top of page
Dr Matahir, Asian Financial Crisis,

Prime Minister Mahathir of Malaysia speaks at the 3rd Southern African International Dialogue October 4th 1999. 


The full text illustrates precisely how a sovereign State has already successfully taken control of  its own currency.


He returns as Prime Minister in 2018 in an attempt to repeat this feat...

We include this transcription here as a factual reference and example of a small independent  State confronting the global banking hegemony and successfully recovering its financial sovereignty

"I believe you are all aware that Malaysia is a multiracial country. More than that the racial differences are heightened because the different races believe in different religions, the indigenous Malays, the biggest group are Muslims, the Chinese are Buddhists and the Indians are Hindus. These religions are usually incompatible.

But to make matters worse their shares of the wealth of the country are also linked to their racial origins. The indigenous Malays are the poorest, owning only one percent of the economic wealth when we gained independence, the Chinese and Indians had 30 percent, the rest being with the British and other expatriates.

Despite these differences the three major races managed to work together to obtain independence. There was a kind of social contract in which, in exchange for citizenship for most of the Chinese and Indians, the Malays should have a bigger portion of the economic wealth.

A decade into independence it became obvious that the indigenous people were not getting a fair share of the wealth. They began to condemn Chinese economic domination.
Tension rose and in 1969 race riots broke out in Kuala Lumpur following an acrimonious election campaign. More than 100 people were killed, motor vehicles and buildings were razed to the ground.

The Government declared an emergency, suspended Parliament and quickly put a stop to the riots. But the Government also studied the causes of racial animosities and decided that the Malays must be given a greater share of the economic wealth while the Chinese and Indians should be given bigger participation in the Government.
An affirmative action programme was initiated to bring the indigenous people to the economic mainstream while the Government invited more Chinese and Indians, largely from the opposition parties to join the Government.

The scheme worked out so well that racial tension was practically eliminated and Malaysians enjoyed almost three decades of stability and economic growth. So successful was the handling of race relations in Malaysia that even the recent recession caused by the currency devaluation and the collapse of the share market failed to spark racial fights as they did elsewhere in Southeast Asia.

But the attacks on Malaysia’s currency and share markets nevertheless damaged the carefully planned redistribution of economic wealth. The still young and friable indigenous business community suffered the most. If the economy is not resuscitated quickly and put back on the growth path, racial antagonism would return and Malaysia would be politically unstable. And political instability in turn would make economic revival difficult.

The Government is acutely aware of this danger of racial tensions, riots and consequent political instability recurring and have to resolve the economic problems caused by currency and share devaluation without disturbing the delicate balance in terms of race relations.
Other countries faced with economic turmoil quickly resorted to IMF help. Unfortunately the IMF wants to use the loans given by it to force through its so-called economic reforms. For the IMF affirmative action, the active Government intervention in the distribution of economic wealth between races, is unacceptable. The economy must be completely ‘free of Government interference and furthermore it must be open to total and unrestricted foreign participation.

The result would be to deprive the indigenous people in particular of their share in the business sector and the wealth accruing from it. The Chinese on the other hand might still retain or even enhance their share.

The IMF solution is therefore not for Malaysia. We have to devise our own solution so that the Government can continue with the eradication of poverty among all races and elimination of the identification of race with economic function - the so-called New Economic Policy which had so successfully created a stable and prosperous Malaysia.
To restore the economy in the face of attacks by currency traders and share market manipulators, the Government set up the National Economic Action Council (NEAC). The NEAC studied the impact of the devaluation on the economy and came up with numerous proposals on resuscitating the economy. The banking and corporate sectors had to be reformed so as to be more resilient. Imports were curtailed while exports were stimulated. Consumption of imported sugar, milk and wheat flour was reduced. Price control was fully enforced to prevent undue inflation. Retail prices of food and goods were monitored closely so as to ensure no profiteering took place. The retrenchment and unemployment figures were scrutinized for signs of recession.

Statutory reserves of banks which stood at 13 percent were reduced by four percent to improve banking liquidity. Hire-purchase terms were also improved. Property, vehicles and retail sales were boosted through foregoing taxes during Government endorsed sales carnivals. Studies were made to improve food production as the biggest import item for the country is food.
The performance of the Stock Market and individual companies were also studied so as to know the effect of the downturn on them and to help them if necessary An asset management company was set up to buy over Non-Performing Loans in order to relieve the banks and help the companies to turn around. A company was also set up to finance banks. Mergers of banks and of stock broking companies were encouraged.

Sources of funds within the country were identified and assessed so as to reduce the need to raise funds abroad. Malaysia has one of the highest savings rates in the world i.e. 40 percent. This money could of course be put to better use so as to maximise returns. In the end it was found that domestic funds were sufficient to finance much of the recovery process and borrowing abroad became less urgent.

