PEK3023: INTERNATIONAL FINANCE
ASSIGNMENT I: Individual assignment
TITLE
EXCHANGE RATE: FACTORS INFLUENCING AND IMPACT
OF COVID 19 PANDEMIC ON EXCHANGE RATES AND
MONETARY POLICY USED TO REDUCE THE PANDEMIC
IMPACT IN MALAYSIA
NAME
: MUHAMMAD RIEDZWAN BIN NASRULLAH
MATRIC NUMBER : D20191090074
LECTURER NAME
: PROFESOR MADYA DR. GAN PEI THA
COURSE CODE
: PEK3023
GROUP
:B
ABSTRACT
In early 2020, the almost uncontrollable spread of Covid-19 caused Malaysia to decide
to implement a restriction called the Movement Control Order (PKP). The writing of this
research examines about something important that is related to the scope of the exchange rate.
The exchange rate is one of the most widely used variables in the country. The exchange rate
determines the value of a national currency. In other words, the exchange rate is a trading
condition measuring how many units of imported goods can be obtained per unit of domestic
currency. In this research, there are some studies that are very important for the country. For
example, from this paper we can see Covid-19 or several factors influencing the exchange rate
and the pandemic effect of COVID-19 on the exchange rate. Some people or countries may not
know that Covid-19 will influence the exchange rate so strongly. The objective of this research
is to identify the factors influencing the exchange rate and the impact of the COVID-19
pandemic on the exchange rate as well as the methods of how monetary policy helps to address
the impact of this COVID-19 pandemic. In general, in this research shows factors that affect
the exchange rate such as changes in balance of payments because Covid-19 affects the
exchange rate, inflation rate done by Covid-19 affects the exchange rate and also the tourism
sector affected by Covid-19 affects the exchange rate.
2
TABLE OF CONTENT
Bil
Content
Page
1.
Cover page
1
2.
Abstract
2
3.
Table of content
3
4.
Chapter 1 : Introduction
5.
Chapter 2 : Literature review
6.
Chapter 3 : Methodology / data sources
7.
Chapter 4 : Findings and discussions
8.
Chapter 5 : Conclusion
9.
References
4–9
10 – 11
12
13 – 23
24
25 – 27
3
CHAPTER 1: INTRODUCTION
1.0 Introduction
In this chapter, the researcher will provide the background of the study, the objectives
of the study, the hypotheses of the study, the significance of the study, the scope of the research,
the definition of exchange rate and monetary policy.
1.1 Background of the study
In early 2020, in Malaysia there was an outbreak of a disease known as novel
coronavirus or better known as COVID-19. The disease first took effect on 23 January 2020
when the Ministry of Health Malaysia (MOH) received a report of three cases suspected of
being infected with novel coronavirus 2019 (COVID-19). Due to the spread of this epidemic
which still lasts until the end of 2020, this disease not only affects human health but the effects
of this disease also affect the development of the country and the most affected is the Malaysian
economy. What exactly is coronavirus and why does the disease also affect the national
economy?
Novel coronavirus or also known as COVID-19 is a type of virus that can cause
respiratory tract infections in humans. The virus was first detected in mid -December 2019 in
Wuhan in China. The virus began to spread throughout the world in early 2020, including
Malaysia itself, which was also affected by the virus outbreak. This is because the virus is
transmitted or spread between a person in a way similar to influenza and the virus is easily
transmitted when a person receives symptoms such as fever, cough and shortness of breath.
Therefore, the virus is easily spread around the world due to the failure of China to close the
entrance and exit of China which caused some of its citizens who were infected with the virus
to have time to leave China. Due to the increasing number of cases in China country, China
was forced to carry out a coronavirus pandemic and was recognized as a pandemic by the
World Health Organization (WHO) on March 11, 2020.
Similarly, with Malaysia, due to the increasing cases of COVID-19 infection and to
prevent this virus infection from increasing, the Malaysian government implemented the
Movement Control Order (MCO) which started on 18 March 2020 until 31 March 2020. During
the Movement Control Order (MCO) this happens all Malaysians are advised not to leave their
homes except for important matters such as buying daily necessities, buying medicines and so
on but only one family member is allowed to leave the house for a specific purpose. This
4
continued until 1 May 2020, Tan Sri Muhyiddin Yassin announced that the business would be
allowed to resume operations on 4 May 2020 as the Conditional Movement Control Order had
replaced the Movement Control Order (MCO).
The impact of the Movement Control Order (MCO) has led to socio -economic
disruption, daily activities, cancellation or postponement of sporting and cultural events as well
as widespread fear of lack of daily supplies which has resulted in panic buying during the
Movement Control Order (MCO). Due to the severe disruption to the economy in Malaysia
due to this Movement Control Order, the government improved or set some conditions so that
the economy in Malaysia is always moving and growing such as reopening food businesses,
allowing people to go to work and so on.
Due to the declining and unstable Malaysian economy during the coronavirus outbreak.
Many businesses reduce their operating costs to enable the business to operate in the future.
