The rekindled appetite for an Asian Monetary Fund: A Malaysia perspective

During his visit to China in March 2023, Malaysian Prime Minister Anwar Ibrahim proposed an Asian Monetary Fund (AMF). Since then, this proposal has been well received in various quarters, especially in the Global South. While no concrete to-do list or follow-up has accompanied the proposal to set up an AMF, it is generally understood that proponents are worried about their nations’ overreliance on the US Dollar (USD). This is especially so for economies that have the bulk of their sovereign debt denominated in USD. Aggressive interest rate hikes by the US Federal Reserve since early 2022 have caught them off guard. Furthermore, where this has not been done already, these states have also voiced their desire to diversify (further) into alternative reserve currencies such as the Japanese Yen (JPY) and Chinese Renminbi (CNY) .

Notwithstanding the above, the urge to de-dollarize is not a straightforward matter. In Malaysia, the private sector’s reaction thus far to Anwar’s call for de-dollarization has been somewhat lukewarm (Saieed, 2023). A prominent currency strategist, Saktiandi Supaat, has suggested that it would hypothetically be feasible for the Southeast Asian nation to reduce USD-denominated trade by up to 20 per cent, provided trade invoicing and settlement are conducted in Malaysian Ringgit (MYR) and other non-USD currencies. However, firms in key export industries, ranging from palm oil and petroleum to electricals and electronics, are reluctant to move away from the existing reliance on the USD. They have revealed that such commodities are still mostly traded in USD, with few realistic options in the near to medium term.

Ultimately, a reserve currency must fulfil several interrelated criteria. Firstly, it must be easily convertible, with liquid, deep markets available to market participants. Secondly, it must possess a relatively stable value. Thirdly, it must be widely accepted and trusted as a medium of exchange across national borders. Only the USD ticks all these boxes, although at a regional level, alternatives such as the JPY, British Pound (GBP), and the euro (EUR) have been utilised to various extents. While the CNY has gained popularity, it is not realistic for it to eclipse the USD. The best it can hope for is to join the ranks of the JPY, GBP and EUR, at least in the short to medium term (Chey, 2021).

Despite such structural challenges, de-dollarization attempts by the Malaysians are unlikely to abate. Put differently, de-dollarization is not simply a technocratic exercise, nor does it take place in a vacuum. If anything, it is driven by multiple interest groups and factors. To this end, a more nuanced reading, at both domestic and regional levels, would further the understanding of this multifaceted issue.

Domestic Political Economic Motivation

It is important to understand the circumstances leading up to Anwar’s visit to China in March 2023. He became Prime Minister only in November 2022, following frantic political horse-trading (Kurlantzick, 2023). Although his coalition has since settled down somewhat, it is still far from secure, and faces a vocal, cohesive opposition bloc. To keep his coalition intact, Anwar must deliver economic results, in addition to projecting a popular image domestically and internationally.

Like most other developing economies, the Anwar administration was not spared the capital exodus triggered by the US Federal Reserve’s rate hikes since 2022. In addition to triggering shocks such as inflation and weakening of the MYR, this volatility bears some resemblance to the panic induced by the 1997 Asian financial crisis. As Minister of Finance during that period, Anwar knows all too well how a headlong rush towards USD-denominated assets could destabilise a supposedly “miracle economy” like Malaysia and fellow high-performing Association of Southeast Asian Nations (ASEAN) economies (Sheng, 2009). Therefore, pushing for an AMF on the global stage was an opportune moment for the Prime Minister to not only make his mark on the global front, but also sound the alarm over a possible repeat of such a meltdown.

Additionally, Anwar’s more immediate goal was to secure investment and trade from Chinese business groups, which have gradually grown their portfolio in Malaysia. The broader picture is that since at least the 2000s, Malaysian policymakers have found it increasingly tough to attract investment from “traditional” sources (i.e. industrialised Western countries, Singapore and Japan) in transitioning the nation towards higher value-added activities (Lim, Li and Ji, 2022). Given the close ties between China’s commercial and political spheres, it would not have done Anwar any harm to obtain an endorsement from Chinese political elites, which he arguably received from the way the AMF agenda was embraced and highlighted. Anwar’s political signaling was also boosted by similar calls from the likes of Brazilian President Luiz Inácio Lula da Silva, who commands a huge following in Latin America (and by extension, the Global South), and who visited China days after Anwar left (Asahi Shimbun, 2023).

