Najib Razak’s links to Malaysia fund need transparency

Financial Times
July 9, 2015

Prime minister is under pressure over allegations regarding 1MDB

Ever since Malaysia gained its independence from Britain in 1957, the country has been ruled without interruption by one party, the United Malays National Organisation.

After more than six decades in power, UMNO, which represents the Muslim Malay majority, has much to celebrate. Malaysia has the third-largest economy in Southeast Asia, and is an all-too rare example to the world of a moderate and democratic Muslim state. But UMNO’s longstanding grip on power is under threat, raising doubts about the country’s political stability.

One sign of the pressure on the ruling party came at the 2013 general election, when Anwar Ibrahim, leader of the three-party Pakatan Rakyat coalition, came close to toppling UMNO from power. Campaigning to reform Malaysia’s political system, which he stigmatised as ossified and corrupt, Mr Anwar’s performance was good enough to raise fears within UMNO about a possible defeat at the next election in 2018.

In February, the opposition was dealt a crippling blow when Mr Anwar was imprisoned for five years by a court on sodomy charges —a case widely seen as politically motivated. Now, UMNO faces a new challenge that may be harder to brush aside. Allegations surfaced last week that almost$700m from 1Malaysia Development Berhad, or 1MDB, a state investment fund, was paid into a bank account in the name of Najib Razak, the prime minister. The premier has denied taking money from 1MDB or any other public funds. But his long-ruling predecessor Mahathir Mohamad recently called on Mr Najib to prove he did not pocket state cash, adding that in many other countries a leader in his position would have been forced to step down.

Concerns over 1MDB, which is 100 per cent owned by the finance ministry and was set up by Mr Najib in 2009, have intensified in recent months. The fund was created with the aim of developing new industries and turning the capital, Kuala Lumpur, into a global financial hub. But it has financed itself through issuing debt, and today owes more than$11bn.

Concerns grew this year when the fund rescheduled debt repayments and had to rely on a $1bn capital injection from an Abu Dhabi state fund to repay other loans. Here, too, Mr Mahathir has been on the attack, saying 1MDB borrowed too much and lacks transparency.

Mr Mahathir’s personal motives for speaking in this way are unclear, but his warning should be heeded. Mr Najib’s government should launch an independent investigation into 1MDB, one that throws a spotlight on its operations and investments. It must determine whether the prime minister, or any other individual or organisation, directly profited from the fund in any way.

The Malaysian government should understand why such transparency is needed. The economy may have performed well in 2014, with 6 per cent growth. But foreigners own about 40 per cent of Malaysia’s public debt. Worries the government may have to bail out 1MDB are preying on these investors and helped to push the ringgit to a 16-year low against the dollar this week.

In the meantime, UMNO’s leadership needs to contemplate Malaysia’s future more broadly.

The party’s six decade-long rule appears to have inculcated in its leaders a sense that they are somehow both indispensable to and indivisible from the state. Both the imprisonment of Mr Anwar and the apparent stalling over 1MDB give the impression of a party that denies the possibility of losing power.

UMNO should change course before it steers Malaysia into dangerous waters.

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