Many more studies and actions were undertaken so as to minimize the impact of currency devaluation and the fall in share prices. However, despite all that was done or could be done the devaluation of the currency and stock market’s near collapse placed the country in a very difficult position. In all, the country lost about 50 billion US Dollars in terms of purchasing power of imports and 150 billion US Dollars in market capitalization. If the currency devalued further the economy could be so weakened that we would have to turn to the IMF and accept its terms.

A solution had to be found which would protect the country from the rapacious currency traders and stock market manipulators. Malaysia actually had some experience in currency trading. In the early 80’s the Central Bank traded extensively in the currencies of Europe, America and Japan. It was pure speculation and the funds available were not adequate to move the market. In the end Malaysia lost a lot of money and decided to get out of the business. But the knowledge gained was useful nevertheless.

Malaysia studied the mechanism of currency trading thoroughly. It became obvious that the free convertibility of the local currency, the Ringgit , which facilitate trade is also the Achilles heel which exposed us to the attacks of currency traders. We have to stop the free convertibility of the Ringgit and to reassert the sovereignty of the Government over our currency.

Apparently no cash is involved in currency trading. When money is sold or bought the figures on the bank’s computers move and the buyer gets the figures representing the amount of money credited to him. Since the money is only legal tender in the issuing country actual money is held in banks in the issuing country. The foreign hank would instruct the domestic bank to credit the money to the buyer’s account. Clearly the buyer can only have the money if the domestic bank credits it to his account.

To stop the trade in currency the local banks were instructed by the Central Bank not to transfer any foreign-owned Ringgit held by foreigners except during the first month of the control. Effectively this made the foreign-owned Ringgit worthless unless it is transferred to a local account in the first month. After that no more transfers would be allowed.
Thus money belonging to foreigners held in their accounts in domestic banks would be useless after one month if it was not already transferred. If it was transferred it meant that foreign owned Ringitts would have been repatriated and would be available for banks to lend. Billions of Ringgits were repatriated in this way. Once repatriated it could not be taken out of the country again as it would not be allowed to return. Taking out the Riggit would render it useless as it could not be legal tender in any other country. And no one would accept it in exchange for other currencies.

This meant no Ringgits would be available outside the country for currency traders to borrow and sell. Trading in the Ringgit stopped and the Government was then able to fix the exchange rate within the country. Anyone needing foreign currency to pay for imports can change their Ringgits for foreign currency at the Central Bank. On the other hand if exporters earn foreign currency they can change into Malaysian Ringgits at the Government fixed rate at the Central Bank or authorised bank. All the while the Government would keep track of all incoming or outgoing money in whatever currency.
Had the Government fixed a high rate for the Ringgit exports would be costly and there would be a black market in foreign currencies. A low exchange rate would make import more costly and result in inflation. The Government fixed a rate that is neither too high nor too low.

Once the rate is fixed businesses can operate without the uncertainties of fluctuating exchange rates and the need to hedge. The return of all the Ringgits from abroad meant the banks have plenty of money to tend. Interest rates could therefore be reduced without fear of traders devaluing the currency further. Businesses could borrow and could repay loan, The rapid rise in Non Performing Loans was reversed. Debtors became solvent and could borrow again.

To recover fully the slide in the price of shares must also be stopped. Initially, the Government disallowed short-selling on the Kuala Lumpur Stock Exchange. But the short-selling went on as Singapore had opened a market in Malaysian shares without the consent of the Malaysian Government. They were able to continue short-selling and consequently the share prices kept on dropping. As a result our companies and bank were in distress as margin calls could not be met, and debts could not be paid.

Malaysia had to stop the operation of the so-called Central Limit Order Book (CLOB) in Singapore in order to make currency control effective. To avoid reporting changes in ownership of shares through sales on the CLOD, all shares were registered in the name of nominee companies on the Malaysian Stock Exchange. We could not track the transactions on the CLOB and so short-selling went on, depressing our share prices. To stop CLOB we made it necessary for all shares to be registered directly in the name of the substantive owner. Transactions not so registered will not be legally recognised. Nominees were not recognised. Trade on the CLOB stopped immediately and the Composite Index of the KLSE climbed rapidly. It is almost 50 percent higher than when CLOB was operating.

We also stopped repatriation of the proceeds from the sale of shares for one year. Thus we stopped the possible massive withdrawal of capital from KLSE by foreign investors which would have caused a severe plunge in the index and serious loss of market capitalisation
It was believed that when one year was up there would be a massive outflow of capital. But so good is the performance of the Malaysian economy after controls that there was only a little outflow, The stock market remained sound and the banks and companies were released from the pressure of bad loans. Besides the Asset Management Company and the bank re-capitilisation exercise helped the banks and the companies to deal with non-performing loans.

The efforts to revive the economy did not end with the stoppage of currency trading and shares short selling. As I pointed out numerous other steps were taken to bring back the growth performance of the Malaysian economy. But the most important steps were the frustrating of currency traders and short selling on CLOB.

