MIER: Need For More Flexible Exchange Rate Policy

A more flexible exchange rate policy is needed to boost the undervalued ringgit, Malaysian Institute of Economic Research (MIER) executive director Dr Mohamed Ariff said Tuesday.

"The ringgit is currently undervalued compared with other regional currencies despite the fact that the ringgit's fundamentals are much stronger," Mohamed Ariff said. This, according to him, showed that other regional currencies were more flexible compared with the local unit, which has the possibility of trading higher.

"Hence, I would argue that we should go for a more flexible exchange rate policy and allow the local unit to appreciate further," he said on the sidelines of the MIER National Economic Outlook Conference 2007-2008 here. "The ringgit should be given more reach than what Bank Negara has given now," he added.

According to him, the local unit could strengthen to RM3.50 per US dollar by the first quarter of 2007 and closer to RM2.50, where the ringgit was before the 1997/98 financial crisis, in the foreseeable future.

At 3.17pm today, the ringgit was traded at RM3.56 per US dollar, the highest since its depegging against the greenback on July 21, 2005.

In the interim, the exchange rate policy would take centre stage and influence the macro economy here due partly to external circumstances and partly because there was a lot of room for adjustments, Mohamed Ariff said.

He said the current scenario was that the ringgit was appreciating only against the US dollar but declining versus the regional units. "The fact is that the ringgit is not adjusting as much as it should. In fact, the other regional currencies are adjusting even more. They are appreciating faster than the local unit," Mohamed Ariff said.

Even the Chinese renminbi, which was depegged at the same time as the ringgit, has moved up by about seven percent versus the US dollar but the local unit has appreciated less than that against the greenback, he said.

Mohamed Ariff said a strengthening ringgit would have adverse implications for the export segment, making it less competitive. "But that is the global scenario now. All our competitors are East Asians and their currencies are appreciating along with us. So, we are not going to lose out against our competitors," he said.

In order for Malaysia's goods to be competitive in the international market, one should not ride on the exchange rate but on productivity and efficiency, he added.

-- BERNAMA