Combating the falling Ringgit and rising cost of living

In search of a plan

Murray Hunter

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 households 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.