further, causing more foreign currency loans to default. Yet the traders could appear to be simply responding as innocent bystanders to a crisis that they themselves had triggered. A vicious cycle quickly developed: the more the baht depreciated, the more loan defaults increased and the more the Thai economy weakened. The Thai Government tried to buy baht with its US dollar reserves to sustain the bahts value, but the currency traders seemed to have limitless supplies of the currency to dump into the markets. Eventually, the Thai Government was landed with a lot of badly depreciated baht and greatly reduced foreign reserves. This started another round of selling as the baht weakened from a perceived lack of foreign currency reserve support. By the time I came home from leave in August 1997, things were looking very bad for Thailand. We decided to lend it some hard currency to strengthen its reserves but it was to no availthe baht kept falling. Malaysian finances were in good shape at the time, as neither the Government nor our business people had needed to borrow much foreign currency. Our interest rates had always been low and foreign currency borrowings would not have given us any advantage. Bank Negaras foreign currency reserves were also sufficient; at least we thought it was sufficient enough to support the ringgit if it came under attack. But that seemed hypothetical. We had not made ourselves vulnerable as the Thais had, through their foreign exchange borrowings and dealings with currency traders. What did we have to fear? Then we began to hear talk about financial contagion, and how our neighbours troubles might soon infect us. It seemed that despite the soundness of our economy and finances, the ringgit might still come under attack. If the traders caused a loss of confidence in Malaysia as well, then the ringgit too would be devalued. I simply could not understand why this should be so, but the economists were certain it would happen.

They were right. Currency traders began selling the ringgit in huge amounts and it soon began depreciating. Before the attack began in mid-1997, the ringgit exchange rate was RM2.50 to the US dollar, but it would lose half its value by the end of the year. We did not know who was selling the ringgit nor did we know who they were selling it to. I was told about a man named George Soros who had attacked the British pound and the Italian liraboth England and Italy had a tough time fending off his attacks and their currencies were forcibly devalued. Not knowing who the currency traders were, I assumed that Soros was one of them. Whoever it was, I was furious. How could outsiders impoverish our country and our people? How could they knowingly and intentionally do such a thing? Even if that was not their main purpose, how could they choose to ruin us as a casual by-product of their own currency trading strategies? It made no sense to me, economically or morally. Malaysians, particularly the business community, soon felt the effect of devaluation. Importers could not earn enough ringgit to buy the dollars needed to pay for the goods they had purchased from foreign suppliers, leaving them cash-strapped and unable to service their debts. Malaysians who were used to enjoying overseas travel suddenly found foreign trips too expensive. While our exports should have earned us more ringgit since sales were often denominated in US dollars, foreign buyers demanded to pay less. Malaysias costs, they insisted, had gone down because the value of the ringgit had fallen. But imported raw materials and components were costing more, as were the capital goods. The fall in the ringgit did not make us more competitive, certainly not against our neighbours whose currencies were also devalued. We felt helpless as the ringgit continued to sink and the economy moved further towards recession. Only recently we had been growing at eight per cent per annum for almost 10 consecutive years, but now we faced the prospect of negative growth. But I could say nothing about the currency tradersevery time I made a public statement, the ringgit would immediately fall further. On 17 June 1997, just before the attack on regional currencies began, IMF Managing Director Michel Camdessus praised the Governor of Bank Negara for a well-managed economy and financial regime at the Los Angeles World Affairs Council. Malaysia is a good example of a country where the authorities are well aware of the challenges of managing the pressures that result from high growth and of maintaining a sound financial system amidst substantial capital flows and a booming property market, he said. Inflation, he had noted, was low and the ringgit had remained at RM2.5 to USD1 for a long time; it was truly a strong currency, reflecting the sound finances of the country. But now the same people were saying the economy was overheated and, as a result, the ringgit was reeling under the onslaught of the currency traders. I refused to believe that the depreciation of the ringgit was due to a weak economy or to any loss of market confidence in Malaysia. I bought books on currency trading to better understand its mechanisms because I believed it was currency trading, not the basic condition of our economy itself or our currency which was affecting the ringgit. I had met Camdessus earlier and he seemed like a nice man. As Minister of Finance and Deputy Prime Minister, Anwar met the IMF head quite often. I asked Anwar to appeal to Camdessus to stop currency trading and argued that it was unnecessary and damaging to the economy of developing countries. I do not know whether Anwar stated my case to Camdessus, but no attempt was made to stop currency trading. To me, trading in currencies as if they were commodities was absurd. Coffee, sugar, rubber and the like are real commodities and they have all kinds of substantive human uses. But currency is different. It has no value in itself, only in exchange as a way of procuring real commodities. It cannot be used in any other way and cannot be directly consumed. We are no longer in the Middle Ages, when the European economy did not have any credible currency and traders in the French markets used Southeast Asian pepper as their money and medium of exchange. Now we use pepper and spices to make our food tasty and we have money to buy the commodities we need. I remember reading that once, when there was a glut in the coffee market and coffee prices were very low, the Brazilians dumped their coffee beans into the sea to create a shortage and raise the price. But can you dump or burn money in the same way to raise its value? In the case of currency, the situation is actually worse, for there