Not only that, it is undeniable that many businesses go bankrupt or close down their businesses
because they cannot afford the high operating costs such as Small and Medium Enterprises
(SMEs). In addition to the many closures of businesses and companies due to this epidemic,
the people are also affected by the loss of their permanent jobs which will affect the income of
an individual to support his daily life.
Overall in 2020, the Malaysian economy contracted by 5.6% in a very challenging
global and domestic operating environment. This caused Malaysia's Gross Domestic Product
(GDP) growth to contract sharply to the lowest ever recorded since 1998. Not only that, the
effects of this pandemic were exacerbated by the decline in world oil prices which affected the
incomes of oil producing countries including Malaysia and producing countries. other oils.
Therefore, the Malaysian economy also showed a decline in the exchange rate between the
Malaysian Ringgit and the US Dollar. Due to that, the government must take serious action to
prevent the economic recession from continuing to occur in Malaysia. Therefore, it is important
to investigate the factors and effects of the COVID-19 pandemic on the exchange rate in
Malaysia. In addition, this paper will also try its best to find out how the Central Bank of
Malaysia, known as Bank Negara Malaysia (BNM), uses monetary policy to overcome this
economic crisis.
1.2 Research Objective
There are several objectives to be achieved in writing this research. Among its
objectives are:
5
1. Identify the factors that influence the exchange rate
2. Identify the effects of the COVID-19 pandemic on the exchange rate in Malaysia
3. Identify the monetary policy used by Bank Negara Malaysia to reduce the impact of the
COVID-19 pandemic in Malaysia.
1.3 Research Hypothesis
1. The COVID-19 pandemic can have a significant impact on economic well-being,
including in developed countries such as Malaysia.
2. The monetary policy used by the central bank is reliable and can be used to be the most
useful tool during an economic crisis as happened in this COVID-19 pandemic.
1.4 Significant of Study
The results of this research will benefit graduate candidates, institutions and so on. This
is due to the fact that this research will help them to make reference from time to time. The
most important thing is, writing this research will help the sanjana candidate to know and
provide information about money exchange rates and monetary policy. In addition, the
suggestions or ideas presented in the writing of this research can be used as a reference for a
broader study or to justify the validity of other relevant findings. In addition, this writing will
also help them do better analysis in related fields. The writing of this research will also enable
institutions to provide a high quality environment, encourage the local community and also be
the main source of the economy to work together to ensure economic development in a country
continues to progress and grow. Finally, this research paper will provide an analysis of the
exchange rate between the Malaysian Ringgit (MYR) and the US Dollar and look at the impact
of the effectiveness of monetary policy undertaken by Bank Negara Malaysia (BNM) to
overcome this problem.
1.5 Scope of the research
The focus of the research is on the factors that influence the exchange rate and to study
the impact of the COVID-19 pandemic on a country's economy. Therefore, Malaysia is one of
the countries affected by the COVID-19 pandemic. With this research, we can see or compare
how Malaysia, as a developed country can weather or face the effects of this COVID-19
pandemic. Prior to the COVID-19 pandemic, there were several other economic crises that hit
Malaysia and this country has proven its ability to overcome the crisis.
6
1.6 Definition
The definition section is very important for a full understanding of the writing of this
research. this section will describe the definition of exchange rate and monetary policy so that
it can be understood or accepted by everyone and not just by those in the economic field only.
1.6.1 Exchange rate
Basically, the exchange rate is the value of one country’s currency relative to the
currency of another country or another economic zone. For example, how much Ringgit
Malaysia (MYR) is needed to buy a US dollar (USD). This is because the exchange rate system
that applies to a country’s currency is determined by that country. In addition, a country will
use the real exchange rate or known as the nominal exchange rate that takes into account the
difference in inflation between countries. Its importance is to be used as an indicator of
competitiveness in foreign trade with other countries. Not only that, the importance of the real
exchange rate is very useful to the central bank in order to implement a prudent monetary policy
or in accordance with the economic situation of a country. This is because the change in the
number of currency in circulation requires good management such as through the use of
monetary policy tools by the central bank that is the central bank will stabilize prices.
1.6.2 Monetary policy
Monetary policy is a macroeconomic policy set by the central bank. This involves the
management of money supply and interest rates and is a demand -side economic policy used
by the government of a country to achieve macroeconomic objectives such as inflation,
consumption, growth and liquidity. Moreover, monetary policy is the process by which the
government, central bank or monetary authority of a country controls the money supply, money
availability and interest rates for purposes oriented on economic growth and stability. The
concept of monetary provides an idea of how optimal monetary policy is. Monetary policy also
depends on the relationship between interest rates in the economy i.e. the price at which money
can be lent and the amount of money supply. Monetary policy uses a variety of tools to control
one or both to influence outcomes such as economic growth, inflation, exchange rates with
other currencies and unemployment. Where a currency is under an issuance monopoly or where
there is a system issued to issue currency through banks tied to the central bank, monetary
authorities have the ability to change the money supply and thus influence interest rates.
