KUALA LUMPUR (March 24): In its 2024 annual report, Bank Negara Malaysia (BNM) defended the flexible exchange rate regime for managing short-term risks to the ringgit while emphasising that long-term stability requires strengthening the economy.

The central bank said the flexible exchange rate regime, which came under fire when the ringgit fell to a 26-year low of 4.8 against the US dollar last year, allows the Malaysian economy to adjust to changing external conditions.

A weaker ringgit makes Malaysia's exports, local goods, and tourism more competitive, boosting foreign demand and stimulating domestic economic activity.

BNM said Malaysia's diverse economy, strong financial sector and solid external position — including a sustained current account surplus and ample reserves — enhance resilience against external shocks, making the flexible exchange rate regime well-suited to its economic structure.

To combat the ringgit depreciation in 2024, BNM said it focused on managing excessive currency volatility through foreign exchange interventions, ensuring liquidity in the market without disrupting broader economic fundamentals.

To achieve this, the central bank deployed its international reserves selectively to counter disorderly market conditions.

BNM said it faces a delicate balancing act when deciding whether to intervene in the foreign exchange market while taking a measured and prudent approach.

It emphasised the importance of a robust financial system that can withstand exchange rate fluctuations.

BNM also pointed to recent measures aimed at deepening the local forex market, including the Qualified Resident Investor (QRI) programme, which facilitates the repatriation of foreign currency proceeds from overseas investments into ringgit. The initiative, introduced in April 2024, seeks to encourage a balanced flow of funds and bolster demand for the local currency.

While the ringgit remains vulnerable to short-term external pressures, BNM stressed that ongoing policy initiatives, including efforts to boost Malaysia’s investment appeal and deepen local currency markets, will provide a more sustainable foundation for currency stability.

"BNM’s foreign exchange intervention is useful in dampening short-term excessive volatility caused by global shocks. However, relying too heavily on international reserves to counter long-term drivers rooted in fundamental factors may not be the appropriate strategy.

"Instead, structural reforms and policies must take centre stage, whether through further financial market developments to build resilience against the negative impacts of ringgit volatility or through policies aimed at strengthening productivity and competitiveness, hence improving economic growth prospects and fiscal sustainability," the central bank said.

BNM said in improving Malaysia’s relative productivity growth and relative terms of trade, the government’s ongoing initiatives — such as the New Industrial Master Plan 2030 (NIMP) and the National Energy Transition Roadmap (NETR) — have a critical role to play.

These plans aim to help Malaysian industries move up the global value chain by focusing on higher-quality, more complex and diverse products instead of just low-cost advantages.

It said by doing so, Malaysia can boost its export value, generate more stable earnings for businesses, and attract more foreign direct investment (FDI).

These factors will strengthen the ringgit and support long-term economic stability, even during periods of global financial stress.