Regional Geoeconomic Rationale

From a longer-term perspective, it is entirely in Malaysia’s interest to not rely too heavily on any one nation (or currency) to fuel its geoeconomic ambitions. The dependence on USD, while logical in the short to medium term, appears self-defeating over the long run. One only needs to re-visit the 1997 Asian financial crisis to understand where the anxieties of today come from. Furthermore, this crisis laid bare the importance of a regional self-help institution or fund, not least to serve as an alternative lender of last resort. Indeed, this was the very first time that an AMF was formally proposed by the Japanese financial authorities. Although the idea was shot down swiftly by the International Monetary Fund (IMF) and the US Treasury, it has continued to be touted, on different occasions, by East Asian elites as a genuinely “regional” institution (Hamanaka, 2009). If anything, it potentially offers a second opinion to regional financial authorities through discreet consultation, unlike the high-profile approach taken by the IMF during the 1990s downturn (Katada, 2020). Anwar’s open call for an AMF, seen in this light, is not entirely out of step with the actions of his regional peers. Perhaps what differs this time around is Malaysia taking a more vocal role in leading the charge to promote regional financial solidarity.

Yet, as mentioned at the start, Anwar’s idea of an AMF has not been clearly spelled out, although it is prudent to presume de-dollarization is one of its key agendas. If that is the case, then it is almost inevitable that the proposed AMF must provide emergency liquidity (to prevent or minimise a balance-of-payment crisis), in addition to offering an alternative financial advisory role to its respective member states. However, analysts familiar with East Asian financial affairs would point out that these two interrelated roles are currently performed by the Chiang Mai Initiative Multilateralisation (CMIM) and ASEAN+3 Macroeconomic Research Office (AMRO).

The CMIM is ASEAN+3’s de facto safety net mechanism for crisis prevention and resolution, as it guarantees up to USD 240 billion in swaps. This pot of money is managed by two coordinating countries within ASEAN+3 that are appointed each year to oversee the decision-making process, and assisted by AMRO’s technical secretariat (if requested) (Han, 2022). AMRO, on the other hand, was born out of the 1997 Asian financial crisis. Housed in Singapore, AMRO’s vision is to be an independent, credible, and professional regional organisation acting as a trusted policy adviser to ASEAN+3 members and a thought leader with global influence (ASEAN+3 Macroeconomic Research Office, 2023). It aims to serve as a regional knowledge hub, contributing to the macroeconomic and financial resilience and stability of the region through surveillance, regional financing arrangements and technical assistance. It is commonly viewed as the closest substitute the region has to an AMF (Chen, 2021; Katada, 2020). Wei Benhua, its first director (2011–2012), describes it anecdotally as such:

I believe if we had something like AMRO at that time [1997–1998; added by author], we could have had better economic intelligence to find out what was going on in the regional economies before the crisis... It is like going to the doctor. Sometimes we need a second opinion and it is good for the patient itself. If one goes to another doctor and he gives the same assessment as the first [the IMF; added by author], then it’s more convincing… It serves the same purpose, since one of the major purposes for AMRO is conducting economic surveillance of the economies in this region... (Khor, Guinigundo and Kawai, 2022: p.181).

Malaysia (and Southeast Asia) under the Shadow of De-dollarization

As the Prime Minister-cum-Finance Minister, Anwar must surely be aware of the CMIM and AMRO as well as their operating protocol. Notwithstanding the expectations placed on his fledgling coalition’s shoulders, Anwar’s ulterior motive could very well be a desire to push for a stronger role for the CMIM and AMRO. He was, after all, a very important go-to person during the frantic years of the 1997 Asian financial crisis. With the benefit of insight and hindsight, Anwar must also surely understand that, despite the progress made by the CMIM and AMRO since the late 1990s, these two institutions have not grown as fast as initially expected, which in turn has frustrated some of the region’s policymakers. According to Rana and Pacheco Pardo (2018), longstanding complaints are that they remain “institutionally light” compared to regional financing arrangements in other parts of the world, and that they remain untested in real time.

In the grand scheme of things, Anwar is probably cognisant of the shifting global economic and political landscape between the late 1990s and the present day. One of the reasons an AMF, as proposed by the Japanese, was rejected by the US Treasury and the IMF was that it could potentially disrupt the status quo. However, can East Asia (and by extension, the Global South) be bypassed or denied perpetually? For one, China’s growing weight in the international arena as well as its role as a pacesetter in the developing world has been challenging established norms in areas ranging from infrastructure to technology standards. While China is unlikely to eclipse incumbent powers such as the US and Europe, what is certain is that its voice is growing in prominent international platforms and institutions such as the Group of 20 (G20) and the Asian Infrastructure Investment Bank (AIIB) (Ji, 2022; Ji and Lim, 2022).

More prosaically, Anwar’s de-dollarization message is probably—on balance—an indirect way to prod the CMIM and AMRO into further reforms. Taking everything into consideration, it is politically and technically more efficient to enhance the role and mandate of the CMIM and AMRO, in spite of their shortcomings. In other words, the coordination cost for this recently mooted AMF would most likely add another round of paperwork to the already heavy workload of regional policymakers. Although the anxiety about an overdependence on the USD is real, it does not negate the fact that the ASEAN+3 economies have learnt much from the Asian financial crisis and adapted since. Much like the argument for Japan (Goto 2023), it would be in the interest of Malaysia and the region to encourage greater economic cooperation through pre-existing channels like the CMIM and AMRO, instead of creating an institution from scratch (again).