is more money in circulation than there is issued by central banks and currency boards. It is no longer just real money that changes hands during transactions as there are also cheques, credit cards and electronic transfers. The total amount they represent must exceed the total value of currency notes issued and in circulation. Money has, in effect, become virtual. Looking back now, I suppose I literally took to heart the economists clich that money is the lifeblood of the financial and economic system. As a doctor I understood that there is a finite amount of blood circulating in a persons body at any time (although you sometimes have to increase it with a transfusion). But I have learned not to take that medical idea or metaphor literally when it is applied to the economy. Money is different from debt, as there can be far more debt around than the money in circulation to support and denominate it. Economists think differently from doctors. For them, two plus two can sometimes be more than four. After the US emerged from World War II as the dominant military and economic power, the world accepted the US dollar as the standard currency in international trade and as its reserve currency. The Bretton Woods Agreement[1] had fixed the US dollar at 35 to one ounce of gold. All other countries then fixed their currencies against the US dollar, which in effect meant the value of gold. The post-war world economy recovered while this regime was in place, but when the US went off the gold standard in 1971, largely to pay for the accumulating costs of the Vietnam War, the worlds currencies were destabilised. Market forces would now determine the rates and most currencies would float in relation to one another. I felt that this destroyed the sovereignty of countries and left them at the mercy of the market and human greed. Greedy people will not take the welfare of others into account; they will certainly not be sensitive to the needs of developing countries. For profit, they will destroy whole countries and impoverish their people. However, we had to accept the situation despite knowing that market mechanisms and forces could be manipulated. It did not take long for speculators to begin abusing the system. They had invented the short selling of commodities and shares; now, they invented the short selling of currencies. They made fortunes by bankrupting countries, especially those in the developing world; these were quite literally financial killings. Enterprising people set up hedge funds and invited the rich to subscribe to them. The returns on investments would be far greater than through other channels, but the operations of these funds produced nothing that could be used in the market or for people. The least that could have been done was to regulate them, but while their promoters kept insisting on transparency in every deal or transaction and in everyone elses plansfor how could serious investors possibly risk their money on anything that was shrouded in secrecy?the operations of the funds themselves were allowed to remain mysterious. Who the traders were, where they got their money, how much they borrowed, to whom they sold and who bought the currencies that they sold: we did not know the answers to any of these questions. The funds could leverage their capital by as much as 20 times. With them, more than anywhere else in the economy, credit expansion outstripped the supply of money and ceased to have any coherent relation to it. The effect of their operations was devastating. Camdessus was French and, I heard, a friend of President Chiracs. Since I knew Chirac well, I wrote to him about the depredations of the currency traders and asked him to intercede with Camdessus to stop the trading. Again, during the Commonwealth Heads of Government Meeting in Edinburgh, Scotland, in 1997, I met Tony Blair, who had only just become Prime Minister of Britain. I explained the effect of currency trading to him at length and asked him to take it up with the IMF, but my efforts came to nothing. Malaysia had some prior experience in currency trading, in which we had become involved because we needed to ensure that our reserves would not be depleted because of the fluctuations in the currencies we kept. But we only dealt in the currencies of developed countries. We speculated as all in the market did, but we did not

