Implications
Malaysia's financial position has been impacted in a number of ways as a result of the Bank
Negara Malaysia Forex scandal huge losses in 1991. According to Abdul Murad Khalid, a
former assistant governor of the central bank, Bank Negara Malaysia's (BNM) US$10 billion
foreign currency losses in the 1990s had a substantial impact on the central bank's foreign
reserves today. He further said that if the money had been saved with the government for 25
years at a compound interest rate of 4% per year, it would have risen to US$26.66 billion, or
more than RM100 billion (Malaysiakini, 2017). As a consequence, Malaysians have had to
pay for BNM's currency losses, resulting in inflation in the nation. Due to the massive loss
from 1988 to 1994, it colluded to generate a negative wealth effect, resulting in a broad
contraction in domestic demand, poor stock prices, a slump in the housing market, and the net
recessionary impact of ringgit depreciation (Ariff. M and Abubakar, 1999). Investors
gradually lost confidence and faith in investing in Malaysia via Foreign Direct Investment as
a result of the low stock prices.
Furthermore, the enormous currency losses in 1991 and 1992 'punched a gaping breach' in
Bank Negara, not only making it bankrupt but also tarnishing its name and authority as
Malaysia's "banker" and "keeper of banks." Bank Negara is insolvent, with liabilities
surpassing assets by RM20.1 billion, and it would have been taken over if it had been a
commercial bank. Such errors are plainly meant to hide the reality that Bank Negara is
technically insolvent or bankrupt. In accounting, net assets are used to offer an approximation
of a strategic and long solvency, value, and financial success. The following are the net worth
or net assets as reported in Bank Negara Annual Reports since 1990: -
1990 1991 1992 1993
RM Millions
Paid-up Capital 100 100 100 100
General Reserve Fund 3,258 3,458 3,556 3,556
Other Reserves 8,749 10,053 753 41
Net Assets 12,107 13,611 4,409 3,697
In 1993, Bank Negara's net value declined by RM712 million to RM3,697 million since it
only reflected the RM712 million net operational loss and not the RM5.7 billion in Forex
losses. If the RM5.7 billion in Forex losses are included in, Bank Negara has a negative net
worth of (RM2,010) million, suggesting that it is technically insolvent. Bank Negara is
therefore insolvent, implying that its obligations exceed its assets by RM2,010 billion; if it
had been a commercial bank, the Governor and Board would have been suspended, and the
bank would have been taken over (Pursuit of a Malaysian Dream RSS, n.d.).
Furthermore, Bank Negara Malaysia suffered enormous losses of RM32.07 billion due to
forex losses. According to the Royal Commission of Inquiry (RCI), currency losses depleted
the central bank's reserves by two-thirds. To compensate the significant loss, 123 million
Telekom Malaysia Berhad shares and 47 million Tenaga Nasional Berhad shares were
surreptitiously transferred at par value and sold to shore up the reserves (Appaduray &
Amarthalingam, 2017). For starters, the Malaysian currency's rating has plummeted
dramatically. As previously stated, Bank Negara Malaysia established monetary policy to
keep Malaysian currency stable in foreign exchange markets. As a result, a drop in the local
currency might have an impact on the commercial bank's interest rate and the return on
investment, either directly or indirectly. This is due to Bank Negara's crucial function in
controlling interest rates when changing foreign exchange currency. In brief, a decline in
domestic currency may have the same impact on the economy as tighter monetary policy,
such as increased interest rates. As a result, there is a challenge attracting international
investors seeking for higher-yielding assets.
In a nutshell, massive losses on the part of the Bank Negara in forex trading might cause
major financial and reputational issues for Malaysia. As a result, the domestic currency may
become unstable, making it difficult to attract cash or investment from international investors.
This may have an impact on Bank Negara Malaysia's reserves and financial circumstances.
Foreign capital or investment, as we all know, may flow into a strong government with an
active economy and stable exchange rate.
References
Report: BNM's foreign reserves 'hugely impacted' by forex losses. Malaysiakini. (2017, June
28). Retrieved March 29, 2022, from https://www.malaysiakini.com/news/386855
Ariff, M., & Abubakar, S. Y. (1999, December). THE MALAYSIAN FINANCIAL
CRISIS: ECONOMIC IMPACT AND RECOVERY PROSPECTS. The Developing
Economies, XXXVII-4 .
Pursuit of a Malaysian Dream RSS. (n.d.). Retrieved March 31, 2022, from
https://bibliotheca.limkitsiang.com/1994/04/11/the-colossal-forex-losses-in-the-last-
two-years-have-knocked-out-a-big-hole%E2%80%99-in-bank-negara-not-only-
making-it-insolvent-but-destroying-it-credibility-and-authority-as-the-
%E2%80%98banker/
Appaduray, A., & Amarthalingam, S. (2017, September 19). 'share sale to cover forex
losses was to be done discreetly'. The Edge Markets. Retrieved March 31, 2022, from
https://www.theedgemarkets.com/article/share-sale-cover-forex-losses-was-be-done-
discreetly
