KUALA LUMPUR, MALSYSIA- Malaysia's central bank Wednesday relaxed foreign exchange rules to woo foreign investment but said it won't let its currency, the ringgit, trade abroad amid volatlity in global financial markets.
Bank Negara Malaysia made the announcement after reporting that the economy expanded 7.1 percent in the January-March quarter from the same period a year ago, supported by strong domestic demand and robust exports.
Governor Zeti Akhtar Aziz said the currency liberalization will boost the country's competitiveness by lowering the cost of doing business, giving companies wider access to financing, and enhancing business efficiency.
The measures include lifting a 100 million ringgit ($31 million) cap on foreign currency borrowing by locally incorporated companies.
"It will encourage foreign direct investment and support the economy," she told reporters.
But Zeti said that the ban on ringgit trading abroad will not be lifted in the near future.
"We do not plan to internationalize our currency. It would need very stable overall international financial market conditions before any major change is made," she said.
The ban, which effectively keeps out currency speculators, is the last vestige of Malaysia's capital controls imposed in 1998 amid the Asian financial crisis. It is a key tool for the central bank to shield the currency from sharp fluctuations and ensure economic stability.
The ringgit is now hovering at around 3.2 to the U.S. Dollar, up sharply since authorities lifted a peg of 3.8 to the dollar in July 2005.
Economists said the government appears to be inching toward full liberalization of the ringgit.
"It seems to signal that they want to slowly take out the control of ringgit trading but not now, especially with confidence in the economy still shaky," said Gundi Cahyadi, economist with Singapore-based economic think-tank IDEAglobal.
The first quarter economic data exceeded market expectation of an average 6.5 percent growth, but was slower than the 7.3 percent pace in the previous quarter.
Cahyadi said the strong growth was partly due to a low base from last year and warned growth may taper off amid an anticipated fuel price hike later this year which will hurt private consumption.
Zeti said inflation rose 2.6 percent in the first quarter, but Bank Negara has no plans yet to revise its inflation forecast of 2.5-3 percent for the full year despite a possible hike in fuel prices. Inflation was 2 percent in 2007.
Fuel prices have been unchanged since February 2006 but the government has come under increasing pressure as global oil prices soar to record highs.
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