7
1.7 Introduction to type of exchange rate
At the same time, the exchange rate can also be categorized into several categories
based on the suitability of the economic problems faced or depending on the conditions of the
country. Among them are:
1. Free floating
A floating exchange rate can be classified as free -floating if the intervention
occurred only unusually, aimed at overcoming irregular market conditions, and if the
authorities have provided information or data confirming that the intervention was
limited to at most three incidents in six months previously, each lasted no more than
three working days.
2. Currency board arrangement
Classification as a currency board arrangement involves the verification of the
exchange rate arrangement of the national authority. A currency board arrangement is
a monetary arrangement based on an explicit legal commitment to exchange a domestic
currency with a specific foreign currency at a fixed exchange rate, combined with
restrictions on the authorities to ensure fulfilment of its legal obligations. This implies
that the domestic currency will be issued only against foreign exchange and it remains
fully backed by foreign assets, eliminating traditional central bank functions such as
monetary controls and final lenders, and leaving little room for discretionary monetary
policy. There may be flexibility, depending on the stipulation of banking rules in the
currency board arrangement.
3. Stabilized arrangement
Classification as a stable order requires the spot market exchange rate to remain
within a margin of 2% for six months or more with the exception of certain amounts or
step adjustments, and not float. The required stability margin can be met either with a
single currency or a group of currencies, where the anchor or basket currency is
ascertained or verified using statistical techniques. Classification as a stable order
requires statistical criteria to be met, and that the exchange rate remain stable as a result
of official actions including the rigidity of the market structure. The classification does
not indicate the policy commitment of the state authorities.
8
1.8 Concluding Remarks
The background of the study, research objective, research hypothesis, significance of
the study, the scope of the research, and the definitions were provided in this chapter. It should
help the readers to gain some lead about the direction of this research. For the next chapter,
attention will be given more to the previous studies about the economic crises that have been
conducted in the past.
9
CHAPTER 2: LITERATURE REVIEW
After briefly discussed the research background, objectives, hypothesis, significance,
scope and together with the definitions in Chapter 1, we proceed to Chapter 2 to provide the
relevant literature review regarding the scope of the topic which is the financial crisis. This
chapter perhaps can emphasize the significance of the research.
2.1 Literature review
The average change in the KLSE index is -0.264, indicating that negative values
predominated during the COVID-19 outbreak. Changes in currency exchange rates, on the
other hand, show a mean with a negative value of -0.087. The changes in the KLSE index and
the currency exchange rate were analysed using Spearman rank correlation analysis in this
study. The results show an important, moderate, and positive relationship between KLSE index
changes and currency exchange rates (Nashirah Abu Bakar & Sofian Rosbi, 2020).
Indrajit Banerjee, Atul Kumar & Rupam Bhattacharyya (2020) explain in their study
the VAR findings suggested that the rise in reported COVID-19 cases caused indicative but
not statistically significant changes in the exchange rate and Sensex values, and that the Sensex
and exchange rate growth rates would have taken a significant number of days to return to their
long-run growth trends as a result of the COVID-19 shock.
Following that, this study examined the relationship between two variables, namely
changes in the KLSE Index and currency exchange rates during the COVID-19 outbreak. Both
of these variables show a mean of negative change during the COVID-19 outbreak.
Furthermore, statistical tests revealed that both variables were affected during the COVID-19
outbreak period (Nashirah Abu Bakar & Sofian Rosbi, 2020).
Indrajit Banerjee, Atul Kumar & Rupam Bhattacharyya (2020) also emphesized in their
study for Indian economy was during lockdown 1.0, GROWTHC and GEX have a positive
correlation, but GROWTHC and GSENSEX have a negative correlation. This meant that as
the number of confirmed cases increased, the Indian currency continued to depreciate, while
the stock exchange index began to fall. Furthermore, there is a strong negative correlation
between the exchange rate and the Sensex index, implying that as the Indian currency
depreciated, so did the stock market.
However, owing to the COVID-19 outbreak, the global economy is currently
experiencing a downturn. As a result, since COVID-19 is a new virus discovered in 2019, there
10
is still a lack of research into its financial effects. As a result, this research aims to close the
gap by looking into the effect of COVID-19 on the currency exchange rate.
11
CHAPTER 3: METHODOLOGY / DATA SOURCES
This section will discuss and describe the process or method used to complete the
writing of this research. in addition, a research methodology is provided to link the objectives
of the study with the results of the study. There are various sources used to collect, analyse and
process the data obtained to obtain final results or decisions related to the factors influencing
the exchange rate and the impact of the COVID-19 pandemic on the exchange rate. In addition,
the purpose of the data obtained is to evaluate or determine actions taken or used such as
monetary policy to reduce or minimize the impact of the COVID-19 pandemic on a country’s
economy. In this writing, secondary data has been used through library research and internet
sources. Not only that, all the sources used in writing this research are very useful as they can
provide so much information about the country’s economy, about pandemics and also exchange
rates.
3.1 Secondary data
Secondary data is a source of research data obtained by the research directly or
indirectly through intermediate media obtained and recorded by other parties. Secondary data
is generally in the form of evidence, records or historic reports that have been compiled into
published and unpublished documentary data.
