Malaysia, which defied the advice of the International Monetary Fund during the Asian financial crisis two decades ago, is again disagreeing with the agency over how to manage its currency.
This time, it’s about a crackdown in the offshore trading market. In its annual Article IV report on Malaysia, the IMF said the measures contributed to capital outflows, while authorities say they succeeded in curbing volatility and improving the efficiency of the onshore market.
The government disagreed with recommendations from IMF staff to phase out the measures.
“We continue to have strong concern on the Fund’s inflexibility to be receptive and open to new approaches and policy instruments needed to maintain stability and promote financial market development,” Juda Agung, an IMF executive director representing Malaysia along with other Southeast Asian countries, said in the report.
“Our authorities are also deeply concerned with staff’s lack of understanding of the domestic context which can diminish the Fund’s role as trusted adviser,” he said.
A statement from IMF directors accompanying the report was more balanced, with some of them calling for the measures to be phased out, while a few said there should be more support for the government’s approach. Overall, the directors commended Malaysia for its fiscal and monetary policies, which have helped to underpin the economy’s strong performance since last year.
Malaysia has a well-documented history of turning down the fund’s assistance during the 1997 crisis. The government implemented capital controls at the time, which were first panned, but much later acknowledged by IMF officials as being ahead of the curve.
Authorities may have reason to crow once again. The ringgit has gained 10 percent against the dollar since the clampdown on offshore trading in 2016, beating all other Asian currencies except for the Thai baht.
The IMF itself recognized that the measures have benefited the currency, citing the increased hedging opportunities and supply of foreign exchange onshore. Turnoverin the onshore spot, forward, and swap foreign-exchange markets improved, bid-ask spreads narrowed and ringgit volatility declined, it said.