Malaysia has been grappling with high exchange rates over the past two years, leading to not only an increase in our cost of living but also prompting many young people to seek better income opportunities in other nations like Singapore and Australia.
Some economists and politicians are urging our government to bolster the value of MYR and take all necessary steps to attract investment flows to Malaysia, as well as accelerate the implementation of structural changes.
While these measures are commendable, they are primarily short-term solutions.
To effectively address the issue of high exchange rates, we must first grasp its underlying complexities.
Understanding the dynamics of exchange rates entails acknowledging the fundamental principles of economics. According to Economic 101, the value of local currency vis-à-vis foreign currency hinges solely on the demand and supply of the local currency in relation to the foreign currency. If the demand for MYR surpasses that of USD, the value of MYR will appreciate, and vice versa. Thus, the crucial question arises: how can we stimulate greater demand for MYR? One solution lies in Malaysians reducing their expenditure on foreign goods and services while encouraging foreigners to spend more on Malaysian goods and
services. This can be discerned from the Malaysia Balance of Payment account, which illuminates whether Malaysians are net spenders on foreign goods and services or vice versa. Such insights can facilitate policymakers in devising long-term strategies to fortify our exchange rate. It's crucial to keep in mind the tenet of economic policy 101: while everything can change in the long run, there are limitations to the changes that can be made in the short run.
The challenge lies in our propensity for instant gratification, which may not yield lasting impacts. Much like treating frequent migraines with painkiller medicine provides temporary relief, but fails to address the underlying cause, short-term fixes for high exchange rates might offer fleeting respite without tackling the root issues.
Similarly, to tackle our high exchange rate problem effectively, we need enduring solutions. The root causes can be readily identified in Malaysia's balance of payment accounts, which meticulously record the flow of money in and out of the
country. A close examination of the 2023 balance of payments account, as well as the preceding three years, reveals glaring issues that demand attention in the long run.
Firstly, while Malaysia maintains a positive balance in the production of goods for export compared to imports, the surplus remains stagnant. This stagnation is primarily attributed to our reliance on exports of crude oils and palm oils. To sustainably increase exports, we must diversify our production to include goods in high demand globally, particularly technology-related products. Achieving this necessitates a robust human capital development policy and a thorough reevaluation of our education system.
Secondly, the production of services by Malaysians for foreigners lags behind the demand for overseas services, resulting in a negative net contribution to our balance of payments for the past three years. Although there has been a reduction in these negative contributions, they still amounted to RM30 billion in 2023. The focus should be on cultivating skilled workers capable of providing high-quality services, especially in transportation. Upgrading Malaysia's airports and seaports to serve as hubs for Asia can significantly enhance our service sector.
Thirdly, the primary incomes section in the balance of payments reveals a deficit, with payments for expatriates outstripping receipts by Malaysians. This indicates a shortage of highly skilled workers serving multinational or international companies. We must stem the brain drain and elevate the quality of our human capital to meet the demands of the global job market.
Lastly, the secondary income section shows a negative contribution due to remittances sent abroad by Malaysian workers, indicating an over-reliance on foreign labor. This underscores the urgency of transitioning to automation and encouraging locals to fill low-skilled positions, rather than perpetuating dependence on cheap foreign labor or increasing refugee populations.
These four key areas play pivotal roles in determining demand for MYR and consequently influencing the exchange rate. It's imperative to focus on long-term solutions rather than quick fixes like boosting foreign investment, which may prove transient. We must prioritize initiatives that bolster human capital development and enact effective governance and laws to foster growth and retention of talent. As James Clarke aptly put it, a statesman thinks about the next generation, not just the next election. All policymakers must act as good statesmen, for Malaysia's future lies in their hands.
*Professor Dr. Tan Peck Leong, Arshad Ayub Graduate Business School, University Teknologi MARA