Exposed ! How our Government hide illicit funds transfer in our Balance of Payment?

It is already becoming a cliché to hear politicians boasting on how well our country is doing due to our large foreign reserves. They may be forgiven because International Economics is not their forte. On the surface it looks like we are on the right track because surplus seems like a form of savings. With larger foreign reserves, our country not only can finance more imports but also act as a cushion against an economic downturn. However there are also disadvantages in having a large foreign reserve. Besides generating inflation it also increase our reliance on the US$ which we are trapped. Those are other issues that I am going to address in another article. For the time being let’s get educated on how the balance of payment works. First and foremost how foreign reserves are accumulated in our country?

A country can only increase the size of its foreign reserve when it is running a balance of payment surplus. What exactly is the Balance of Payments? To illustrate let me present you below with the table of our balance of payment from 2009 to 2012 in summary form.

Column1	Column2	Column3	Column4	Column5
Items	2009	2010	2011	2012
Balance on Current A/C	110727	88079	97108	59977
Balance on Capital A/C	-80300	-19993	22061	-22464
-  Capital Outflow	-27436	-42932	-46688	-50968
+  Capital Inflow	5121	29322	36616	29061
Direct Investment	-22315	-13161	-10072	-21907
Statistical Discrepancies	-16596	-70713	-24487	-33640
Overall Balance	13831	-2628	94682	3873
Foreign Reserves (Mil)	RM 331277	RM 328649	RM 423331	RM 427204
Sustain Import (Months)	9.7	8.6	9.6	9.5

For a layman to understand a country’s balance of payment will be a herculean task. All they read from the media is whether our country is running a balance of payment deficit or surplus. Other than that they have basically no idea what is a surplus or deficit or how our country’s international transaction and payment flows. Let me present you with a quick introduction to the concept of balance of payment. It consist three parts namely the Current Account, Capital Account and the Statistical Discrepancies.

The Current Account deals with the import and export of goods and services. It records transaction arising from trade in goods and services, income accruing and transfers of residents in one country to residents of another.

The Capital Account deals with the import and export of assets. It records the transactions related to international movement of financial assets.

The Statistical Discrepancies or Error and Omissions deal with the problem of data accuracy and timing.

In practice the current account and capital account should balance. This is because the surplus in the current account should match the deficit in the capital account and vice versa. However as I have mentioned sometimes there might be some problems with the data due to delay and timing. To force the current and capital account to balance, statistical discrepancies is brought into the equation.

Or,

Current A/C + Capital A/C + Statistical Discrepancy = 0

However if you look deeper into our Balance of Payment above, you may find some irregularities in their classifications.

Few things to Note

Firstly, we did not reduce our debts. As you can see from above, we are running balance of payment surpluses in three out of the four years. There are two things a country will do when it runs a balance of payment surplus. One is to add on to its foreign reserves and the other is to retire some of its debts. Malaysia obviously goes for the first option and that is to add to its reserves. In 2010 our foreign reserves drop to RM 328,649 million because it has to absorb the RM 2,628 million deficits. Then in 2011 it soared to RM 423,331 million due to the budget surplus of RM 94,682 million in 2011. Similarly in 2012, it shot up to RM 427,204 million when we have a budget surplus of RM 3,873 million. Why are we not reducing our debts or financing our Government expenditure with the surplus? Why burden the people by reducing subsidies and increasing taxes (GST)?

Secondly, why such a huge Statistical Discrepancies? As you can notice the main objective of the Statistical Discrepancies is to force balance the account due to the delay or accuracy of the respective accounts. Normally these are only minor adjustments and don’t run into tens of billions. If that’s the case then there are some serious problems with our data accuracy and hence suspicion. This may be due to large hidden capital flows and hence explains why this item has very large adjustment figure. In other words, there are folks secretly diverting funds out of our country. The following chart shows the illicit funds flowing out from Malaysia.

  

Year	US$ (Bil)
2001	13.1
2002	12.5
2003	17.8
2004	19.6
2005	28.1
2006	29.6
2007	32.5
2008	37.3
2009	30.4
2010	64.3
	285.2

Source : Global Financial Integrity

As can be seen from the data derived from Global Financial Integrity, a U.S based financial watchdog, there has been a constant rise in illicit funds going out of Malaysia. The worst is during 2010 where US$ 64.3 billion flowed out. As its name suggests ‘Discrepancy’, hence it is very difficult to keep track of the financial transaction flows between our residents and foreigners.

 

Thirdly, there is a massive Capital Outflow from Malaysia to foreign countries. From 2009 till 2012 it totaled RM 168 billion. Whatever it is, I am certain that there are no Malaysian companies that can afford to invest that much as Outward Foreign Direct Investment. Again it might be illicit capital outflow from our country.

Wrapping Up

What can be deduced from above is that there is certainly much suspect on the accuracy of the data presented to us. It raises more questions than answers as to why our statistical discrepancies and capital outflows figures are way out of range. Other than being used to masked illicit funds transfer from our country, I can’t think of any other reasons.