manipulate. It was a matter of taking calculated risks, and when one of our speculative ventures failed, we lost a lot of money. After that lesson, we got out of the business. In September 1997, I was invited to speak at the annual meeting of the World Bank and the IMF in Hong Kong and took the opportunity to blast currency traders, accusing them of further impoverishing the worlds poor countries. I mentioned Soros by name as one of the traders who had manipulated the currencies of Southeast Asian countries and undermined their development. The next day, Anwar spoke at the same meeting. I had left for Sabah and he rang me there. He sounded annoyed and informed me that my speech had caused the ringgit to depreciate further. He stopped short of telling me not to speak like that again, but I continued with my criticism of the IMF and the currency traders. At a later meeting in Santiago in Chile, I again condemned them and once again, the ringgit fell in value. That seemed proof to me that the currency traders were pushing the devaluation. It could not have been the market, as the reaction was instantaneous. This was not a general consensus from the market but a few key hidden players who were calling the shots. And for their own reasonssome people were deliberately trying to shut my mouth about currency traders. At home Anwar started what became known as the IMF solution without the IMF. But fundamentally, we were not in economic trouble. We had no need to borrow from the IMF to settle foreign debts because we had not borrowed much and few of our debts were due. Those that did fall due, we could still manage to pay. But regardless of whether we needed to borrow from the IMF, Anwar felt that Malaysia had to accept its advice. He believed that to maintain international confidence in our economic management, we should do as we were told and manage our economy the way they wanted. Anwar seemed to think that the IMF medicine was good for us and would help us recover from the international malaise, even if we had not yet fallen ill. So he raised interest rates and cut back on government spending. I warned Anwar that his actions might well deprive the Government of the revenue it needed to pay the salaries of our government servants. He also tried reducing the payment default period from six months to three months before declaring loans as non-performing. This landed the banks with a high percentage of non-performing loans, while making bankrupts of the borrowers. Business slowed down. The disease had arrived. The IMF medicine was not the cure but its cause. Still, Anwar pressed ahead. The economy was now clearly heading towards a recession. Companies were going bankrupt and were defaulting on their bank loans, especially after Anwars decision to reduce the default period and increase interest rates to 12 per cent. We decided to set up an operations agency along the lines of the National Operations Council which dealt with the aftermath of the race riots in 1969. We wanted to minimise political contentions so we brought in all the State Chief Ministers and Menteri Besar, including from PAS, into what we called the National Economic Action Council (NEAC).[2] Trade union and business leaders and think-tank heads were also included. We were able to explain the problems faced by the country to them and heard their views on how to handle the situation. But because of its large size, the Council could not meet often. I decided to have a small advisory panel to follow developments and to suggest remedies. It had to be backed by the Cabinet as a whole, though only a few Cabinet members would be in it. Fortunately, the Cabinet did not question the authority or the arrangements for setting up such a powerful body. Its members included Anwar; Datuk Mustapa Mohamed, a well-credentialled economist who now serves as Malaysias Minister of International Trade and Industry; Tun Daim Zainuddin; the Chief Secretary Tan Sri Samsudin Osman; the Secretary-General to the Ministry of Finance Tan Sri Samsuddin Hitam; the Deputy Governor of Bank Negara Datuk Fong Weng Phak (for some reason the Governor never attended our meetings); Tan Sri Ali Abul Hassan Sulaiman who had headed the Economic Planning Unit; Oh Siew Nam, a man from the private sector who was familiar with banking and the financial markets; and ISIS chief Tan Sri Dr Noordin Sopiee. This small committee met for at least three hours every morning in my office. We scrutinised all the statistics on the economy, commissioned studies of anything that we considered might influence the economic performance or prospects of the country, brought in experts to explain developments and give their views, listened to numerous briefings, and often decided on action that needed to be taken. Fortunately, we did not experience

social unrest during this critical period. Malaysians could take a beating but a violent destructive response was not their way. We were also making final preparations for the Commonwealth Games to be held the following year, and we could not afford instability of any kind. While managing the crisis, I continued to travel abroad to pursue both economic and diplomatic initiatives. I was in Buenos Aires in Argentina when I suddenly remembered Tan Sri Nor Mohamed Yakcop, who had headed the ill-fated Bank Negara currency trading operation. I had spotted him walking down a street in Kuala Lumpur before I had left for Buenos Aires. That image now came to mind and I decided that he might be able to explain currency trading and possibly suggest ways of countering it. Our loss-making venture into currency trading might yet yield Malaysia a valuable, even life-saving dividend as the currency traders now closed in on us. The matter was urgent and I could not wait to come home, so I asked my office to locate Nor Mohamed and fly him to Argentina. Soon after, in the hotel in Buenos Aires, we sat down together and he explained the intricacies of currency trading and why we had lost money. I asked him what lessons from that earlier experience could be applied to our present situation. He suggested that we get some of our institutions with financial resources to set up a special fund to buy the ringgit. This we did, but again, we were no match for the funds the currency traders had at their disposal. They could leverage 20 times their capital and we would have exhausted our reserves trying to fight them this way. We were up against not one but several funds which were involved in currency trading so, inevitably, the exercise failed. Yet I found Nor Mohamed knowledgeable and decided to appoint him my financial adviser and a member of the NEAC. We directed many questions to him in our efforts to grasp and to curb currency trading. I had to fully understand the banking and the