The Malaysian ringgit fell to its lowest in 25 years against the US dollar on October 19, 2023, the currency dropping 0.3 per cent to 4.7635 per dollar, the weakest since the 1997 Asian Financial crisis.
Many had come out recently to suggest that the ringgit should be pegged to the US dollar as this would prevent a further slide in the ringgit, but this is akin to addressing the symptoms of the problem as opposed to the underlying reason that precipitated the fall of the ringgit.
Unlike the Asian financial crisis, where speculators were shorting the ringgit or short selling the ringgit, there is little evidence of that happening now, at least not in the scale and magnitude that happened in 1998, and therefore the policymakers must look at the problem elsewhere.
While there are external factors far beyond the control of the government, such as the interest rate differentials between the US and Malaysia and the slow recovery of the Chinese economy, it can still bolster its internal resilience to shore up the ringgit's strength.
To inspire both domestic and foreign investors, the government must overtly show that it has a game plan in addressing some of the problems plaguing the economy such as rising prices, widening fiscal deficit, broadening its revenue base, and reducing the operating expenditure.
Investors do not expect the government to address all these structural issues overnight but firm policies with the political will to initiate them must at least be seen by them before deciding on whether they should continue to hold on to the ringgit.
As an example, rising inflation would have the effect of exporters being dissuaded from exporting overseas as they would be able to rake in more profits domestically, but this would have an overall negative effect on the balance of payments and thus downward pressure on the ringgit.
Food import costs have been steadily rising, with an estimated RM75.71 billion in food import bills in 2022. The falling ringgit is also expected to drive up food prices, leaving consumers with little money for other purchases.
This will inevitably have a regressive effect on consumer spending and investment.
To ease the downward pressure on the ringgit, the government needs to drive local agricultural production and agricultural productivity that would bring our import bills down and reduce the price of essential goods.
This would leave more money in the hands of consumers which would bolster consumer demand and investment.
Another factor that has kept the ringgit low is the country's debt.
According to the Ministry of Finance, the federal government's debt at end-2022 amounted to RM1,079.6 billion, or 60.4 percent of the gross domestic product (GDP).
Of this amount, domestic debts totalled RM1,050.1 billion while offshore loans amounted to RM29.5 billion.
If the government's exposure to other liabilities were to be taken into consideration, the federal government's total debt and liabilities at end-2022 would be RM1.45 trillion, or 80.9 per cent of GDP.
The government must advocate spending that would have the biggest multiplier effect on the economy rather than just implementing budget cuts across the board.
It needs to take a serious stance on wastage of funds through leakages and corruption.
Another important factor is the government should broaden its revenue base as the amount of direct taxes and indirect taxes is not sufficient.
Towards this, the government should not hesitate to implement the goods and service tax (GST) as soon as possible.
The GST would certainly add clarity and a roadmap for Malaysia's economic recovery as the certainty of raking in additional revenues into the government's coffers at a time when its financial resources are stretched would bolster investor confidence in the ringgit.
Aside from helping to plug the national deficit hole to the tune of RM1.5 trillion, it will also forestall the shadow economy estimated to be around RM300 billion.
Another factor that Malaysia should look at would be foreign direct investment (FDI) which can strengthen the economy and, MIDA has said that it has adopted focused, targeted, and selective approaches toward attracting investment inflows to ensure quality and high-impact investments.
Malaysia is expected to focus its approach on emphasising investments in new development areas – electric vehicles, smart factories using 5G technology, supply chain ecosystems, and green technology.
It needs to expedite its delivery system and facilitate the inflow of investments into the country to ensure the bounties would accrue to its people without having to frustrate the process through red tape and bureaucracy.
Malaysia's attempts to entice foreign investors into the country come at a time when foreign investors are not starved of options, and therefore it must attempt to facilitate the inflow of investors easily.
The government must address all the structural issues plaguing the economy and the ringgit would automatically strengthen itself.
To fix the ringgit without fixing the economy would be akin to a doctor recalibrating the thermometer when he notices a spike in the patient's temperature without fixing the underlying reasons that gave rise to it.
*The writer was formerly attached to a think tank.