We are not once again and for the nth time engaging in dispute over the validity of his claim that capital controls played an important role in Malaysia's economic performance. They DID allow easing of monetary policy at an earlier point than elsewhere in crisis-torn East Asia, made expansionary fiscal policy easier to execute, and likely saved the country from some of the disruptive social consequences experienced in Indonesia, Thailand and Korea. So, let's leave it at that. Malaysia's economic policy makers don't do themselves or the country any great favors by harping on the issue. It merely detracts from the very real accomplishments of the past year, most notably rapid and competent resolution of non-performing loans in the banking system and overall financial system reform now culminating in the consolidation of financial institutions.
Key issues are the value of the ringgit and the possibility of a rekindling of inflation.
The Malaysian currency, pegged at 3.80 to the dollar, at present is arguably the most undervalued currency in East Asia. A 20 to 25 percent gain against the greenback would be the likely consequence were it floated at this point. Moreover, as Asian recovery continues apace and other regional currencies appreciate, the value gap will grow larger. That may be good for Malaysian exporters, but will drive up import prices to a point where inflationary pressures will become a significant concern. Inflation now stands at below 3 percent and in his report on the nation's economy Daim forecasts that it will not exceed 3 percent next year.