AS promised, Prime Minister Datuk Seri Dr Mahathir Mohamad did shock Malaysians and foreigners by
announcing sweeping controls on the ringgit.

Currency controls include a ruling that makes the ringgit non-legal tender abroad, restrictions on the amount
of cash in ringgit and foreign currencies that travellers can carry, new regulations on the purchase and sale of
stocks in the local bourse, and making it compulsory for exporters to turn in their export earnings which will
be denominated from now on only in foreign currencies.

All these are no doubt shocking but by no means surprising for those who have been reading the lips.

Apparently, Dr Mahathir by a single stroke of genius has delivered a serious blow to the currency speculators
by bringing an immediate end to ringgit trading in the international market.

The ringgit will be no more than a piece of paper outside the country after Oct. 1. This is a strategic manoeuvre
to insulate the economy from the adverse effects of currency turmoil that threatens to take on global
proportions. All this means that there will be currency exchange for economic transactions but no currency
trading.

It may well be argued that tough times warrant tough measures, even if they flout economic orthodoxy. This is
time for lateral, not linear thinking. As the saying goes "when the going gets tough, the tough gets going". Be
that as it may, there are pros and cons to almost everything. Nothing is costless.

The downside represents the price one must pay for the upside. It is important to count the costs and benefits
before one can conclude if it is really worth the price one pays.

There are many positive things one can say about ringgit controls. First of all, it will protect the economy from
the adverse external influences emanating from the forex market by stabilising the ringgit. Second, it will force
ringgit parked abroad to be brought home before the end of September. Third, it will ease liquidity shortage in
the banking system and keep interest rates low. Fourth, it will defuse inflationary pressures by keeping
imported inflation at bay.

Fifth, it can make more domestic resources available for implementing the National Economic Recovery Plan,
especially Danaharta and Danamodal which have been established to buy non-performing bank loans and to
recapitalise the banking system, respectively.

Sixth, it can rev up the economy by removing the credit crunch that has had a debilitating effect.

Finally, it is likely to induce redundant foreign workers to return home, thereby creating jobs for retrenched
Malaysian workers.

What is more, all these positive effects are likely to be felt almost immediately. The announcement by itself has
produced some results, as shown by the firming up of the external value of the ringgit on the first day before the
central bank fixed the exchange rate at RM3.80 to the US dollar.

The stock market has also rallied remarkably. The positive impact on the real sector of the economy may
become manifest in the next few months, as offshore ringgit deposits return home.

The flip side is just as important. We must be wary of pitfalls. Recent measures may not bode well for the local
bourse in the medium and long term, as foreign portfolio investments are likely to shy away under the new
regulation governing stock market transactions. The vision of making Kuala Lumpur a regional financial
centre will remain a pipe-dream. It had better be, as it will mean sacrificing other more important
socio-economic objectives for something in which we may not even have a potential advantage.

We may he out for the adverse consequences of ringgit controls on the real sector of the economy which are
likely to surface in the medium and long term. By the look of it, exchange controls and open economies are
inherently incompatible. To be sure, exchange controls are not our intention, but the Malaysian version is some
what different in that it is much less restrictive than controls in many other developing countries.

Exchange controls have worked effectively in countries with large domestic economies. We must not lose sight
of the fact that Malaysia is a small open economy. Trade is the lifeblood and foreign direct investment the
backbone of the Malaysian economy.

Although it is stated clearly that the policy shift will not affect the business operations of traders and investors
in the sense that current account convertibility and free flows of foreign investment and repatriation of interest,
profits and