This was published in the International Herald Tribune (KL edition) on page B4 on 15 October 2003 and taken from here.

Malaysia pushes a gold standard
Mahathir sees dinar as a way to wean Muslims from dollar
By Kate Mayberry (Bloomberg News)
Wednesday, October 15, 2003

KUALA LUMPUR: Osman Ahmad pays his Iranian trading partners for the Zam Zam cola, dates and pistachios he imports to Malaysia with pineapples, rubber, computers and, sometimes, euros. If outgoing Prime Minister Mahathir bin Mohamad has his way, Osman may soon have an alternative currency: the gold dinar.

Seventeen years of sanctions against Iran and the Iraq war have made the dollar unpopular among many Muslim traders, Osman said. Rules aimed at cutting terrorist funding mean it is even harder to settle some shipments in dollars.

“I don’t like to use the dollar,” the 36-year-old Kuala Lumpur-based trader said. “It gets stuck in New York or some place.”

Mahathir sees a gold-backed currency as one way to wean Muslim states from dollar dependency, protect against volatile exchange rates and generate trade. He will try to sell the plan to 56 fellow leaders this week at the summit of the Organization of the Islamic Conference in Malaysia.

“It seems to me a sensible idea,” said Geoffrey Wood, professor of economics at City University in London and an adviser on financial stability to the Bank Of England. “Gold is a natural way to protect against short-term currency fluctuations.”

Malaysia on Sept. 1, 1998, pegged its currency, which had been trading around 2.50 ringgit to the dollar, at 3.80 ringgit after it tumbled to as low as 4.59. Mahathir has since been pushing greater links within the Muslim world as a counterweight to American dominance - and Malaysia as a model for Islamic development.

“This will enable us to free ourselves from the old monetary restraints of the West,” Zubair Ahmed Hassan, Sudan’s finance minister, told delegates Wednesday at the Organization of the Islamic Conference. Cooperation among Muslim nations “is the only weapon we can use to improve our lives,” he said.

Under the Mahathir-backed plan, importers in one Islamic state would be able to buy goods from a counterparty in another, with the transaction denominated in gold dinars - a non-tradable currency backed by bullion reserves. The central banks of each country would deal with the traders in their local currencies and would settle trades every two months.

The system would allow countries to leverage the relatively small gold reserves they already hold, regardless of their holdings of dollars or other trading currencies, said Bank Negara, Malaysia’s central bank, which devised the system.

“The idea is to create wealth using this asset that you have,” Latifah Merican Cheong, assistant governor at Bank Negara said in an interview. “Net settlement at the national level allows domestic traders with limited foreign exchange reserves to participate actively in international trade.”

The net settlement system works most efficiently when trade is balanced, Latifah said.

Global trade has been tied to the value of bullion three times in the past century. The political pressure on countries running sustained budget and trade deficits led the global gold standard to fail: first in the build-up to World War I, then in the 1930’s, and finally in 1971 when the United States pulled out, arguing that trade had expanded so rapidly there was far more money in circulation than gold to back it.

The timing may be propitious for such a plan. Gold is generating new interest among investors who are looking for alternatives to stocks and bonds.

“The reality is that there is building concern in markets that debt is rising so fast and that central banks have such aggressive monetary policies that gold is becoming again, very attractive,” said Kenneth Courtis, vice chairman in Asia at Goldman Sachs Group.

The system proposed by Bank Negara is, for now, limited to bilateral trade. Even then the system may come under strain because of the challenge of balancing exports and imports. Malaysia’s surplus with members of the Organization of the Islamic Conference rose to 5.6 billion ringgit, or $1.5 billion, last year from 2.3 billion ringgit in 1990.

“Nobody can balance trade, it’s impossible,” said Song Seng Wun, an economist at GK Goh Holdings in Singapore.

“Theoretically it’s great,” said Bala Ramasamy, an associate professor of economics at the University of Nottingham in Malaysia. “In reality, are the small and medium enterprises in these countries capable of making products for export?”

Many businessmen at smaller companies lack knowledge of overseas markets and the contacts to do business abroad, said K.T. Tan, executive director of SMI Consultative Center, which provides advice and support to small Malaysian businesses.

Bloomberg News

  

Posted on October 16th, 2003 by jl
Filed under: Intl Currency