3.1.1 Online resources (Internet)
Most of the data collected is from online search sources or 'internet'. This method is
used because it is more effective in addition to saving cost and time as the area where the author
lives is categorized under the Tightened Movement Control Area (PKPD) which was launched
in the District of Tawau, Sabah. Among the websites visited by the author are the official
website of the Department of Statistics and Statistics Malaysia (https://www.dosm.gov.my/v1/)
and the official portal of the Ministry of Finance Malaysia (https://www.treasury.gov.my/). In
addition, there are many other sources used such as Investopedia, the World Health
Organization (WHO), and the International Monetary Fund
12
CHAPTER 4: FINDINGS AND DISCUSSIONS
In this section, findings and discussion are the most important part of the writing. This
is because, this section covers all the descriptive information from various sources. Therefore,
for data analysis and collective information from journals, articles, previous studies and more.
4.1 Factors influencing the exchange rate.
There are several factors influencing the exchange rate caused by the COVID-19
pandemic in Malaysia. Among them are:
4.1.1 Inflation during the COVID-19 pandemic.
Month
Inflation (%)
January
1.6
February
1.3
March
-0.2
April
-2.9
May
-2.9
Jun
-1.9
July
-1.3
August
-1.4
September
-1.4
October
-1.5
November
-1.7
December
-1.4
Table 1: Inflation in Malaysia in 2020
Source: Department of statistics, Malaysia
13
Inflation in Malaysia in 2020
2
1.5
1
0.5
(%)
0
-0.5
-1
-1.5
-2
-2.5
-3
-3.5
Months
Graph 1: Inflation in Malaysia in 2020
Source: Department of statistics, Malaysia
Inflation is the rate at which prices rise or fall over time. In general, inflation has more
of a negative impact on the exchange rate. The COVID-19 pandemic has a major impact on
inflation which will also affect the exchange rate. In January and February inflation was at a
positive level in January it was 1.6% and in February it was 1.3%. This is because in January
and February all economic activities run or operate as usual. Not only that, in January and
February, the exchange rate was not severely affected and remained stable.
In March, inflation began to decline and showed a negative value of -0.2%. This is due
to the start of the implementation of the Movement Control Order (MCO) this month. Not only
that, the decline in inflation in March was also driven by the fall in the Transport group index
of 8.9% which accounted for 14.6 per cent of the total weightage and also the decline in the
clothing and footwear group index of -1.3%. Overall, inflation from March to December 2020
showed a negative sign, with the highest negative value of inflation recorded in April and May
at -2.9%. In April and May, almost all economic sectors in Malaysia did not operate, resulting
in a lack of money inflows and outflows in the Malaysian market.
From the source of the Economic and Monetary Outlook 2020, this negative inflation
reflects significantly lower retail fuel prices due to weaker world oil prices as well as the
implementation of tiered electricity tariff rebates from April to the end of 2020. Although
14
inflation is negative but declining prices not thorough. The evidence from the Economic and
Monetary Survey 2020, the Consumer Price Index (CPI) which recorded a decline in monthly
prices throughout 2020 at an average of 19%. Finally, the effect of declining inflation on the
exchange rate is that low inflation does not guarantee currency appreciation but very high
inflation is most likely to cause the currency to fall. If inflation is at a high level the demand
for Ringgit Malaysia (MYR) will fall and there will be less exchange of Malaysian currency
with other countries.
4.1.2 The balance of payments deficit affects the exchange rate
Year
Balance of Payment (RM Billion)
2018
7.8
2019
8.4
2020
-19.4
Table 2: Balance of Payment in 2018 until 2020
Source: Department of statistics, Malaysia
Balance of Payment (RM Billion)
10
5
0
(RM Billion)
2018
2019
-5
-10
-15
-20
-25
Years
Graph 2: Balance of Payment in 2018 until 2020
Source: Department of statistics, Malaysia
15
2020
Balance of payments means the balance of trade between a country and that country's
trading partner. If there is a balance of payments deficit, it means that the country has more
imports than exports. Based on graph 3, we can see that there is a decline in the balance of
payments from RM 8.4 billion in 2019 to a negative RM 19.4 billion in 2020. This shows
something bad for the economy in Malaysia in 2020. From the Economic and Monetary Survey
2020 found the account the current balance of payments recorded a surplus of RM 62.1 billion
and was supported by a higher goods surplus as well as lower deficits in the primary and
secondary income accounts.
In 2020, the goods account such as imports, contracted significantly compared to
exports and produced a higher goods surplus of RM 139.1 billion. Not only that, in 2020 also
Malaysia's exports of goods have decreased in the first half of 2020. The services account also
recorded a larger deficit in 2020 of RM 48.0 billion. This deficit reflects a sharp decline in
exports of travel services and air transport as a result of the implementation of international
travel restrictions. In addition, Malaysia's travel account recorded a deficit of RM 7.8 billion
which was also driven by a sharp decline in tourism receipts to RM 12.7 billion due to a
significant drop in tourist arrivals in 2020.
