Demonetization of the ringgit may be a plausible option

Since the formation of the Pakatan Harapan government in Malaysia, there has been a palpable increase in efforts on the part of the new leadership in Putrajaya to shed light on the financial scandal that is the 1MDB, which is closely linked to former prime minister Najib Razak. Quite understandably, the new government has made it a major priority to come to grips with the scale and magnitude of the scandal, while it seeks to ensure that the fundamentals of the economy are not seriously compromised.

Last Friday when law-enforcement authorities in Kuala Lumpur disclosed that police had recovered 114 million ringgit (US$28.6 million) in cash from a condominium linked to Najib, it raised further questions of just how widespread is the hoarding and laundering of illicit cash in Malaysia. Days later, Finance Minister Lim Guan Eng publicly quipped that Najib should account for the 7.2 billion ringgit supposedly invested in PetroSaudi, the 11.9 billion ringgit raised to invest in TRX, another 1MDB-linked venture, as well as approximately 13.9 billion ringgit supposedly to be used for acquisition of power plants in Malaysia.

The financial questions swirling around the 1MDB (1Malaysia Development Berhad) scandal quite simply may be only the tip of the iceberg of illicit flows of Malaysian currency and cash in and out of the country.

Putting aside popular folklore within the country about the widespread prevalence of “black money” that goes undetected and unaccounted for within the formal economy, it raises the question whether Malaysia might be well served to consider demonetization, especially of the higher-denomination banknotes currently in circulation, in order to make obsolete all the illegally acquired and hidden cash being hoarded and converted into properties and other assets, and which continue to make up the vast amounts of monies flowing out of the country illegally.

Indeed, as recently as 2017, Professor Jomo Kwame Sundaram – now one of five members of newly elected Prime Minister Mahathir Mohamad’s select advisory group known as the “Council of Eminent Persons” – noted that according to Global Financial Integrity, “Malaysia lost up to about US$431 billion (1.8 trillion ringgit) in illicit outflows between 2005 and 2014.”

To be sure, demonetization of certain banknotes is not going to be a panacea for erasing corruption and halting the flow of illicit funds, let alone eradicating the “black economy.” Yet, seen as part of a broader set of strategies and tools to reign in extant corruption and laundering of hitherto undetectable illicit funds, demonetization of the larger-denomination banknotes should not be summarily ruled out as an option.

Indeed, the country has had some prior experience with decommissioning the 500- and 1,000-ringgit denominations after the 1997 Asian Financial Crisis.

Demonetization in India

That said, skeptics of any demonetization effort may be inclined to point to India’s recent challenges beginning in late 2016 with demonetization of its 500- and 1,000-rupee banknotes. In India’s case too, much of the stated motivation surrounded the need to curb “black money” and the illicit economy more broadly.

Indeed, as India embarked on its undertaking on this front, the International Monetary Fund was explicit in its support of the government’s initiative to tackle illicit financial flows and corruption. That there were notable challenges with India’s specific implementation process should not in itself be cast as a blanket indictment of the demonetization strategy.

While any demonetization of the ringgit is not necessarily going to enable the recovery of funds squandered, mismanaged or knowingly misappropriated under the guise of 1MDB investments, the known benefits of a well-executed demonetization process in Malaysia (including, among others, controlling inflation, containing illegal transactions, improving tax collection, undercutting the circulation of counterfeit ringgit, and injecting a healthy dose of investor confidence in the economy) would provide much boost to cushioning the adverse effects of the almost 1 trillion ringgit national debt.

Several days after the aforementioned raid on the condominium linked to Najib, some members of his United Malays National Organization (UMNO) party actually claimed that the funds belonged to the party and should be duly returned. If so, it is indeed quite a fascinating commentary that in an age of mind-numbingly advanced electronic banking, Najib would presumably be having what amounts to bags full of UMNO money lying around in a condominium. (Could it be that these funds were also “donated,” much like the $681 million that was previously uncovered in his personal bank account?)

Suffice it to say that the optics involved in this saga don’t bode well for either Najib Razak or UMNO.

Beyond that, there is reason to pause and consider the prospect of political and party warlords along with their close cronies having had – for all these years – seemingly unfettered access to the national coffers or having very much been a part of contributing to the estimated 1.8 trillion ringgit in illicit outflows from the country between 2005 and 2014.

One of the main mantras of the Pakatan Harapan government has been to institute good governance via transparency and openness. It warrants noting that alongside the investigations, assessments of heretofore undisclosed reports and records, and perhaps yet-to-unfold housekeeping that will be required to come to grips with the financial realities confronting the country, good governance would ring hollow without a concerted effort to flush out the hidden gains of corruption as well as the implementation of safeguards to prevent the continued systemic functioning of the illicit economy.

Some food for thought for the “Council of Eminent Persons.”