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Malaysia in transition

Malaysia says state reserves used to pay 1MDB debt

Central bank and Khazanah funds exploited, Finance Minister points out

Former Malaysian Prime Minister Najib Razak gestures as he leaves the Malaysian Anti-Corruption Commission (MACC) Office in Putrajaya, Malaysia on May 24.   © AP

KUALA LUMPUR -- The Malaysian government on Thursday said the previous regime had secretly deployed money from the central bank and a sovereign fund to pay down debt obligations of 1Malaysia Development Berhad, as the extent of involvement by federal institutions in the corruption case becomes clear.

Up to December 2017, state fund 1MDB had maintained it repaid interests on its debt through asset liquidation, including $1.2 billion owed to its Abu Dhabi counterpart, International Petroleum Investment. 

On Thursday, new Minister of Finance Lim Guan Eng said reserves from Bank Negara, the central bank, and Khazanah Nasional, a key Malaysian sovereign fund, were used to service debt obligations of 1MDB. In the case of Bank Negara, it paid 2.066 billion ringgit ($521 million) to the Ministry of Finance in 2017 for a plot of government land valued at market price, a rare transaction between government bodies.

Khazanah paid 1.2 billion ringgit to its sole shareholder, the Ministry of Finance, in the form of redeemable cumulative convertible preference shares that were issued in 2011. 

"The time has come for me to lay the truth on the table," Lim told reporters.

The investigation into 1MDB is moving at a pace and it is becoming clear that the implications of corruption at the fund go far beyond it. Prime Minister Mahathir Mohamad said on Wednesday that national debt reached 65% of gross domestic product, much higher than the 50.8% at end of 2017, as claimed by the previous government under Najib Razak.

Lim said by recognizing the reality of the country's fiscal situation, the government will "prescribe all necessary remedies" as it honors all financial commitments. Stocks have been hit hard this week, with the benchmark Kuala Lumpur Composite Index down 4.2%.

Najib is being investigated for the mismanagement of SRC International, a unit of 1MDB. Irwan Serigar Abdullah, the treasury-general of the ministry who is also 1MDB chairman, has been transferred out of his office to serve the remaining of his contract until mid-June.

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