Zeti: Over-reliance on ringgit devaluation can cause instability

PETALING JAYA: Bank Negara has warned that any attempt to engineer a significant exchange rate adjustment within a short period of time carries the risk of high destabilising consequences.

“Global imbalances that have been built up over several years need to be unwound by a combination of adjustments in demand, prices and exchange rates,” said central bank governor Tan Sri Dr Zeti Akhtar Aziz.

“Over reliance on the exchange rate to do the adjustment may not only not produce the desired result, but it also risks becoming a trigger factor to causing instability and future crisis.”

Her comments were made on Saturday during a luncheon address at the 2010 Institute of International Finance Annual Membership Meeting in Washington.

Touching on the ongoing debate globally over targeting exchange rates as a solution to the current global imbalances, Zeti said there should be recognised that the foreign exchange market was unlike any other market.

“With a daily transaction amounting up to US$4 trillion, it is the most liquid and dynamic market in the world. It is a market that is prone to excessive movements and overshooting,” she said. “Any effort to engineer a significant exchange rate adjustment within a short period of time carries the risk of highly destabilising consequences.”

Many countries are seen to be trying to devalue the currencies as a way to spark exports and generate employment.

The International Monetary Fund failed to reach a deal on tackling a mounting global tension over looming currency conflict on Saturday with the world’s largest economies.

In her speech, Zeti said generating growth and a long-lasting recovery was the primary priority for the global economy in this aftermath of the recent crisis.

“The massive life support that was provided to avert a deep recession was to be temporary – to provide the opportunity to address the weakness in the system and to rebuild the capacity for a self-sustaining recovery,”’ she said.

“Recent indications are that this prospect has not been realised. The emerging world has, however, performed well with the potential to generate such a sustained recovery. These developments have drawn significant interest to the Asian emerging economies and on their changing role in the global economy and in the international financial system.”

She said the global challenges called for a collaborative approach to strengthen the prospects for a global recovery.

Zeti said the way forward was also to recognise the relative strengths of different parts of the world and the potential to leverage on these strengths.

“The transformation of Asia in this new environment offers the prospects for a greater shared responsibility towards a greater shared prosperity in the world,” she said.