This article first appeared in The Edge Malaysia Weekly on September 25, 2017 - October 1, 2017

IN the just-concluded Royal Commission of Inquiry (RCI) into Bank Negara Malaysia’s foreign exchange losses — pegged at RM32.07 billion — it was learnt that the central bank moved from its conventional practice of preserving reserves through asset management to actively participating in the forex market for profits in the late 1980s and early 1990s.

Most of the witnesses who testified pinned the policy change squarely on the late Bank Negara governor Tan Sri Jaffar Hussein, who served from June 1985 to May 1994. Jaffar was a corporate banker who served as Malayan Banking Bhd’s CEO, before being seconded to head the central bank.

He resigned from the central bank in 1994 and passed away at the age of 67 on Aug 11, 1998.

Throughout the nine-day inquiry, several witnesses claimed that Jaffar played down the losses or “hid” them from the government, but later, as the matter blew up in 1994, said he would get the bank out of the mess he created. The RCI heard that the forex losses depleted two-thirds of the central bank’s reserves.

To cover the losses, some 123 million Telekom Malaysia Bhd shares and 47 million Tenaga Nasional Bhd shares were discreetly transferred at par value and sold to shore up the reserves.

The inquiry learnt that forex trading activities were conducted in a cloak-and-dagger manner with hardly anyone, apart from the in-house dealers, banking department head and Jaffar, in the know.

Daily trades, which could amount to more than US$1 billion per dealer, involved the buying and selling of the US dollar, Deutschmark, yen, pound sterling, Swiss franc and French franc.

As revealed by the RCI conducting officers, Bank Negara’s forex losses apparently amounted to RM12.35 billion in 1992, RM15.29 billion in 1993 and RM3.86 billion in 1994, but only RM5.7 billion was recorded as deferred expenditure in 1993.

The last figure, audited by the then auditor-general Tan Sri Ishak Tadin, and Bank Negara’s annual report were presented to the Cabinet and later tabled in Parliament by the then finance minister Datuk Seri Anwar Ibrahim.

Interestingly, it is also the only figure often cited as losses suffered in the 1990s, although it was for just one year — 1993.

And this is despite Bank Negara’s report titled “The accounting treatment of losses arising from active reserve management 1988-1994”, which was presented to the government on April 18, 2007, during former Bank Negara governor Tan Sri Zeti Akhtar Aziz’s tenure.

Zeti told the RCI that the forex losses accrued in that period amounted to RM32.07 billion.

However, former prime minister Tun Dr Mahathir Mohamad and the then finance minister Tun Daim Zainuddin both claimed that they were not aware of the huge losses.

Dr Mahathir maintained that he was only aware of forex losses amounting to RM5.7 billion in the early 1990s, and not RM30 billion.

“If I had known the losses were RM30 billion, I would not have said ‘sometimes we lose, sometimes we win’ or ‘sometimes we make profits and sometimes we make losses’,” he said when queried by the panel.

Whereas Daim, who served as finance minister for the first time from July 1984 to March 1991, rubbished Bank Negara’s forex trading as it was not a central bank’s role to do so, and chided it for not protecting the ringgit and reserves.

He said he only learnt of the losses in 1994 because everything was under the Official Secrets Act 1972.

Even Anwar, who was aware of the additional RM9.5 billion losses (the difference between RM15.29 billion and RM5.7 billion) in 1993, said he was bound by the 1993 annual report that was audited by Ishak, which showed losses of RM5.7 billion.

Ishak is said to have known about the massive losses because he cited its seriousness in a letter dated March 31, 1993, to Anwar, which prompted the latter to see to the matter urgently.

But Anwar claimed that Ishak signed the audited accounts that maintained the forex losses at RM5.7 billion.

The most startling testimony must have been Tan Sri Nor Mohamed Yakcop’s — he admitted to mistakenly hedging 100% on the currency instead of 60% or less. Nor Mohamed was the manager of the banking department, which was involved in forex trading then.

He said in the late 1980s and early 1990s, there was a large inflow of US dollars, the stock market was booming and, in terms of market valuation, Malaysia’s was among the highest in the world.

“High-ticket industries were being set up and US dollars were coming in, but at the time, the US dollar was weakening because there was talk of the ‘Fortress Euro’ — a concept that various European nations were doing well after World War II.

“It was said that Europe, including the UK, would overtake the US as the strongest economy in the world. We subscribed to this view and bought European currencies, including the pound sterling,” he said.

Unfortunately, the European currencies crashed after the non-ratification of the Maastricht Treaty by Denmark in February 1992.

On this, Dr Mahathir defended Jaffar, whose idea it was to trade in forex. He said Jaffar was engaged in currency speculation, not manipulation, but he had miscalculated the non-ratification of the Maastricht Treaty.

“The losses were a result of forex manipulators, who would sell currencies they don’t have in order to reduce the value,” he added.

Now with the RCI over, the forex losses still remain a puzzle, owing to the fact that Jaffar has died and Ishak is medically unfit to testify.

As lawyer Datuk Gurdial Singh Nijar, who held a watching brief for Anwar, said there are huge gaps in the chain of evidence due to the absence of Jaffar and Ishak, who both served at the material time.

He said it was not known why there was a difference in the amount of losses referred to in the documents and annual report.

And so, it remains to be seen what the outcome of the RCI is as the commissioners submit their recommendations to the Yang di-Pertuan Agong on Oct 13.

The RCI went on for nine days from Aug 8, with 25 witnesses testifying and 42 documents presented to the five-man panel chaired by Petroliam Nasional Bhd chairman Tan Sri Mohd Sidek Hassan.

The other commissioners were High Court judge Datuk Wira Kamaluddin Md Said, Bursa Malaysia Bhd CEO Datuk Seri Tajuddin Atan, Malaysian Productivity Corp’s Special Task Force to Facilitate Business co-chairman Tan Sri Saw Choo Boon and Malaysian Institute of Accountants member K Pushpanathan.

The RCI was set up upon a special task force’s recommendation following former Bank Negara assistant governor Datuk Abdul Murad Khalid’s statement on Jan 27 that the central bank suffered losses of US$10 billion in the 1990s.

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