The ringgit is the official currency of Malaysia at independence. The central bank is established in 1958. The Chinese minority controls most of the lending and finance institutions. Agricultural exports are the primary source of hard currency. The absence of foreign exchange controls is key to attracting foreign direct investment.
The New Economic Program (NEP) promotes cheap loans and finance for local Malay entrepreneurs. Malaysia institutes centralized control of the currency exchange rate. The NEP's goals call for using monetary policy to sustain steady growth rates with low inflation.
Malaysia floats the ringgit in international currency markets in 1973. It is initially valued at RM2.45 per U.S. dollar. The central bank, Bank Negara Malaysia (BNM), intervenes in the currency markets to steady its value. Foreign ownership of financial institutions is limited to 30 percent by law. Malaysia embarks on heavy external borrowing to finance industrialization.
The corporate and government bond markets expand in the early '80s. The government practices fiscal restraint and manipulates the exchange rate to control the economy, periodically buying dollars to depreciate the ringgit and boost Malaysian exports. Inflationary forces remain contained at moderate levels throughout the decade.
The 1989 Banking and Financial Institutions Act places all banking and non-bank lending institutions under the supervision of the central bank. The ringgit is remarkably stable throughout the '80s and early '90s. A loose amalgam of government policies and market forces keeps the financial system running despite a lack of transparency in the operation of capital markets.
The Asian financial crisis of 1997 sends the value of the ringgit into free fall. Mahathir rejects IMF guidelines for recovery. The exchange rate is fixed at RM3.8 per U.S. dollar. All banking units are consolidated into six large banks. The Danaharta, a government-owned asset management company, is established to buy and rehabilitate non-performing loans.
Malaysia's strict control of the economy sees it through the Asian crisis. The fixed exchange rate creates a safeguard against currency fluctuations. Active debt management by the Danaharta keeps external debt under control. By 2001, Malaysia liberalizes its financial system to allow 49 percent foreign ownership of financial institutions. The government withstands pressures to devalue the ringgit.
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