Combating the falling Ringgit and rising cost of living

In search of a plan

With multiple agencies downgrading Malaysia’s 2023 GDP outlook, the Ringgit is continuing to slide, and the cost of living is still on the rise. Immediate attention is required.

Currently, the Ringgit is at 4.68 to the USD, and has been trending towards 4.70. Food prices are increasing much faster than the headline inflation rate of 2.8% indicates. People are financially suffering, and these issues need to be solved urgently.

1.      Bank Negara Malaysia (BNM)

BNM will be forced to raise the Overnight Policy Rate (OPR) once again in the very near future, if it is move Malaysia’s relative negative interest rates into the positive, compared with US rates. That would make the Ringgit more attractive, which may entice more capital inflow.

However, such an interest rate hike would devastate househols and businesses, where loan repayments will become much higher. For businesses, these rates rises will increase the cost of doing business and further strain financial liquidity, slowing down the velocity of money, thus slowing down economic activity.

Local banks must look at new methods to weaken the impact of loan repayments to their customers. Not only the timeframe of loan repayments could be extended, but repayments could be made on a weekly basis to lower the base loan principle quicker.  

Raising the OPR rate is not the only thing BNM can do to stem the slide of the Ringgit. BNM could increase its holdings of gold. Malaysia’s physical stock of gold stands at 38.88 tonnes at the end of 2022. This is one of the lowest gold holdings by any central bank in the region. Gold acquisition would also act as a hedge against inflation, and lessen the Ringgit’s dependence upon the USD. Malaysia produced 1.8 tonnes of gold in 2022, and could easily expand upon this, through exploiting untouched deposits still in the ground.

2.      The introduction of a minimum income net

Malaysia must consider introducing a permanent minimum income net for those in need. This would offset some of the cost of living increases for many. Such a policy may cost in excess of RM 35 billion per annum, around 8.0% of government expenditure.

3.      Financing the minimum income net

There are ways and means the present government could finance the required expenditure for such a welfare program. Quite simple, the government could do three things:

a.      Government spending: The finance ministry could set up a “razor gang” to look intensively at all government expenditure. The group must cut all unnecessary expenditure. This could start with cutting unnecessary subsidies that don’t really benefit the poor. The expenditure of each ministry can be can be recalculated through “zero based budgeting” to determine how much each ministry’s budget allocations can be reduced without affecting performance.

b.      The government must look at leakages and work on ways they can be plugged, or at least minimized. This would include expenditure on unnecessary programs, wastage, and leakages through procurement programs.

c.      Finally, the government must look at corruption along the whole spectre of government organizations.

4.      Redefining the Islamic banking system

Malaysia is blessed with an Islamic banking system (IBS). The IBS can play a frontline role in assisting the Rakyat weather the rising cost of living. The IBS could uncouple its lending costs to consumers, from prevailing interest rates. This would truly uncouple the IBS from the shadow of riba. The banks could also share their bumper profits with consumers, by lowering the costs of borrowing. This is true taqwa, a noble objective of the IBS.  

As most Islamic banks are GLCs, or quasi-GLCs, the ministry of finance could easily influence the boards of banks to pursue these initiatives.

5.      Ensuring exports receive remittances

According to BNM, corporations and exporters have retained more proceeds in foreign currencies, indicated by the rising foreign currency account balances, which could lead to imbalance in market flows. Procedures need to be established to encourage exporters to repatriate funds for exports in Ringgit. Errant corporations could be forced to deal in irrevocable confirmed letters of credit, if they don’t repatriate funds from external sales.

6.      Move away from the USD in trade

Malaysia must move away from the USD and trade in ASEAN currencies. The days of the USD as the prime international trading currency are numbered and Malaysia could begin developing bilateral and multi-lateral international trade payment agreements. Malaysia could make overtures to join the BRICS trade grouping to expand trade as well.

7.      Deregulate markets

Monopolies, tariffs, and APs on the import of food must be eliminated to reduce the cost of food. Supply chains must be streamlined, where middlemen, indent brokers, and rent-seeking companies with import licenses must be eliminated where possible to reduce costs. These are all unnecessary draconian restrictions on trade, the nation can no longer afford. Saving can be passed onto consumers.

8.      Food security

With more than 60% of food requirements imported, food security under a falling Ringgit must become a high priority. Malaysia must invest in food production in a way that has never been done before. This can be undertaken through a two-tier approach.

a.      Rural youths should be immediately given the opportunity to learn and train in agricultural activities, including market gardening, cash crops, cattle and goat herding, poultry, and aquaculture. They must be trained to become agro-entreprenurs and focus upon market-sectors where there are shortages. Malaysia must have an SME and small holder revolution, as opposed to allowing GLCs to control Malaysian agriculture.

b.      Larger corporations could focus on hi-tech vertical and/or factory farming of market vegetables in urban areas, close to consumers. These can be set up and operational very quickly with ‘off the shelf’ technologies.

c.      Community urban market gardening should be massively expanded and encouraged by local government, which could supply land plots to community groups.

Land availability is no a question in Malaysia. CLCs like Gamuda, Sime Darby, and MRCB have massive land-banks. They could provide land to entrepreneurs for agro start-ups, so they could quickly enter the market.

This may not be THE plan, but there needs to be something on the table to start from.

Here are my suggestions.

Originally published in FMT 3rd July 2023

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