June 6, 2018 / 3:55 AM / 3 months ago

Breakingviews - Malaysia’s 1MDB purges may hurt before they help

SINGAPORE (Reuters Breakingviews) - Malaysia’s 1MDB purges may hurt before they help. The central bank is the latest institution caught in the backlash over the disgraced wealth fund. More heads will roll in the bureaucracy and beyond, creating extra uncertainty just as external pressures mount and fiscal plans shift.

Ministers and central bank governors including Malaysia's Bank Negara Governor Muhammad Ibrahim (C) attend a photo session at ASEAN+3 Finance Ministers and Central Bank Governors' Meeting on the sideline of Asian Development Bank (ADB)'s annual meeting in Yokohama, south of Tokyo, Japan May 5, 2017. REUTERS/Issei Kato

A replacement for Governor Muhammad Ibrahim, who has run Bank Negara Malaysia for just two years, could be announced on Wednesday, Reuters reported. Politicians and media have criticised Muhammad for the bank’s purchase of government land for about $500 million, cash the new administration says was then used to repay some 1MDB debts. He says the deal was legal and done at a fair value.

Central bank independence is especially valuable in emerging markets, so it is worrying any time a governor is ousted. On the other hand, one of Muhammad’s first actions after being appointed by former Prime Minister Najib Razak was to end the bank’s investigation into 1MDB. He also lifted rates in January: helpful to Najib, although not unreasonable given the wider backdrop. Moreover, he will probably be replaced by a current or former deputy governor, and major changes to monetary policy are unlikely. So the bank’s credibility could actually improve.

The episode nonetheless highlights a broader risk. The government is right to come down hard on the $6 billion 1MDB scandal. But with one influential elder talking of “cleansing the system”, there is a risk that this descends into vindictiveness, with many officials fired or prosecuted. The resulting climate of fear would make it harder to implement policy effectively.

That’s worrying when so much else is uncertain. New Prime Minister Mahathir Mohamad said last month that government debts were far higher than previously reported, at 80 percent of GDP. He is replacing a value-added tax which raised almost a fifth of government revenue last year with a less onerous levy and questioning the country’s relationship with China, which is a key source of funding.

All of this comes against the background of an emerging market sell-off and the threat of a trade war that could batter export-oriented Malaysia. Cleaning up makes sense, but Kuala Lumpur should proceed cautiously.

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