WE need not reason too much to see why the ringgit is on a downward cyclical trend against major currencies. The millions stashed away in the homes of two top Government servants in Sabah’s Water Department will give anybody an inkling of why the ringgit continues to weaken against major currencies.
There is a major “leakage” in the system. And it is the result of a systematic breakdown in the processes that allows for corrupt practices to happen. In a nutshell, it contributes to money going out of the system, hence the continuous downward trend of the ringgit.
The money that is obtained through illegal means is what one would classify as “black money”. More often than not, black money is not kept in the bank to avoid detection. Effectively, it is also out of circulation of the monetary system.
It is common in homes of countries where there is a huge amount of “black money” derived from the system to be equipped with safes. In African countries and some in Asia such as India, it is normal for houses to have highly-sophisticated safes. But it is not a common feature in Malaysian homes.
However, the discovery of RM57mil cash from the houses and offices of the top two civil servants in the Sabah Water Department suggests that the practice of stashing money at homes exists in Malaysia as well.
The question that many are asking is whether the discovery of the loot in the homes of the two officers is merely the tip of the iceberg? How many more cases are there throughout the country?
The money that is alleged to have been gotten from corrupt practices arising from RM3.3bil worth of water projects funded by the Federal Government in Sabah in the last five years is what would be considered as a “leakage” within the system.
Nobody can really put a finger on the amount of leakages arising from the Federal Government’s spending. Apart from corruption, the leakage comes in the form of inflated prices for Government procurement and contracts and payments to rent-seekers.
Some early estimates have the leakage at about 10% of the Government spending. Assuming a Federal Government spending of an estimated RM280bil per annum, the sum comes up to quite a bit. Another inkling of how much can be saved if the leakage can be plugged is a Bernama report quoting the chief secretary to the Government Tan Sri Dr Ali Hamsa calling on civil servants to optimise spending on projects.
He had earlier this year said that the administration would hold sessions with ministry secretaries-general, service and department heads to look into ways to optimise expenditure to overcome weaknesses in the leakage and save 30% of costs.
However, the best indicator is the Auditor-General’s report that comes up with a list of shortcomings in Government spending on procurements and projects. Another pool of statistics can be from the amount of seizures in the form of cash and assets from cases investigated and prosecuted by the Malaysian Anti-Corruption Commission.
Leakages in Government spending are a moral hazard to the economy and are reflected in the strength of the currency.
The direct impact is when some of ill-gotten gains end up overseas and a large portion, such as the discovery of the RM57mil in Sabah, is kept in drawers. When money is kept out of the system, it affects the liquidity of the ringgit.
An indicator of liquidity in the economic data is the broad money within the system, which is known as M3. Last year, M3 was down to 2.7%, which is very low compared to 14.3% in 2011. However, it should be noted that the figure is also impacted due to the slow economic activity of the country.
When there is not enough liquidity in the system, it tends to prompt the central bank, which is Bank Negara in this case, to reduce interest rates to help infuse more money into the system. And when interest rates come down, so does the value of the ringgit.
The broader problem of having a “leakage” in Government spending is that it affects confidence in the country. Hence, over the longer term, the tendency is for the ordinary folk to try and reduce their exposure to the ringgit.
An indication of more money being converted into foreign currencies is the growing foreign currency deposits within the banking system. The foreign currency deposits are basically money owned by locals and companies but held in foreign currency deposits for various reasons. Companies may hold them in foreign currency for their operations, while individuals use the foreign currency deposits to finance their children’s education or purchase property.
There are a host of reasons why people and companies hold foreign currency deposits. But ultimately, it is to convert some of their ringgit holdings.
The foreign currency deposit stood at RM21.39bil in 2007 and gradually grew up to RM130.73bil in February this year before tapering off to RM119.21bil as of August.
To quash the issue of “black money”, one suggestion is a one-time amnesty for those with ill-gotten gains to surrender their proceeds and in return minimise the risk of being prosecuted. Normally, Governments recoup billions from such an exercise.
It is similar to the tax amnesty exercise in India and Indonesia. In India, four months of a tax amnesty programme to induce tax evaders to come clean resulted in the declaration of hidden assets worth nearly US$10bil. It was part of the move by the Government to go after those with “black money”.
In Indonesia, President Joko Widodo ordered a tax amnesty programme beginning July this year. So far, the Government has collected US$7.5bil. The programme was aimed at shrinking Indonesia’s huge “hidden economy” that has thrived due to a lack of confidence in the Government and its policies.
However, in both India and Indonesia, the authorities went after several big cases and prosecuted them in courts before embarking on a tax amnesty programmes. The big cases in courts heard over years served as a lesson to the rest to embrace the amnesty programme when the Government announced it.
This is something to think about. The case in Sabah is certainly not the only one. There are many more.
In recent months alone, we have seen an official in the Sports Ministry being picked up for allegedly misappropriating Government funds to the tune of RM107mil. There was also a high-ranking officer in the Kuala Lumpur City Hall being arrested with RM13mil in his account apart from luxury cars.
For an effective clean-up, there has to be a concerted programme. Some big wigs must be prosecuted followed by an amnesty programme. It will add billions to the coffers of the nation and a huge dose of confidence in the ringgit.