Furthermore, the COVID-19 pandemic also had a direct impact on the manufacturing
sector, especially the manufacture of rubber gloves, rice milling and other basic chemical
manufacturing. In terms of the percentage increase, it was found that most of the manufacturing
industries were from the Food and Beverage Group where the products became consumer needs
throughout the COVID-19. Data from the Department of Statistics Malaysia found that the
sales value of rubber gloves showed an increase in March 2020 with a value of RM 3.8 billion
compared to RM 1.9 in March 2019. Total exports of rubber gloves also showed a continuous
increase in March with a value of RM 1.8 billion compared to RM 1.5 billion in March 2019.
The main export destinations of rubber gloves are to the United States, China, Japan, Germany
and the United Kingdom. These five countries have accounted for more than 50 percent of
Malaysia's export market. Among the main competitors in the manufacture of rubber gloves
are Thailand, China, Germany and Belgium.
Finally, the balance of payments became a deficit due to high import demand in 2020.
The highest imports were in the food and beverage sector, especially rice imports. This is
because rice is a staple food among Malaysians. To meet the needs of the population, 30.0
percent to 40.0 percent of Malaysia's rice supply is imported from abroad. In the situation of
16
the country facing the COVID-19 pandemic, the stockpile of food supplies, especially rice
supplies, can last for three months, which is sufficient for the duration of this movement control
order. The evidence from the data available in the Malaysia Trade Statistics Review for the
period January to April 2020, the main source of rice imports is from Vietnam with an import
value of RM 358.8 million followed by India at RM 110.9 million and Pakistan at RM 102.4
million. This resulted in the average price of rice for the period January to April 2020 recorded
an increase of 3.0 percent which is RM 1944 per metric ton compared to RM 1887 per metric
ton for the same period in 2019.
An increase in the volume of imports will cause the demand for foreign currency to
increase. In general, if imports are higher than exports, it means that the amount of money
coming out of the country is more than the amount of money coming in, thus causing the
demand for the country's currency to fall. Due to the decline in the balance of payments in
Malaysia in 2020, the exchange rate between the national currency and foreign currencies may
fluctuate. The same is true because of fluctuations in the strength of the currency that affect the
balance of payments. Supply and demand for certain currencies, as well as competition for all
financial transactions in international markets are two factors that help link balance of
payments and currency value fluctuations. In conclusion, the balance of payments will also
have an effect on the exchange rate.
4.1.3 The tourism sector influences the exchange rate
Year
Tourist arrivals in Malaysia (Million)
2018
25.83
2019
26.10
2020
4.33
Table 3: Tourist arrivals in Malaysia (2018-2020)
Source: My Tourism Data
17
Tourist arrivals in Malaysia (Million)
30
25
Million
20
15
10
5
0
2018
2019
2020
Years
Graph 3: Tourist arrivals in Malaysia (2018-2020)
Source: My Tourism Data
One of the sectors in Malaysia severely affected by the COVID-19 outbreak is the
tourism sector. Based on graph 3 above, there is a decrease in the number of tourists arriving
in Malaysia. In 2019, the number of tourist arrivals in Malaysia was recorded at 26.10 million
but it has decreased by 21.77 million to 4.33 million in 2020.
It is undeniable that the tourism sector in Malaysia plays an important role in enhancing
economic growth by promoting foreign spending on goods and services in Malaysia. If the
number of tourists continues to decline, part of the tourism industry will have to close due to
unbearable losses and inability to pay workers' salaries. At the same time, other insignificant
sectors also had to cease operations during the Movement Control Order (MCO). For example,
economic activity in the manufacturing and construction sectors continued to hold back to
control the spread of COVID-19 in Malaysia. That is why financial support from the
government to the sectors involved is important. This is in line with Keynes ’view of the role
of government during an economic recession.
Tourism is also one of the three major contributors to Malaysia's GDP. It will help
Malaysia acquire other countries' currencies. The relationship between tourism and exchange
rates is that as tourism grows, so does the demand for domestic currency. As a result, the
relationship could be improved, and as tourism grows, so does the demand for domestic
18
currency. The domestic currency will thrive because of this. While Malaysia is promoting the
"Visit Malaysia" program, for example, many visitors are attracted to visit the country. This
has a significant impact on GDP, and at the same time, demand for our currency increases,
strengthening the domestic currency.
The proof is that the estimated total loss in the tourism sector from January to February
2020 is RM3.37 billion due to the spread of this coronavirus. This will have a huge impact on
Malaysia's Gross Domestic Product, as tourism is one of the major contributors to GDP. As a
result, demand for the Malaysian currency will fall, and the exchange rate will worsen.
