Reserves neither too low nor too high

KUALA LUMPUR: Bank Negara Malaysia has debunked misconceptions surrounding its international reserves.

It dismissed the common misconception that its international reserves are too low.

As at end-2020, the reserves remained sufficient and were neither too low nor too high, Bank Negara said in its annual report yesterday.

Bank Negara said reserve accumulations had moved in tandem with potential foreign exchange liquidity needs of the economy.

“Bank Negara’s international reserves meet the reserves adequacy thresholds but do not siignificantly exceed these benchmarks. They are, therefore, adequate and not excessive.”

Bank Negara refuted the misconception that its reserves could be used to finance the government’s fiscal deficit and pay off part of government debt.

“As a highly open economy, Malaysia is exposed to sudden and sizeable two-way capital flows. We are entrusted to ensure that the impact of these capital flows is well managed, in order to preserve orderly foreign exchange markets and stable macroeconomic conditions.”

It added that depleting its reserves for other purposes would affect Malaysia’s ability to withstand and respond to external shocks, thereby exposing the country to significant risks during periods of stress.

Citing Malaysia’s past episodes of large and volatile capital flows in 2015 and during the 2008-2009 global financial crisis, Bank Negara said it has deployed its reserves to mitigate the significant withdrawal of foreign currency liquidity and ensure orderly functioning of the domestic foreign exchange market.

“This successfully prevented excessive ringgit exchange rate fluctuations that would have harmed the Malaysian economy.”

Bank Negara also refuted the notion that it used the reserves to target a specific level of ringgit exchange rate.

“Malaysia maintains a flexible exchange rate policy where the level of the ringgit exchange rate is market-determined. This allows the exchange rate to play an important role in the economy, particularly to respond to and absorb the impact of external shocks effectively.”

It reiterated that its two-way intervention operations were conducted during periods of ringgit appreciation and depreciation.