financial systems and Nor Mohamed was able to explain it all. Not understanding these intricacies had made us institute measures which proved ineffective. At one stage I had thought of deliberately devaluing our ringgit and increasing salaries and wages to neutralise the effect of devaluation. When I took this idea to some of my colleagues and Ministers, they were adamant that it would not work. Yet I believed there had to be something the Government could legally do to stop the trade in our currency. I was still under the impression that actual money changed hands during all these transactions. I had not yet grasped the abstract and virtual nature of money, and how paper transactions in billions may flow across the world faster than you can pay for RM10 worth of vegetables at the local night market. That was why when we were told that money was being taken out of the country, we thought people were actually taking cash out with them as they left. We asked the Customs officials at exit points to check travellers bags but were mystified because no cash was being taken out of the country. Yet the amount of money in Malaysia was now considerably less than before, and we learnt that money had flowed to Singapore by the millions. That was why we asked the Singapore Government to deposit some of their ringgit in Malaysian banks. We were also puzzled as to how currency traders who operated outside Malaysia could have billions of ringgit to sell. Where, I wondered, did these international predators get their ringgit? They were short selling the ringgit and entering into contracts to deliver ringgit they appeared not to have. Still, they had to deliver some time. I asked Nor Mohamed how such large amounts of our currency could leave Malaysia undetected and how the currency traders could physically handle billions of ringgit. We had no record of their acquiring the ringgit before they started trading it as a commodity and destabilising the exchange rate. Yet at some stage, I reasoned, they must have acquired their ringgit before selling it in the market. Nor Mohamed explained to the NEAC that no cash was actually being moved. A million ringgit, even in RM100 bills, would be extremely bulky and would not be easy to transport. Certainly there was no way hundreds of millions or one billion ringgit could be moved around. The ringgit was legal tender only in Malaysia and it could not be used outside the country. Banks and money changers in other countries may accept the ringgit in exchange for local currency, but only in small amounts. In the end, they must repatriate the notes to Malaysia.

Yet this was clearly not happeningif it were, endless streams of armoured vans would need to travel back and forth constantly between Singapore and Malaysia. So what money was now being traded? No physical cash was involved, Nor Mohamed explained. Instead, the money was being held in Malaysian banks in cash, mostly in the accounts of the people to whom the money belonged. I asked Nor Mohamed what happened when the money was bought or sold. Small amounts may be deposited in the banks or taken out in cash, he said, but usually the money was simply credited to the recipients account or debited from the accounts of the person making the payment. No cash transaction was involved at all as it was purely a paper transaction and only the figures in the bank books would change. When ringgit trades were made, no money ever left the country or entered it. The process might be slightly more complicated in the case of foreign currency accounts in foreign banks, but even then, the ringgit traded would never leave Malaysia. I suddenly realised that this must be the way. We had asked Bank Negara to withdraw high denomination notes of RM1,000 to stop people from taking money out of the country. It turned out that the money was actually being held in Malaysian banks in the accounts of foreigners. Since the foreigners owned the money, we could not make use of it. This was a revelation to me. I was not a banker and I had few dealings with banks. I always made payments by cheque without thinking about how the figures changed in my accounts. My own transactions were small and usually handled by my personal assistant. I was now appalled that I had been spending huge sums of government money without knowing anything about how banks operated. But from the moment I learnt that traded ringgit never left Malaysia physically, and that sales and purchases simply involved transfers of ownership of money from one account to the other in bank books, I began thinking about how the Government might use Bank Negaras control over Malaysias banks to stop the currency trading. I believed that many of my NEAC colleagues knew that the financial system generates far more credit than the money that is issued by the central banks, but they did not see how this knowledge might lend itself to instituting government control over currency trading. It may have been good to be ignorant about the financial system, as it allowed me to see with fresh eyes how to frustrate the currency traders. I asked Nor Mohamed whether the Government could order the banks not to transfer ownership when currency traders bought and sold the ringgit. He said it was possible. I mulled things over andwith Tun Daim, Nor Mohamed and the bankers in the NEACbegan to discuss the possibility of blocking the currency traders access to the ringgit. At the same time, we would have to put a stop to the buying and selling of Malaysian shares through the Central Limit Order Book or CLOB, the so-called over-the-counter stock exchange set up by Singapore to trade in Malaysian stocks after we separated our stock exchanges in 1989. The Singapore CLOB trading was causing our share prices to drop continuously. Our Composite Index (KLCI) was around 1,200 when the devaluation of the ringgit began. Not wanting to lose the money they had invested in Malaysia, foreign investors