4.2 The effect of the COVID-19 pandemic on the exchange rate.
Month
Exchange rate of Ringgit Malaysia per
US Dollar (USD)
January
4.1945
February
4.1202
March
4.2015
April
4.3380
May
4.3965
Jun
4.3836
July
4.3187
August
4.3118
September
4.2335
October
4.1926
November
4.1937
December
4.1573
Table 4: Exchange rate of Ringgit Malaysia per US Dollar (USD) in 2020
Source: Accountant General's Department of Malaysia
19
RM
Exchange rate of Ringgit Malaysia per US Dollar (USD) in
2020
4.45
4.4
4.35
4.3
4.25
4.2
4.15
4.1
4.05
4
3.95
Months
Graph 4: Exchange rate of Ringgit Malaysia per US Dollar (USD) in 2020
Source: Accountant General's Department of Malaysia
The COVID-19 pandemic has affected economic development, national well-being and
also affected the global economy. Among the effects of this COVID-19 pandemic on the
exchange rate. The exchange rate is very important and is influenced by capital flows and
countries with stable markets are better able to attract foreign capital. When a country is
affected by economic problems, economic growth will be delayed to prepare for the need to
close certain sectors of the economy. In addition, current economic trends can be estimated
using foreign exchange rates. This is because the foreign exchange rate is very important for a
country’s trade ratio.
The effects of the COVID-19 pandemic will also affect the exchange rate of Ringgit
Malaysia (RM) per US Dollar (USD) in 2020. As can be seen in graph 1, the exchange rate of
Ringgit Malaysia (RM) per US Dollar (USD) is unstable. there are fluctuations in the exchange
rate of the Malaysian Ringgit. The exchange rate of Ringgit Malaysia (RM) per US Dollar
(USD) was RM 4.1945 in January 2020. Earlier this year, the effects of the COVID-19
pandemic have not affected the exchange rate in Malaysia and all economic activities are
running smoothly. In addition, in January 2020, the ringgit appreciated against the US dollar
mainly driven by inflows of non -resident portfolios. The increase was supported by improved
investor sentiment and willingness to take risks following the positive development of trade
20
negotiations between the US and China. In February 2020, the exchange rate of Ringgit
Malaysia (RM) per US Dollar (USD) began to decline to RM 4.1202. However, in February
and March, the ringgit, along with regional currencies, experienced a significant depreciation
against the US dollar. The depreciation trend of the ringgit was due to geopolitical
uncertainties, declining commodity prices and the spread of the COVID-19 pandemic. (2021
economic review report)
The increase in the exchange rate of Ringgit Malaysia (RM) per US Dollar (USD)
began to occur in March 2020, which increased to RM 4.2015. This is because the Malaysian
government has implemented international restrictions, namely prohibiting other countries
from entering Malaysia and closing all economic sectors in Malaysia. The purpose is to prevent
this COVID-19 virus or this COVID-19 case from increasing in Malaysia. In this
implementation, the government also implemented the Movement Control Order (MCO),
where in this implementation all citizens who are in Malaysia to sit quietly in the house and do
work from home only. The increase in the exchange rate of Ringgit Malaysia (RM) per US
Dollar (USD) continued to increase until June 2020 which was RM 4.3836 but between March
and June, May recorded the highest exchange rate of Ringgit Malaysia (RM) per US Dollar
(USD) high for 2020 which is RM 4.3965. During the implementation of the Movement
Control Order until May, all activities involving foreign exchange decreased because no
tourists came to travel in Malaysia.
The decline in the exchange rate of Ringgit Malaysia (RM) per US Dollar (USD) began
to decline from July which was RM 4.3187 to RM 4.1573. This is because the Malaysian
government relaxed the conditions during the implementation of the Movement Control Order
(MCO) in July with the implementation of the new conditions allowing economic sectors to
move again. Finally, according to the 2021 economic outlook report at the end of September,
the ringgit depreciated 1.6% against the US dollar as the global and domestic economic
recovery is expected to support the strengthening of the ringgit. Nevertheless, the protracted
uncertainty over the COVID-19 pandemic, global policy and political environment will lead to
increased exchange rate volatility over a period of time.
21
4.3 Monetary policy used by Bank Negara Malaysia to reduce the impact of the COVID19 pandemic in Malaysia.
In response to the economic crisis, the Bank’s Monetary Policy Committee reduced
Implementation of monetary stimulus through rapid and significant policy overnight rate
(OPR) reductions ensuring accommodative monetary conditions to mitigate the impact of the
COVID-19 pandemic on the economy and further support economic recovery. The policy
overnight rate (OPR) was reduced cumulatively by 125 basis points in four meetings in 2020,
and hit an all -time low of 1.75%. The thrust of monetary policy throughout 2020 is to provide
support and mitigate the long -term adverse effects on the economy in the face of an
unprecedented global health crisis.
The policy overnight rate (OPR) reduction of 25 basis points in January 2020 was made
as a precautionary measure to protect the growth trajectory amid price stability, given the low
risk of global and domestic growth prospects. These actions have also provided some support
to the economy during the onset of the crisis. As the shock from the COVID-19 pandemic
escalated into a global economic crisis, the policy overnight gross (OPR) was further reduced
in March and May 2020 by 25 and 50 basis points respectively to reduce the economic impact
on businesses and households. The easing of monetary policy should be due to the significant
disruption in economic activities following the implementation of the Movement Control Order
(MCO) to curb the spread of this COVID-19 pandemic. In an income environment affected by
slowing economic activity, the reduction in the OPR eased the debt repayment burden and total
borrowing costs, thereby reducing cash constraints and providing support for financing for
households, small and medium enterprises (SMEs) and corporate companies. This is very
important to reduce the impact of major shocks on economic activity as well as reduce the risk
of job loss.
