Interest behind rate cut beyond power politics

PUBLISHED : Thursday, 06 August, 1998, 12:00am
UPDATED : Thursday, 06 August, 1998, 12:00am

Malaysia has decided to take the plunge and reduce interest rates at last, after steady increases for almost four years and a particularly hard-hitting boost when the Asian crisis broke last summer.

But much of the commentary on this has centred on a presumed power struggle between Prime Minister Mahathir Mohamad and his finance minister, Anwar Ibrahim, rather than on the economic background.

Dr Mahathir is cast here in the role of the populist politician who wants interest rates down and doesn't care for foreign opinion. Mr Anwar, meanwhile, supposedly takes the part of the prudent economist who accepts the tight-money doctrines of the International Monetary Fund.

Most foreign commentators side with Mr Anwar, largely because Dr Mahathir has made what they perceive as strident remarks about foreign interference in Malaysia's affairs.

Dr Mahathir seems to have won the struggle (it is a dangerous game to challenge this man) and has appointed an old crony to assume much of Mr Anwar's powers. This is seen as a bad thing and hence the drop in interest rates, which Dr Mahathir has championed, is also seen as a bad thing or at least a dangerous gamble.

But Malaysia is not the only country to have brought its interest rates down recently. Its immediate neighbours, Thailand and Singapore, have done so, as has the Philippines. Even a few banks in Indonesia have brought down rupiah rates for what little business they can do in rupiah.

The arguments the Malaysian authorities present for doing it are reasonable enough. They point out, first of all, that the current account balance has improved enormously in recent months. They have not published the figures for the current account since December last year (they are always among Asia's tardiest in this respect) but the trade balance certainly shows a substantial improvement.

As of May, the trade surplus was the equivalent of 12 per cent of gross domestic product on a six-month average basis. On the same basis, it was in deficit in November last year. The surplus now is greater than any neighbouring countries have achieved.

The authorities also claim that inflation has been tamed. This is less certain. Inflation in June of 6.2 per cent on the consumer price index was less than the average of Malaysia's neighbours but there was as yet no sign that it was topping out.

However, these standard IMF benchmarks for whether interest rates should be raised or lowered need some questioning.

Malaysia is not an IMF client state and, with some exceptions, did not commit the sorts of sins which would have made it one.

Its government finances are sound, its inflation rate has been restrained, it never ran huge external deficits and its central bank has already maintained tight money policies for several years.

If Dr Mahathir therefore wishes to take the risk that dropping interest rates may cause the currency to weaken further and depress the stock market it is a perfectly reasonable risk when set against the benefits of alleviating interest rate pressure on Malaysian industry.

Personality politics have clouded this question too much.