KUALA LUMPUR: The use of the gold dinar in settling international trade should be considered as a way to end the currency war, former prime minister Tun Dr Mahathir Mohamad said, noting the weakening US dollar would prompt other countries in the region to devalue currencies for competitive reason.

Speaking to the media at the First World Conference on Riba yesterday, Mahathir commented that the devaluation of currencies would worsen the global economic crisis that is crippling growth in advanced economies.

Mahathir, who imposed capital controls during the 1997/98 Asian financial crisis after the sharp depreciation of ringgit then, believes that the US dollar depreciation would create problems for countries as they needed to devalue their currencies in order to overcome the loss of competitiveness.

“If every country devalues its currency, there will be a currency war and, of course, it will contribute to the crisis… As a result, we are likely to see a prolonged crisis, which will recur because the solutions are going to be for the good of a privileged few only,” he added.

Mahathir said the dinar should be used to settle international trade and not as a domestic currency as it was cumbersome. However, he said the gold bullion could be kept as savings.

“Gold has true value; even when you do not want to use it (in trade), you do not throw it away,” he said. “We have reserves to back our ringgit, but the US has got no gold or assets to back them as their currency is the reserve currency.”

On the local front, Mahathir said, “The ringgit was still undervalued (as it was once at 2.50 to the US dollar, pre-1997 Asian financial crisis).”

“If our neighbours had much weaker currencies than ours, we would face stronger competition, but for now we are still competitive,” he added.

He added that for now, although cost of doing business in Malaysia was manageable, it was high compared with other neighbouring countries due in part to higher wages.

“If costs become too high, no foreign investment will come in. At this stage, the central bank would need to come in and take control to devalue the currency; but if all the other countries did that, we would have a currency war on our hands,” Mahathir explained.

When asked whether the Islamic financial system needed to be reviewed, Mahathir said he understood it was constantly under review and was well accepted even by non-Muslims.

“However, as (its popularity) spreads, we need to be very careful when new products and the like come about. The Western banking system was abused because of the ability to introduce new products to make more money,” he said.

“Islamic banking should stick to (syariah) principles even when there is an opportunity to take over the role of the conventional banks.”

He had earlier said the “abuses in the banking system” by allowing lending without asset-backed securities, lack of transparency in global financial systems and the notion of allowing the markets to self-regulate were also contributing factors to the crisis.

This article appeared in The Edge Financial Daily, November 2, 2010.