Malaysia would not have lost three precious months if the government had heeded the DAPís advice in Parliament fo greater flexibility  in the  capital control measures


Media Statement
by Lim Kit Siang  

(Petaling Jaya, Thursday): The Special Functions Minister, Tun Daim Zainuddin has said that a working group within the National Economic Action Council (NEAC) is studying ways to modify the controls placed on the outflow of short-term capital.

He told the International Herald Tribune  that Malaysia was studying two options for replacing the one-year moratorium on the  repatriation of foreign capital invested in shares - an exit tax on the withdrawal of foreign portfolio investments and a system of "most-favoured investors" which would allow investors judged to have a long-term interest in the country more freedom to move money in and out.

Malaysia would not have lost three precious months if the government had heeded the DAPís advice in Parliament for greater flexibility in the  capital control measures.

During the Parliamentary debate on the 1999 budget on October 26, 1998, I had cautioned that the efficacy of capital controls introduced on Sept.1 remained a matter of controversy and reminded the authorities of the views of influential economists that there would have been recovery of growth in the country regardless capital controls had been imposed or not.

Although DAP is not opposed to the capital control measures as extraordinary times may require extraordinary measures, the DAP raised several critical issues about the capital control measures which have an important bearing on restoring investor confidence in Malaysia but unfortunately, these were not given serious  consideration by the government at the time.

DAP had urged the government to  encourage capital inflows - both long-term and short-term - but restrict short-term capital from outflowing within a certain time frame as what the government had done instead was to bar short-term capital inflows totally.  This was akin to locking the stable doors after the horses have bolted. It is short-sighted as in the event the horses (short-term capital) wish to return, they canít as the doors are locked.  Or to put it facetiously,  what is there left to control when there is no capital left.

During the budget debate, the DAP proposed a form of withholding tax, or "exit tax" as mentioned by Daim yesterday, say about 3 % if within a month and then a diminishing amount the longer the capital is retained.  This will ensure that there  will be some capital inflows at least.

In this connection, the following views of  Michael Mussa, the  Economic Counselor and Director of Research Department of the International Monetary Fund (IMF) in Washington on Monday on Malaysiaís capital control measures when releasing the IMFís latest  World Economic Outlook, which forecast a  -7.5 per cent GDP growth for Malaysia for this year and a -2% GDP growth for next year, is worth noting.
 

During the budget debate, the DAP also raised another very important aspect of the capital control measures - whether  the window of opportunity created  by the capital controls were being  fully utilised to undertake structural economic and financial reforms, as eliminating corruption, cronyism and nepotism.  Unfortunately, the answer in this case is a categorical negative.

(24/12/98)


*Lim Kit Siang - Malaysian Parliamentary Opposition Leader, Democratic Action Party Secretary-General & Member of Parliament for Tanjong