KUCHING: Reform efforts by Bank Negara Malaysia (BNM) since 1994 has enabled the Malaysian economy to continue to remain resilient with financial and economic stability remains uncompromised despite volatility of capital flows and the ringgit in the recent period, said Second Finance Minister, Datuk Seri Johari Abdul Ghani.
“In fact, our international reserves continues to strengthen ever since and as at end November 2017 the reserves amounted to US$101.9 billion and were able to support 7.5 months of retained imports,” he highlighted.
Johari in an open letter to former Prime Minister Tun Dr Mahathir Mohamad explained that there was a difference between speculative foreign exchange activity from the orderly management of foreign exchange market.
“It is very important for the public at large to understand the difference between speculative foreign exchange activities and orderly management of foreign exchange market,” he said in the letter.
“The speculative foreign exchange activity, to put it in simpler words, is a kind of “gambling” activity with the hope of quick returns.
“The orderly management of foreign exchange market, however, is very much different in that it is a facilitation of liquidity by BNM to market participants in the country for the purpose of mitigating imbalances with respect to the ringgit’s supply and demand in the market.”
To put the matter in perspective, Johari said it was highlighted in an Internal Audit Report prepared by BNM’s Internal Auditors dated January 24, 1994 that the Foreign Exchange Operation Division of the Banking Department in BNM was involved in voluminous foreign exchange trading activities.
This occurred to the point that the monthly maturing buy and sell foreign exchange transactions which amounted to an average of RM140 billion in 1992 had increased to a staggering RM750 billion in 1993, he said.
“The substantial portion of such transactions was very speculative in nature and did not reflect BNM’s mandate to maintain orderly condition of the foreign exchange market as per Section 4 of the Central Bank of Malaysia Ordinance 1958,” he said.
The Internal Audit Report, he added, also highlighted that the magnitude of such foreign exchange speculative transactions was considered very excessive given that the shareholders’ fund of BNM was only RM4.4 billion and the country’s international reserves were merely RM43.98 billion at that material time.
“These speculative activities had caused BNM to suffer foreign exchange transaction losses amounting to RM31.5 billion during the period under review.”
The Audit Report also stated that the voluminous speculative foreign exchange trading activities that the central bank had undertaken during that time were carried out by the Foreign Exchange Division of the Banking Department of BNM, headed by its then-advisor/manager Nor Mohamed Yakcop, whom later became the Minister of Finance II of the country.
“Because of the scale of these foreign exchange speculative activities losses, the Government was forced to transfer its shares in Telekom and Tenaga Nasional Berhad to BNM at the nominal value of RM1 per share and these shares were immediately revalued by BNM at RM22.10 per share and RM19.30 per share for Telekom and TNB respectively.
“In addition, BNM had to dispose off its Malaysia Airlines shares to a third party at the price of RM8 per share and MISC shares at RM10 per share to Kumpulan Wang Pencen in order to realise the gain.
“If these speculative foreign exchange losses were not real, the Government would not have taken these drastic actions in order to cover the BNM losses at that material time.”
Johari noted that BNM and the country have since come a long way, particularly in instituting the necessary reforms and check and balance with regard to its foreign exchange forward transaction activities.
“I have said enough on this subject and if understanding of the truth is not the objective of the discussion, then there is nothing much I can say on this,” he concluded in the letter.