stampeded to the exit, selling off their shares and converting the ringgit they received into US dollars or other currencies. Their sales were causing our share prices to fall further, at one point to below 300. Market capitalisation of our stock exchange was now less than one quarter of what it had been before the crisis. We found that the shares bought through CLOB were all registered in the names of trustee companies. It was completely legal, but when shares were sold within each trustee company, ownership did not change; it remained in the name of the holding trustee companies. There was therefore no need to inform the Malaysian Stock Exchange of the transaction. Still the continuous selling of these Malaysian shares caused their prices to drop. The KLSE could do nothing about CLOB and there was no need to register these transactions with the KLSE so long as they remained on paper with the same trustees. We had to put a stop to this practice, and so decided that no sale would be recognised unless the real owners of the shares registered with the KLSE. Failing this, the transaction would not be valid and the shares would be legally considered as belonging to the seller. Once we imposed that condition, it was no longer possible for

shares to be traded in CLOB without registering with the KLSE. No one would buy if the shares would not become legally theirs. Therefore, forcing the real owners to register their deals with the KLSE as a condition of having the acquisitions recognised was able to put a stop to the role of front-man trustees. Everyone had to register with the KLSE. CLOB had no more role in the trading of shares. It had to close. Meanwhile, we made the decision to peg the ringgit to the US dollar, a move which was sure to be controversial. But we had to determine the exchange rate of the ringgit soon after instructing the banks not to transfer money in their accounts in any transaction. We also had to be sure we had enough foreign exchange (mainly US dollars) in the banks and at Bank Negara should traders need to pay for their imports. And of course we had to ensure that there was enough ringgit in the banks to exchange with foreign currencies at the rate we fixed. Malaysia had always insisted that the proceeds of the sale of Malaysian products to foreigners must be brought back and deposited in Malaysian banks. Some developing countries, Argentina for example, allow such proceeds to be kept abroad. (In the case of some Middle Eastern states, a vast fund of so-called petrodollars was never repatriated but allowed to flow back and forth in search of profitable investments around the world.) In our case, this would have resulted in a continuous drain of money out of the country. Without access to the foreign exchange it earned, the country would not be able to pay for imports or repay loans. Because of this practice of repatriating our foreign earnings, Malaysia always had enough foreign exchange for our importers wishing to buy goods or services from abroad. When the Government fixed the exchange rate, it had to be able to guarantee the availability of foreign currencies to pay for those essential imports at the fixed rate. We might even have enriched ourselves by strengthening the ringgit to its former pre-crisis rate of RM2.5 to one US dollar, as the ringgit had by then recovered somewhat after falling to almost RM5 to the dollar and was now hovering at between RM3.8 and RM4 to one US dollar. But if the ringgit was too strong because we set the exchange rate too high, Malaysian products would not be able to compete internationally with similar products from Thailand, the Philippines and Indonesia. We had to decide on an exchange rate that would not impoverish us too much but would still make our products competitive. We decided on RM3.8 to one US dollar. We kept this a secret, but we needed Bank Negara and the KLSE to implement our decision. The Government had to oversee implementation of its plans virtually minute by minute. When we began putting these measures in place, we could not be sure whether or not the controls would be effective, or whether our decision on the mandatory registering of CLOB share sales could be carried out or would prove sustainable. But when we made the decision in the NEAC, it is worth noting that Anwar was still the Deputy Prime Minister and Minister of Finance. He did not disagree with the plan to stop the currency traders and restrain the Singapore CLOB. To play devils advocate, Noordin of ISIS came up with over 30 reasons why we should not carry out these plans. I had to argue against and demolish every one of those objections. The other NEAC members displayed varying levels of enthusiasm, with some pointing out that this had never been done by anyone before. True, it was risky and there could be a total collapse of the ringgit. A black market might also emerge, selling the ringgit at below the price we fixed. The countrys finances and economy might go into a tailspin and fly completely out of controlwe could not be sure of anything. But the argument that nothing must ever be done for the first time is an argument that appeals to the timid and the orthodox, not to someone who was responsible for his country in times of unprecedented difficulty. Some pointed out that in many developing countries, people refused to be paid in local currencies and instead insisted on payment in US dollars. The ringgit might also be rejected for payments and if so, it would not be worth the paper it was printed on. I was to later learn that some NEAC members told the Menteri Besar of several states to try and stop me, but they were not willing to confront me to argue about currency trading and the CLOB, about which they knew little. They understood even less the complexity of the measures we were planning to take and the risks these measures posed. Even if any of them had well-founded doubts, they were in no position to argue their cases.

