Published : 17 April, 1994.
Posted. : 30 January, 2017.
The Bank Negara’s RM5.7 billion loss last year plus RM9.3 billion in 1992 amounting to RM15 billion loss in foreign exchange is of grave concern to the country and the people. Compared to the BMF scandal of RM2.5 billion loss 10 years ago, this amount is monumental – some 600% more.
The only difference is, in this case, there is no reported evidence of fraud or CBT but is due to “errors in judgement” as admitted by Bank Negara’s governor. Tan Sri Jaffar Hussein, who has taken full responsibility. He will resign from the governorship as of 1st May 1994.
The resignation is a courageous step taken by the governor but the “errors in judgment” is inexcusable because the loss is not RM1.5 billion but RM15 billion which is very huge by any standard. To allow the losses to snow ball into such a big number, he must have made many “errors in judgment” by allowing the trading in forex to persist so long before taking a position which losses can be cut within a few billion ringgit.
Last April 1993, when the RM12 billion loss (RM9.3 billion + RM2.7 billion of contingency liability) in foreign exchange was reported, Jaafar had said “make no mistake” and that it was only “a paper loss”. He gave detailed explanations that the forex losses were mainly attributed to :-
*A strong ringgit which brought about reserves losses due to strong economy.
*Such losses could get longer due to difference of exchange rates between the beginning and the end of the year,
*Tightening inflation which was costly by tightening the inflow of foreign exchange, especially the US dollars.
*The dilemma of reserves management when BN could not just sit still when the values of its reserves were exposed to risks of external currency fluctuations while trying to attain higher yields.
Many critics, including the writer, had doubts that he had fully explained to the public. With recent revelation and admission of “errors in judgment” on the foreign exchange losses, his past explanations are now mainly invalid and have become incidental. He was either not telling the truth or ignorant of what had transpired in Bank Negara’s foreign exchange department or had been thoroughly ill advised.
Now, it is clear that Bank Negara’s RM15 billion loss has been due to heavy trading, beyond prudence, on the forex.
Following the release of 1993 Bank Negara’s accounts last week, the governor and the government continue to emphasize that the balance remains strong with the total assets increased by 68% to exceed for the first time, RM100 billion at the end of 1993 (see BNM’s Balance Sheet for 1991, 92, 93 appends) and the international reserves rose sharply by RM29.3 to RM76.4 billion or equivalent to eight times of the value of monthly imports.
Such statements are most reassuring and they provide confidence locally and internationally in the country’s monetary system. However, it should not be over-played, because the statements have appeared to be condoning Bank Negara’s “errors in judgment” on foreign exchange losses.
The RM5.7 billion loss has wiped out all the Bank Negara’s paid up capital, the general and other reserves which total only RM3.6 billion – far from sufficient to cover the loss.
With this, Bank Negara has become technically INSOLVENT. This does not appear so because the RM5.7 billion has been categorised under “differed expenditure” in the assets column. This figure artificially helps to add up to the total asset values of over RM100 billion for the first time. This can be unreal. But Bank Negara is owned by the government and unless the government is insolvent, Bank Negara cannot be insolvent as it is aptly claimed by the deputy governor.
The sharp increase of RM29.3 billion of the total reserves to RM76.4 billion is a result of mopping up funds during the year of 1993 by Bank Negara through various available instruments f IProm the highly liquid banking system and money market. For the year 1992 and 1993, a total of RM46 billion had been mopped up by Bank Negara to back up its total reserves of gold, foreign exchange and international monetary fund.
Many have claimed that with the backing of RM76.4 billion in gold and forex reserves, Bank Negara is still in a strong position to withstand the loss of RM15 billion. But is this worth the risks?
The losses are very costly, it will take many years to recover fully. It is a lesson to be learnt – several times more costly over the losses of the BMF loan scandal, the Maminco fiasco and the Co-Op debacles put together in the past 10 years. When will we ever learn again?…..and again ?…..and again ?
Besides, this backing of reserves comes from the R hiakyat and foreigner’s deposits placed in our local banks and financial institutions which Bank Negara is holding in trust for them. This is a vote of confidence for the government and the country’s economy. Being so, Bank Negara should protect the depositors’ trust and interest, responsibly. It should also ensure the hard-earn confidence of the local and foreign depositors are not eroded.
The role of Bank Negara is to regulate prudently in protecting the country’s reserves and monetary system in order to help maintain confidence and stable economic growth.
The RM15 billion loss has given every reason for the people to think that Bank Negara’s role encourages speculations rather than regulations. Its integrity as the country’s monetary regulator and its custodian role as trustee of billions of ringgit in deposits are at stake.
Bank Negara and the government have taken full responsibility. They must ensure that such costly incident must not recur again. They should act swiftly to investigate and to review the management of the foreign exchange trading policy to avoid further losses.
K L Lau
Kuala Lumpur ,12 April 1994.
Foot note :
1.To give the readers an idea of the enormous loss, RM15 billion is equivalent to striking a 1st prize lottery of RM2 million every day for a period of 20 years.
2.This article was translated into Chinese and published in‘The China Press’’on 17 April, 1994.
BANK NEGARA MALAYSIA
BALANCE SHEET AS AT DECEMBER 31st
1991 1992 1993
Gold & Foreign Exchange 29,197 46,074 75,310
International Monetary Fund Reserve Position 700 848 838
Holdings of Special Drawing Rights 570 295 326
Malaysia Government Papers 1,611 561 454
Bills Discounted 5,195 3,860 3,524
Deposits with Financial Institutions 2,387 1,944 1,749
Loans and Advances 1,898 2,369 2,637
Deferred Expenditure – – 5,707
Other Assets 3,001 3,641 9,754
——- ——- ——
Total 44,559 59,592 100,299
====== ====== ======
Authorised Capital RM200,000,000
Paid Up Capital 100 100 100
General Reserve Fund 3,458 3,556 3,556
Others Reserves 10,053 752 41
Currency in Circulation 12,070 13,174 14,649
Commercial Banks, Finance Companies
and Merchant Banks 10,447 27,559 56,761
Other Financial Institutions 21 29 –
Federal Government 5,596 5,596 2,911
State Governments 393 566 –
Others 79 6,780 13,534
Bank Negara Malaysia Bonds/Bills – – 7,161
Allocation of Special Drawing Rights 542 491 510
Other Liabilities 1,800 906 1,076
——– ——— ———
44,559 59,592 100,299
======== ======== ========
(Source: Bank Negara Annual Report 1992 and 1993)