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Wednesday, September 1, 1999 Published at 10:02 GMT 11:02 UK

Business: The Economy

Malaysia lifts cash controls

Prime Minister Mahathir Mohamad says goodbye to market controls

Investors are able to withdraw cash from Malaysia from 1 September without paying any exit taxes.

The taxes were part of a set of measures put in place to stop investors selling shares and taking their money out of the country as Asian currencies plummeted last summer.

The exit taxes were imposed in February to replace a 12-month moratorium on repatriating foreign funds. This was imposed - along with other capital controls - on 1 September last year.

The controls had been put in place to protect Malaysia from the massive outflow of funds from the region, which was triggered by the Asian crisis and exacerbated it.

Prime Minister Mahathir Mohamad banned trading of the Malaysian currency, the ringgit, overseas and pegged it at 3.80 to the dollar. He feared speculative trading could weaken the currency even further.

Enforcing the controls gave the Malaysians leeway to enforce the economic measures of their choice, free from the fear that foreign investors could easily take their cash and go.

Now with the Malaysian economy back on its feet - while the government is attributing its recovery to the controls it put in place - it is prepared to lighten some of the restrictions.

After 1 September, exit taxes will continue to be imposed on profits from investments but no longer on the principal amount. It has no plans to scrap the controls entirely or the fixed exchange rate.

The head of the IMF's Asian operations Mr Hubert Neiss, said that capital controls had played only a marginal role in bringing economic recovery to the country, with "macroeconomic and structural" change the real reason for recovery.

Malaysia originally came under fire from the international community last year, when it turned its back on the free market and imposed capital controls.

Cash cushion

The Malaysian central bank now has an estimated $30bn of foreign currency reserves, with which it can cushion itself from any massive outflow of funds.

There is an estimated $7bn worth of foreign investment in Malaysia.

As yet, it is unclear how many foreign investors will leave the Malaysian market and if they will ever return.

Prospects for further growth in Malaysia appear good. The Malaysian authorities have declared that the country is out of recession, after economic growth in the three months to June reached 4.1%. This followed five consecutive quarters of contraction.

Controls did help

Hugo Young, managing director of Aberdeen Asset Management, says that bizarrely, the controls have benefited investors.

Aberdeen Asset Management has $30 -$40bn invested in Malaysia.

"That money has done exceptionally well over that period, because the Malaysian stock market has trebled (from its lows a year ago)," Mr. Young said. "It has put a dent in the free market argument."

While some of this growth can be attributed to growth in the Malaysian economy, part of it is also due to the rebound in Asia as a whole, he said.

Mr Young cautioned that the problems that had triggered the Malaysian crisis - cronyism and favouritism within the political system - were still evident.

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