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The Asian Financial Crisis — 1997 to 2000

Malaysian Capital Controls of 1998

Explain why Malaysia restricted money leaving the country in September 1998, how its route differed from the IMF route, and what different sources judged the controls achieved.

Before you start

What you'll be able to answer

  1. Why did Malaysia restrict money leaving the country in September 1998?
  2. How did Malaysia's route differ from the IMF route its neighbours took?
  3. Did Malaysia's controls work?

Where this sits

The Asian Financial Crisis — 1997 to 2000 · this module is lit

  1. 2 Jul 1997Thailand stops holding the baht at a fixed rate to the dollar and lets it float
  2. 14 Aug 1997Indonesia lets the rupiah float
  3. 20 Aug 1997The IMF approves a loan of about $3.9 billion for Thailand
  4. Nov 1997The IMF approves a loan of about $10.1 billion for Indonesia
  5. Nov 1997Indonesia closes 16 banks
  6. 4 Dec 1997The IMF approves a loan of about $21 billion for Korea
  7. 24 Dec 1997Korea's programme is speeded up
  8. 21 May 1998President Suharto of Indonesia resigns
  9. Aug 1998A crisis in Russia spreads panic beyond Asia
  10. 1-2 Sep 1998Malaysia brings in rules on money leaving the country
  11. 1999Growth returns in most of the region

In September 1998 Malaysia set out to win back control of its interest rates

On 1 September 1998 Bank Negara Malaysia, Malaysia's central bank, announced measures to regain monetary independence: the freedom to set interest rates to suit Malaysia alone. During the crisis Malaysia, like its neighbours, had used high interest rates to try to hold up its currency, the ringgit, records the Independent Evaluation Office of the International Monetary Fund (IMF), which lends to countries that cannot pay their foreign bills. Now, the central bank said, the crisis had deepened and spread to other continents.

Predict first

What do you expect Malaysia's central bank mainly wanted that freedom for?

Malaysia at first tightened policy as the rescued countries did

Thailand, Indonesia and South Korea took IMF loans in 1997, which came with conditions such as higher interest rates for a time, government budget targets, and closing or rebuilding weak banks. Malaysia had not taken IMF loans, as a US Congressional Research Service report notes; the service writes reports for the US Congress. At first it tightened policy much as the rescued countries did, yet its prime minister had railed against what he called foreign speculators and the IMF, the same report notes.

In the IMF's later account Malaysia began the crisis in better shape than the others, with less foreign debt, lower inflation, higher savings, a budget surplus and healthier banks and firms. Even so it suffered as they did: investors lost confidence, money flowed out, its reserves of dollars and other foreign money fell, share prices collapsed and the ringgit fell sharply.

Malaysia used high interest rates to try to hold up the ringgit, while its economy shrank

A higher interest rate pays more to anyone holding ringgit, so fewer want to sell them for dollars, and the currency falls less. But high rates also make borrowing more expensive for firms and households at home. When, and under what conditions, high rates can defend a currency had not been settled by 2003, the IMF's evaluation office notes; theory points both ways.

By September 1998 the central bank described falling currencies, share prices and exports across the region feeding on each other and cutting output sharply. It said Malaysia's own economy was contracting, and it wanted lower interest rates to support a recovery.