Although the domestic economy has begun to recover from its lowest level in the
second quarter of 2020, the policy overnight rate (OPR) was further reduced by 25 basis points
in July 2020 to accelerate the pace of economic recovery. In the fourth quarter of the year, the
re-emergence of COVID-19 infection resulted in the re-enforcement of containment measures
in some states. However, growth for 2020 remains within the previously projected range and
economic activity is expected to improve in 2021. Given the significant easing of monetary
policy in early 2020, as well as the positive impact of financial assistance and other regulatory
measures by the Bank, and a very significant fiscal stimulus, the Malaysian Productivity
22
Corporation (MPC) described the existing monetary policy stance as appropriate and
sufficiently accommodative. Therefore, the policy overnight rate (OPR) has not been changed
for the remainder of 2020. However, given the low risk of growth prospects due to global and
domestic uncertainties due to this pandemic, the Malaysian Productivity Corporation MPC will
remain vigilant when assessing the changing situation. -changes and their implications for the
overall outlook for domestic and national inflation and growth.
Finally, banks streamlined the Statutory Reserve Requirement (SRR) to support
financial intermediation activities. The SRR has been adjusted as part of the Bank's ongoing
efforts to ensure adequate liquidity in the system to protect the mediation process. The Statutory
Reserve Requirement (SRR) is an instrument used to manage liquidity and does not indicate
the stance of monetary policy. This adjustment was made during the onset of the crisis in March
and May 2020, which included a 100 basis point reduction in the Statutory Reserve
Requirement (SRR) ratio from 3.00% to 2.00%, and temporary flexibility allowing banking
institutions as part of Statutory Reserve Requirement compliance (SRR). The injection of
liquidity through this combination of measures, amounting to approximately RM46 billion,
gives banking institutions greater flexibility in their liquidity management, as well as
supporting the continued functioning of the domestic bond market. This harmonization of the
SRR, in addition to other liquidity injection operations by the Bank, enables banking
institutions to continue to perform their role effectively in the credit intermediation process.
23
CHAPTER 5: CONCLUSION
In conclusion, news about the Covid-19 epidemic is the lifestyle of Malaysians.
Malaysians need to live the lifestyle of the new norms introduced by the government with
certain Standards of Procedure (SOP). Not only that, with the occurrence of this COVID-19
pandemic has a lot of impact on society, country and world. The worst effects of the C0VID19 pandemic are on the world economy and the economy of a country. We can see that the
employment rate is declining rapidly, the rate is also influenced by Covid-19. Many people in
Malaysia sourced resources because of Covid-19. Of course, all this will not be easy. In
addition, the COVID-19 pandemic has had a serious impact on the Malaysian economy.
Therefore, the finance minister plays an important role in this important time to help Malaysia
face this crisis. I believe that all the policies I propose will be able to help the vast majority of
Malaysians not in need during these challenging times of using well -connected small and
medium companies and families. Therefore, each individual needs his or her own request to
help Malaysia in winning this war. In addition, the monetary policy used should be appropriate
to the current economic situation. The Malaysian economy is constantly evolving and using
the depreciation of the local currency. The purpose is for our country to compete with other
foreign countries in terms of the required rate of our country which benefits from such
additional rates.
24
REFERENCES
Amato, J., Filardo, A., Galati, G., Peter, G., & Zhu, F. Research on exchange rates and
monetary
policy:
an
overview. BIS
Working
Papers.
Retrieved
from
https://www.bis.org/publ/work178.pdf
Benzid, L., & Chebbi, K. Impact of Covid-19 Virus on Exchange Rate Volatility: Evidence
Through GARCH Model... Retrieved from file:///C:/Users/user/Downloads/SSRNid3612141.pdf
Cooper,
R.
N.
EXCHANGE
RATE
CHOICES...
Retrieved
from
file:///C:/Users/user/Downloads/99p.pdf
Chen,
J.
(2020).
Exchange
Rate
Definition.
In Investopedia.
Retrieved
from
https://www.investopedia.com/terms/e/exchangerate.asp
Faktor Yang Mempengaruhi Kadar Pertukaran Wang. (2020, March 13). Celik wang.
Retrieved
from
https://moneycompass.com.my/bm/2020/03/13/faktor-yang-
mempengaruhi-kadar-pertukaran-wang/
Friedman, B. M. (2000, December). Monetary policy. NBER Working Paper Series. From
https://www.nber.org/system/files/working_papers/w8057/w8057.pdf
Geanina, I. A. Monetary Policy and Economic Policy. Journal of Knowledge Management,
Economics and Information Technology. From https://www.scientificpapers.org/wpcontent/files/1113_Monetary_Policy_and_Economic_Policy.pdf
Habermeier, K., Kokenyne, A., Veyrune, R., & Anderson, H. (2009, January). Revised System
for the Classification of Exchange Rate Arrangements. IMF Working Paper. Retrieved
from
https://www.researchgate.net/publication/46433287_Revised_System_for_the_Classi
fication_of_Exchange_Rate_Arrangements
Kerugian sektor pelancongan akibat COVID-19. (2020, March 13). BERITA HARIAN.
