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Reduce reliance on greenback for trade, diversify foreign currency reserves: Economists

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PETALING JAYA: Malaysia needs long-term strategies to stop over-reliance on the US dollar and must diversify its foreign currency reserves if the country wants to achieve economic stability, said Universiti Tun Abdul Razak economist Prof Dr Barjoyai Bardai.

He added that instead of relying on the US dollar for trade, Malaysia should consider using alternative currencies to help reduce costs to consumers.

“Indonesia has taken proactive steps to reduce by 30% the amount of US currency it uses for trading. More countries are turning away from the greenback because of its volatility and are using other currencies for trade.

“At present, most financial transactions, international debt and global trade invoices are denominated in US dollars and close to 60% of global foreign exchange reserves we hold are in dollars as of 2021.”

He said the worry is not about how we can lower the exchange rate for the US dollar from its current high of RM4.72, but for how long the US Federal Reserve will continue to increase interest rates to manage its high inflation.

The only silver lining is earnings of Malaysian exporters have increased with the shrinking ringgit, and they make about 15% more by selling in US dollars, Barjoyai said, adding that the main worry for exporters will come when inflation and stagnation hit consumers in the US and Europe, and they start cutting down on consumption. This will affect demand for raw materials sourced from countries such as Malaysia.

“We should look at gold or other foreign currencies to allow the nation to be protected from (US currency) volatility. Cutting this reliance will not happen overnight, so the government must formulate medium and long-term policies to achieve it.”

Barjoyai said Asian nations could create a basket of trading currencies which will reduce the import cost of items in each nation.

The inflation for the period January to August increased by 3.1% compared with the same period last year. It was driven by strong demand, commodity prices that remained high and disruptions in global supply chains.

Among the groups in the consumer price index (CPI) that recorded increases were food and non-alcoholic beverages (5.1%), transport (4.5%) and restaurants and hotels (4%).

The increase in the food and non-alcoholic beverages group for the January to August period was mainly contributed by an increase in the subgroup of meat (9.2%), followed by milk, cheese and eggs (7.3%).

Sunway University economics professor Dr. Yeah Kim Leng said the country will have no respite from the ever-increasing US dollar as long as the Federal Reserve continues to increase interest rates to fight inflation.

He said there are options available. For example, the central bank can intervene to dampen the rise of the US dollar. But at what cost to the nation’s foreign reserves remains unclear.

“Trading in the Euro and Renminbi could be another option. It will benefit consumers and the cost of goods will no longer be priced in the volatile US dollar but in more stable currencies.

“Nations have started cutting their reliance on the US currency because it has been weaponised. This has caused inflation to go up, thus hitting the people’s pockets.”

Yeah said the country has to urgently look into the substitution of food imports as well as source food from countries that sell it cheaper.