That worked in my favour. I slept well on our decision, but that did not mean I was not worried that what we planned to do could bring disaster to the country. I was frightened at the prospect of going against conventional wisdom, of going against all the experts, including those at the IMF and the World Bank. Our strategy was undoubtedly contrarian, as it was soon dubbed by its critics. It went against all conventional wisdom and if we crashed, no one would help us. I might even have had to make my exit in disgrace, something I truly feared. But I hated the idea of losing control over the country the way the Government of Indonesia had lost to the IMF. I disliked that eloquent picture of Camdessus standing over President Suharto with his arms folded, watching with almost smirking satisfaction as the President signed away Indonesians control over its economy, the basis of its national sovereignty for which it had fought so hard and bravely against the Dutch in the 1940s. I certainly did not want Malaysia placed in that same situation. We had tried to persuade Indonesia not to give in to the IMF. The Indonesian Minister of Finance, Marie Muhammad, was in close contact with Anwar, who said he had asked Marie to advise Suharto not to sign. The President, I was told, could not sleep by then. Some 40 million Indonesians had lost their jobs. The rupiah had collapsed from 2,000 to 16,000 to the dollar and there were riots in the capital city of Jakarta. Shops were torched and people killed. The Indonesians put the blame for the crisis on the Chinese Indonesians. They did not see the Americans and their control of the IMF as responsible for the currency crisis. When the IMF took control of Indonesian finances, the measures they forced the country to take, such as stopping food and fuel subsidies, only made matters worse and there were more riots. Thailand and the Philippines, which had both also submitted to the IMF, fared no better. Only South Korea was able to make some tangible recovery. I simply had no faith in the IMF solutions which Anwar had imposed on the country. Ministers began complaining that they had no money for their development projects. All their perks had been reduced and the austerity measures imposed on them were hurting. Anwar wanted a surplus budget but it was just not possible with the ringgits lowered purchasing power, so he cut the budget by 25 per cent. If we had kept on doing that we would not have any money in the Treasury. Worse would follow, and we too would end up surrendering our economic sovereignty. I was determined to go through with our solution. At the last minute, Anwar rang me to say that Tan Sri Ahmad Mohd Don, the Bank Negara Governor, and his deputy Fong had sent in their letters of resignation. I was shocked but I remained determined to go ahead. I asked the third most senior officer of Bank Negara to see me. At the time, Tan Sri Dr Zeti Akhtar Aziz was Assistant Governor responsible for economics, foreign and money market operations and exchange controls.[3] I knew her, but not well. There was no time to find a new Governor so I immediately appointed her as Acting Governor. She came to my residence and I explained the situation and what she had to do. Fortunately, she was very cooperative and able. She said she would contact the banks and stop all transfers of large sums of money involved in currency trading. She of course had to allow payments to be made for business transactions. On 1 September 1998, Zeti formally announced the implementation of currency controls and the pegging of the ringgit to the US dollar. She told the Press: We had to act on our own, considering the international community has failed to come up with any meaningful solution to the global financial turmoil. Ideally, the world should act in concert, instead of forcing countries to act individually. Zeti, who went on to become Governor and win several international awards for her leadership of a central bank, joined the NEAC and gave it good feedback on the current situation in the market and the behaviour of the ringgit. We were on the lookout for a black market in ringgit to make its appearance. We monitored prices and tried to make sure that no one sought to profiteer. We ensured adequate supplies of all necessities. The daily NEAC meetings continued. The banks were required to deposit all the foreign exchange they received in Bank Negara, which meant we were never short of foreign money to sell to bona fide importers. The ringgit exchange rate against the US dollar was maintained strictly at RM3.80 to one US dollar, which proved good for importers as well as exporters.

