Malaysia’s foreign-currency reserves wouldn’t be affected under a proposal for the International Monetary Fund to become a kind of global central bank

IMF idea flawed, Malaysia argues, but plan won’t affect reserves
ISTANBUL, Oct 7 — Bank Negara governor Tan Sri Zeti Akhtar Aziz said Malaysia’s foreign-currency reserves wouldn’t be affected under a proposal for the International Monetary Fund to become a kind of global central bank.
IMF managing director Dominique Strauss-Kahn has used the fund's annual meeting to suggest making the IMF an international lender of last resort. If the IMF had sufficient funds to lend widely, he argues, nations would have less incentive to build up foreign-currency reserves as a kind of insurance. If countries reduced their reserves, they would have more money to spend to build their economies.
Zeti (picture) said that the flaw in the IMF's reasoning is that reserves, at least in Malaysia's case, come from foreign capital inflows, which vary from year to year. The IMF seems to think, she said, that reserves of countries like Malaysia stem from a policy of building a trade surplus by undervaluing the local currency and building a trade surplus, which governments can more easily regulate.
"They have the wrong perception" that the accumulation of reserves is from trade surpluses, said Zeti in an interview. "It looks like our reserves are very high, but a significant part is short-term [capital] inflows that could reverse." Malaysia's reserves are about US$90 billion (RM315 billion), she said, down from US$120 billion in 2008.
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"A certain level of reserves is important," said Zeti. "Beyond that, it's beyond the control of a small country like Malaysia." Zeti said Malaysia was weathering the economic crisis reasonably well, thanks in part to fiscal stimulus.
She said the country shouldn't start withdrawing support until it saw a turnaround in private investment. "We have to see a private sector-led recovery that's benefiting from more than fiscal stimulus," she said.
Malaysia, which has grown rapidly for 30 years, isn't a member of the Group of 20 nations or the Financial Stability Board, which rankles many in the country. "We want our voice to be heard," she said, adding that perhaps the G-20 and FSB could "engage with regional groups."
Zeti said the financial crisis hadn't thrown Malaysia off its plan to award seven new banking licences to foreigners — the first such award in 40 years — by year-end. Two licences are for Islamic banks, the other five for traditional ones. — Wall Street Journal