The Malaysian government has been defending the present undervalued ringgit by insisting that it is required in order to maintain orderly and competitive international trade transactions. Former prime minister Dr Mahathir Mohamad had correctly responded to this argument by saying that the revaluation of the ringgit could be done by adjusting the exchange rate of the peg upwards without resorting to any new exchange mechanism.

What is the subject of contention here is the unrealistic rate of exchange of the present peg of RM3.80 to one US dollar and not the peg itself. Apart from the fact that this undervalued peg is discriminatory and has been the source of serious distortion in resource allocation, it is also expensive to maintain.

The present inter-bank liquidity in the Malaysian money market is estimated to be about RM130 billion with an equal amount being held by Bank Negara and placed back into the market by way of reverse repositioning in order to mop-up half of the liquidity.

In other words, the actual overall liquidity in the market would otherwise have been RM260 billion. The surplus, by and large, represents our trade surplus and the inflow of 'hot money' which in the past six months has been increasing at the rate of RM4 billion per month on the average.

Local money in ringgit denomination will not yield any income to Bank Negara as the money represents the bank's own indebtedness to members of the public. Much of it could have otherwise been invested back into foreign currencies such as the Euro, the dollar and the Japanese yen.

But there is not much avenue for this local money to be converted into foreign currency as the ringgit is not traded on overseas market and there are not enough short-term investment papers for foreigners to invest apart from equities.

Various measures taken by Bank Negara to neutralise these strong inflows of speculative money has not been successful. It has, therefore, to continue absorbing this inflow of 'hot money'.

The implication of this is that the undervalued ringgit peg carries a heavy carrying cost to the Malaysian central bank. Taking the current US dollar interest rate of 2.5% as a proxy, this is about RM5.4 billion per year.

Put it in another form, it would mean that the country is losing that much in subsidising the exporters in order to be 'competitive' in the export market. We must remember that nothing is for free in this world.