The current peg of the ringgit to the US dollar at 3.80 should be maintained until the government can be more certain about the future direction of the world economic slowdown, said a foreign economist today.

However, a flexible monetary policy is inevitable in the next 12 months if the government wants to ensure that the country stays competitive in international trade, said Dr Prema-Chandra Athukorala.

He expected Bank Negara to revert to its polices of the late 1980s to early 1990s where the market is allowed to determine the value of the ringgit.

"The institution can intervene to smooth out any wild fluctuation," said Prema in an interview with malaysiakini today.

Prema, a senior fellow with the economics division of the Australian National University, has written numerous books and research papers on trade, development and macro-economic policy, the most recent of which is Crisis and Recovery in Malaysia: The Role of Capital Controls .

He said the current fixed exchange rate of the ringgit had worked well in reviving the country's economy by providing the market, particularly foreign investors, with 'certainty' for their investments.

"The domestic inflation is still comparatively lower than most countries. Any move to meddle with the ringgit now will send the wrong signal to the market," said Prema.

He added that many people have given too much focus to the exchange rate of the ringgit to the US dollar and failed to understand that it is just one of the many considerations in the country's bilateral trade.

Financial crisis

In October 1998, following the regional financial crisis the year before, the government introduced a series of financial control measures to stem capital outflow from this country. This included pegging the ringgit to the dollar at RM3.80.

Staunch critics predicted that the measures would put the country's economy go into a tailspin but the Finance Ministry reported an annual growth of 7.5 percent last year - a sharp contrast to the -7.4 percent of the year before.

The capital controls have since been gradually lifted, among others the ban on ringgit trading outside Malaysia and the 10 percent exit levy on profits from portfolio investments which are repatriated within one year. However, the peg of the ringgit to the US dollar still stands.

In recent months, amid weakening regional currencies, investors and analysts have warned that the ringgit is overvalued and this may erode Malaysia's competitiveness in trade.

Rumours that the ringgit is to be re-pegged at RM4.20 to the dollar has affected market sentiments and caused uncertainties on the stock exchange.

However, Prime Minister Dr Mahathir Mohamad had stressed that the ringgit was not overvalued and there would be no re-pegging of the currency.

The government had in March also announced a RM3 billion stimulus package to cushion the impact of the US economic slowdown on the domestic economy.

Tricky part

Prema reiterated that structural reforms in the banking and corporate sectors as well as transparent macro-economic policies are important to speed up the recovery of the economy.

He added that political stability has to go hand in hand with economic reforms but admitted that the former could be a 'tricky part' in Malaysia.

The sacking and subsequent jailing of former deputy prime minister Anwar Ibrahim in 1998, coupled with the economic crisis in the country, had caused the ruling Barisan Nasional coalition headed by Umno to lose substantial support.

Anwar, convicted of sodomy and corruption charges and sentenced to 15 years of imprisonment, had claimed that he was a victim of a conspiracy by the top leaders, but this had been denied by the government.