Retrieved from https://www.bharian.com.my/berita/nasional/2020/03/665159/rm337bilion-kerugian-sektor-pelancongan-akibat-covid-19
Kruskovic, B. D. (2016, October 25). Exchange Rate and Interest Rate in the Monetary Policy
Reaction Function. Journal of Central Banking Theory and Practice. Retrieved from
25
https://www.researchgate.net/publication/313782603_Exchange_Rate_and_Interest_
Rate_in_the_Monetary_Policy_Reaction_Function
Kronologi Covid-19 di Malaysia sehingga 16 Mac 2020. (2020, March 17). My Metro.
Retrieved
from
https://rlacollege.edu.in/pdf/Eco_Presentations/Principlesofmacroeconomics/Balanceof-Payment.pdf
Kes pertama rakyat Malaysia positif koronavirus. (2020, February 4). BERNAMA. Retrieved
from https://www.bernama.com/en/general/news_covid19.php?id=18113 73.
Malaysia Tourism Statistics in Brief. (n.d.). In Tourism Malaysia. Retrieved from
https://www.tourism.gov.my/statistics
Malaysia
inflation
rate.
(n.d.).
In Trading
economics.
Retrieved
from
https://tradingeconomics.com/malaysia/inflation-cpi
MALAYSIA TRADE STATISTICS REVIEW (2020, June 4). In Jabatan Perangkaan
Malaysia.
Retrieved
from
https://www.dosm.gov.my/v1/uploads/files/1_Articles_By_Themes/External_Sector/
MTSR/Malayia_Trade_Statistics_Review_Vol-1-2020.pdf
Mohd Mustafa, A. (2012). Kesan Kejutan Kadar Pertukaran Ke Atas Sektor Eksport Di
Malaysia. Prosiding Persidangan Kebangsaan Ekonomi Malaysia, 2. Retrieved from
https://www.ukm.my/fep/perkem/pdf/perkemVII/PKEM2012_4B3.pdf
N. N. Idalisa, M. Tismazammi and M. A. N. Azwani (2017, October 17). Linkage between
Ringgit exchange rate and U.S Dolla. Journal of Fundamental and Applied Sciences.
Retrieved
from
https://www.researchgate.net/publication/322815272_Linkage_between_Ringgit_exc
hange_rate_and_US_Dollar
Nashirah Abu Bakar and SofianRosbi (2020, April). Impact of Coronavirus Disease 2019
(COVID-19) to Equity Market and Currency Exchange Rate. Journal of Economics
and
Finance, 11(2).
Retrieved
from
https://www.researchgate.net/publication/340827067_Impact_of_Coronavirus_Diseas
e_2019_COVID-19_to_Equity_Market_and_Currency_Exchange_Rate
26
ON THE MALAYSIAN RINGGIT EXCHANGE RATE DETERMINATION AND RECENT
DEPRECIATION. (2017). International Journal of Economics, Management and
Accounting.
Retrieved
from
https://www.dosm.gov.my/v1/uploads/files/1_Articles_By_Themes/External_Sector/
MTSR/Malayia_Trade_Statistics_Review_Vol-1-2020.pdf
Perkembangan
Monetari
dan
Kewangan.
(n.d.).
Retrieved
from
http://www1.treasury.gov.my/pdf/ekonomi/2021/Bab-4.pdf
Pertukaran mata wang asing (n.d.). In Jabatan Akauntan Negara Malaysia. Retrieved from
http://www.anm.gov.my/index.php/pertukaran-mata-wang-asing
Perkembangan Ekonomi, Monetari dan Kewangan pada Tahun 2020 (n.d.). In Bank Negara
Malaysia.
Retrieved
from
https://www.bnm.gov.my/documents/20124/3026377/emr2020_bm_ch1_devts.pdf
Tinjauan Ekonomi 2020. . Retrieved from http://www.anm.gov.my/index.php/pertukaranmata-wang-asing
Taylor, J. B. (2001, May). The Role of the Exchange Rate in Monetary-Policy Rules. POLICY
IMPLICATIONS OF MACROECONOMIC RESEARCH, 91(2), 263-267. Retrieved
from
https://web.stanford.edu/~johntayl/Onlinepaperscombinedbyyear/2001/The_Role_of_
the_Exchange_Rate_in_Monetary-Policy_Rules.pdf
Variasi kadar pertukaran matawang dan harga minyak sawit. (2006). Jurnal Ekonomi
Malaysia. Retrieved from https://www.ukm.my/fep//jem/pdf/2006-40/jeko_40-1.pdf
Yang, B. Z., & Zeng, T. (2014, December). A Note on the Real Currency Exchange Rate:
Definitions and Implications. Journal of International Business and Economics, 2(4).
Retrieved
from
https://www.researchgate.net/publication/273421959_A_Note_on_the_Real_Currenc
y_Exchange_Rate_Definitions_and_Implications
27