An open letter from Johari to Dr Mahathir

By Johari Ghani
 
Dear Tun,

Many of my friends who are readers of Tun’s blog, have contacted me for clarification regarding Tun’s latest writing entitled “Dear Mr Johari” on the issue of speculative foreign exchange transactions. At first I told them I had already said enough about the subject matter and I did not want to prolong the discussion on this issue, especially since there is an independent team at PDRM (Royal Malaysian Police) investigating this matter.

The subject of foreign exchange activities can sometimes be too technical a subject for the ordinary man on the street to understand, particularly in relation to the role of Bank Negara Malaysia (BNM) in the management of the country’s international reserves. However, I felt it best that I try to hopefully close the discussion by putting the matter in simple perspective for ease of understanding.

It is very important for the public at large to understand the difference between speculative foreign exchange activities and the orderly management of the foreign exchange market. The speculative foreign exchange activity, to put it in simpler words, is a kind of “gambling” activity with the hope of quick returns. The orderly management of foreign exchange market, however, is very much different in that it is a facilitation of liquidity by BNM to market participants in the country for the purpose of mitigating imbalances with respect to the ringgit’s supply and demand in the market.

To put the matter in perspective, it was highlighted in an internal audit report prepared by BNM’s internal auditors dated Jan 21,1994, that the foreign exchange operation division of the Banking Department in BNM was involved in voluminous foreign exchange trading activities so much so that the monthly maturing buy and sell foreign exchange transactions which amounted to an average of RM140 billion in 1992 had increased to a staggering RM750 billion in 1993!

The substantial portion of such transactions was very speculative in nature and did not reflect BNM’s mandate to maintain orderly condition of the foreign exchange market as per Section 4 of the Central Bank of Malaysia Ordinance 1958.

The said internal audit report also highlighted that the magnitude of such foreign exchange speculative transactions was considered very excessive given that the shareholders’ fund of BNM was only RM4.4 billion and the country’s international reserves were merely RM43.98 billion at that material time. These speculative activities had caused BNM to suffer foreign exchange transaction losses amounting to RM31.5 billion during the period under review.

The audit report also stated that the voluminous speculative foreign exchange trading activities that the central bank had undertaken during that time were carried out by the foreign exchange division of the Banking Department of BNM, headed by its adviser/manager then, a Mr Nor Mohamed Yakcop, who later became the minister of finance II of the country.

Because of the scale of these foreign exchange speculative activity losses, the government was forced to transfer its shares in Telekom and Tenaga Nasional Berhad to BNM at the nominal value of RM1 per share and these shares were immediately revalued by BNM at RM22.10 per share and RM19.30 per share for Telekom and TNB respectively.

In addition, BNM had to dispose off its Malaysia Airlines shares to a third party at the price of RM8 per share and MISC shares at RM10 per share to Kumpulan Wang Pencen in order to realise the gain. If these speculative foreign exchange losses were not real, the government would not have taken these drastic actions in order to cover the BNM losses at that material time.

BNM and the country have since come a long way, particularly in instituting the necessary reforms and check-and-balance with regard to its foreign exchange forward transaction activities. As a result of these reforms, despite volatility of capital flows and the ringgit in the recent period, our economy continues to remain resilient and BNM’s ability to safeguard the financial and economic stability remains uncompromised.

In fact, our international reserves have continued to strengthen ever since and as at end November 2017 the reserves amounted to US$101.9 billion and are able to support 7.5 months of retained imports. I have said enough on this subject and if understanding of the truth is not the objective of the discussion, then there is nothing much I can say on this.

I wish Tun and family the very best of health and a very Happy New Year; may the New Year be peaceful and prosperous for all of us Malaysians.

Johari Abdul Ghani