Once selective control of capital flows were put in place ace the effect was quite dramatic and immediate. The Executive Committee of the NEAC watched the data daily, and what we saw was very encouraging. Firstly the foreign reserves up rapidly until it is now about 32 billion US Dollars against 20 billion when we started. Loans given out by banks picked up fairly well, vehicle and property sales went up, infrastructure work started again. The contraction of the GDP slowed down and we achieved a growth of 4.1 percent in the 2nd Quarter of the year.

We are on target to achieve one percent growth in 1999 although various experts predict bigger growth of up to four percent.
The stock market index rose from 262 points on September 1st 1998 to over 800 at one time. It has now come down to around 700, relieving both the banks and the companies of much of the NPL.

While most of the indicators are positive, the economic turmoil precipitated by the currency traders and stock market manipulators destroyed much of our achievement in correcting the imbalance between the economic performance of our multiracial population. While everyone was hit by the downturn, the indigenous businessmen were hit most badly. The big corporations they had successfully set up were unable to withstand the burden of debts they carried. They were forced to sell off to the non-indigenous people and this of course undid much of the redistribution we had achieved. The indigenous middle class, small compared to he non-indigenous, practically disappeared. And once again we find the indigenous people only among the low paid workers, hawkers and petty traders.

Now that we have to start all over again and it is not going to be easy. Already our affirmative action has been labeled cronyism. To our foreign detractors affirmative action only benefits the family and friends of the Government, in particular the Prime Minister. Explanations given to prove that it is not so have been totally ignored. The western Press, the IMF and other agencies in the west kept on repeating that our New Economic Policy directed at restructuring our society benefits only the rich friends and families of Government members.

Yet in truth, the New Economic Policy benefits every single indigenous person and even a fair number of non-indigenous people. Obviously the policy cannot make everyone of these deprived people millionaires. They benefit according to their own capability. Thus everyone could get free education and scholarships some could progress beyond secondary schools, while others could go to universities at home and abroad. Others went into business while others went out to acquire and manage billion dollar enterprises and were even able to venture out to acquire enterprises and were even able to venture abroad. Others went into business as a result of the opportunities, licences, premises and capital made available by the Government. Some could only manage small businesses’ while others went out to acquire and mange billion dollar enterprises and were even able to venture abroad. That some indigenous businessmen could rise to such levels depended on their abilities. Opportunities are created by the Government for all but obviously not everyone would be able to avail themselves of these opportunities and profit from them.

But the foreign detractors and their local supporters see everyone of the indigenous businessmen as cronies of the Government. That many of these people failed miserably and some of them were actually members of the families of Government members or their friends is ignored. Those who succeed were all regarded as cronies and families of the Government members. Even members and strong well-known supporters of the opposition were regarded as cronies or families of the Government they succeed. If they fail then they are not..

Because the affirmative action had produced very successful and therefore very rich indigenous businessmen and they were alleged to be cronies of the Government the foreigners demanded that affirmative action should be stopped. This would create disparities between the races as among the very rich and successful there would not be a single indigenous person.

The real reason for foreign dislike of affirmative action is because most of the highly profitable privatised projects went to the indigenous entrepreneurs in order to balance the surfeit of very rich and very successful non-indigenous entrepreneurs. This policy cuts off the foreigners from getting the privatised projects for themselves. And these areas which they are particularly interested in as they aim to monopolise them worldwide. The impoverishment and subsequent submission of the country to the IMF would have provided the foreign companies with this opportunity. But the Malaysian Government has not submitted to the IMF. We are under no obligation to jettison our New Economic Policy, and our affirmative action programme.

Economic management of the country is not about enriching it only. A country can be made wealthy without the wealth being evenly distributed. It was the extreme disparity between rich and poor in the old capitalist system that brought about the Socialist and Communist revolutions.
In Malaysia it would have been easy to give a free hand to the very dynamic and business oriented non-indigenous Chinese Malaysian to develop and enrich the country. But then the indigenous people would remain poor and have a sense of deprivation. They would be bitter and angry and would rise against people whom they regard as foreigners who had stolen wealth that rightly belongs to them. They would destroy the wealth which had been created and the country would fail to develop. In the end everyone would lose and the country would have to beg for foreign aid and accept the conditions imposed.

After our traumatic race riots of 1969 we in Malaysia are determined to have growth with equity. Our New Economic Policy was successful in achieving this. We are not about to give up this formula simply because the IMF and the Western media think we should do so. Our growth had not been stunted because we had a political and social agenda intricately bound with our economic agenda. We think we can continue to grow with equity by adhering to the objectives of our New Economic Policy, now that we have been able to defeat the attempt to destroy our economy and political independence by devaluing our currency and independence."   (end)

bottom of page