The release of the Bank Negara Malaysia (BNM) annual report for financial year 2004 last week was a non-event. The same applies to its announcement of a series of measures to further liberalise, energise and enhance efficiency of the financial services sector.

What is of prime interest to us is the monetary stance adopted by BNM amid strong opinions to review the undervalued ringgit peg . It is no secret that the Central Bank has been pushed to the wall in having to either review the peg or increase interest rates.

It has been pointed out by various parties that as a mechanism to protect our economy against speculative pressure on the ringgit in the foreign exchange market, the peg has outlived its usefulness.

Like all remedies, a prolonged use will result in side effects that outweigh the benefits. In this case, the peg favours importers and penalises exporters and the general public. It is also expensive to maintain and is now beginning to give rise to imported inflation.

The monetary stance adopted by BNM clearly indicates that it prefers to increase interest rates rather than review the peg, at least during the current year. In support of this monetary stance, BNM announced in its report a package of 'sterilisation' measures to release pressure on the ringgit peg as a result of the strong inflow of speculative money into the economy.

An overall assessment of this monetary stance is that in the first instance, it is quite similar to what China adopted earlier. Secondly, it does not address the problem directly. It is a strategy to buy time. A prescription that is intended to disguise the symptoms rather than to cure the disease itself.

It is not appropriate to use a broad spectrum contractionary prescriptions such as interest rate increase to relieve pressure on the ringgit at a time when the economy is just about to regain its normal strength and resilience.

These measures will not effectively contain imported inflation that is created by an undervalued currency such as the ringgit, neither will they cure the problem of price inflation of strategic commodities such as oil and gas and building materials such as steel.

What they are sure to do is to further create hardship for the general public and businesses. They may, in fact, burst the bubble that has been building in the consumer sector as a result of the aggressive promotion of mortgages, hire-purchase for cars and credit cards by financial institutions particularly during the last four years.

This bubble is becoming quite evident with the increasing number of bankruptcy cases even after the threshold amount was raised to RM10,000 about two years ago.

Revaluation of the ringgit peg, on the other hand, is a more appropriate instrument to employ at the present phase of our economic recovery, particularly in a moderating year such as this. Revaluation of the peg would be a more specific and expansionary prescription.

It would certainly stimulate further growth and encourage new investments in technology that would, in turn, enhance productivity. Revaluation of the ringgit peg is, therefore, the most appropriate remedy.

Apart for ignoring the ringgit peg question, the rest of the measures announced by BNM are to be welcomed and applauded. The creation of the Small and Medium Enterprises Bank has long been overdue. Thailand created a similar institution some five years ago.

With enhanced equity capital, SMEs with viable projects that were once unbankable would now be welcomed by commercial banks for working capital funding. This would have a significant impact on growth and development of SMEs in this country.

The proposed move to merge Export Import Bank of Malaysia and Malaysian Export Credit Insurance Bhd which has been quite inactive for quite sometime already is to be supported. This is on the understanding that there would be a shake-up of key management staff and the acquirement of the relevant skills and expertise.

The rationalisation of lending activities by Malaysian Industrial and Technology Banks and the Malaysian Development and Infrastructure Bank will enable these banks to be more focused in their direction and operation.

Notwithstanding our honest differences in our perspectives on strategy and the choice of policy options, overall, we would like to take this opportunity to commend BNM for its good performance thus far and for its efforts to further improve the financial sector of the country to be on par with the best globally.