Businesses were happy to accept the ringgit at RM3.80 whenever they changed their US dollars or other currencies. They were also comfortable with our assurances that we would maintain the exchange rate for as long as it took for the situation to stabilise. They could budget for the whole year and not have to hedge against fluctuations in the value of the ringgit, which reduced their cost of doing business. Requiring all owners of shares to register with the KLSE and stopping the sale of Malaysian shares held in trustee companies also stopped the plunge in the KLSE, and within a short period, the KLCI rose from below 300 to over 800. The number of nonperforming loans declined after the period of default was returned to six months, and the economy began to show signs of recovery. During the crisis we had introduced several measures to help mitigate the problem. When property sales became stagnant we arranged for home ownership campaigns that brought together developers, potential buyers, financiers, government officers and lawyers. At the first promotion exhibition, RM3 billion worth of property was sold. To get the construction industry going again we decided to build 40,000 flats to house urban squatters. Since retail sales were lagging, we found places for goods to be exhibited by retailers and we helped negotiate lower prices where necessary. We studied reports on electricity consumption, the movement of cargo and containers at the ports, incoming tourists and airline passengers, vehicles registered and many other things. We knew in detail how the economy was performing and often we found ways to stimulate it. The NEAC gave particular attention to the operations of Pengurusan Danaharta Nasional Bhd (the National Assets Management Company), Danamodal Nasional Bhd (the National Bank Refinancing Company) and the Corporate Debt Restructuring Committee (CDRC) which had all been set up to address the problem of nonperforming loans and bank recapitalisation. We did not allow the shares acquired through CLOB to be sold immediately in the market, for this would cause all share prices to fall. The owners of the shares had to register first with the KLSE. Later we set up a special company to buy up these shares, oversee their repatriation and then manage their gradual sale into the market in order not to disturb share prices generally. At first, the owners of those CLOB-traded shares were unhappy. But as the KLSE recovered, share prices increased by 200 per cent by the time our special company bought up their shares. They were spared the great financial loss that they had feared, and waiting a while to cash in proved profitable for them. The company also made a profit in dealing with those shares and the Government recovered the money it had outlaid in its bold rescue exercise. The world condemned our currency controls and many economists said that they were not in keeping with the open-market trading system. Experts predicted disaster for Malaysia and gleefully anticipated its return with a begging bowl. But we were not deterred. We believed we had found the right answer to the plundering of small countries by the rich currency traders. It may have been unconventional, but it worked. Let others uphold economic doctrinewe had a country and ourselves to save. In the end, we recovered faster than all the countries that, freely or under duress, accepted loans from the IMF and submitted to its one-size-fits-all solution. The currency traders ceased their operations. Even the IMF eventually admitted that our way had worked, though they would not recommend it to other countries. Joseph Stiglitz, the Nobel Prize-winning economist, endorsed our view.[4] Even Soros later acknowledged that Malaysia had done the right thing in not submitting to the IMF. Ours was a solution that worked for us, but not many other developing countries were in our situation. It could only work for us because, in addition to our political will and rich sources of practical policy expertise, we had ample foreign currency reserves at our disposal in Bank Negara to defend our economic sovereignty. We also had huge savings which, in turn, were due to our responsible economic management over the years. Our success in turning back the challenge of the currency predators and the IMF was not due solely to our decisive actions at the time. It drew upon and vindicated the Governments entire economic stewardship over the years, especially since the 1970s and 1980s.

The currency crisis, however, was not the only problem we were grappling with. Just one day after Zeti announced Malaysias currency controls, my problems with Anwar came to a dramatic head. ENDNOTES [1] Representatives from 44 countries met just before the end of World War II to discuss how to rebuild the global economy. [2] The National Economic Action Council, or Majlis Tindakan Ekonomi Negara (MTEN), was created on 7 January 1998 to advise the Government on all issues related to the financial crisis. [3] Tan Sri Dr Zeti Akhtar Aziz is the only woman Central Bank Governor in Asia. She is also the daughter of Professor Ungku Abdul Aziz Ungku Abdul Hamid, the countrys first Malay economist and former Dean of the Faculty of Economics and Administration at the University of Malaya, and is the grandniece of UMNO founder Datuk Onn Jaafar. [4] Joseph Stiglitzs book Globalisation and its Discontents criticises the IMFs handling of the financial crisis. -------------------------------------------------------Note: This is for information purposes only.

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