On 1 September 1998, the Malaysian government, acting through its central bank, Bank Negara, pegged the Malaysian ringgit at the rate of US$1 to RM3.80, and instituted a set of ‘exchange control mechanisms’. Bank Negara's imposition of a fixed exchange rate for the ringgit (vis-à-vis the US dollar), and of the capital controls, represented the Malaysian state's concerted, not to say desperate, response to the worsening effects of the ‘East Asian financial crisis’ of July 1997. These financial measures sealed a strategy of crisis management that had been haphazardly formulated since late 1997, to use publicly financed rescue plans and packages to prevent the sudden collapse of key sectors, strategic industries and powerful conglomerates.

On 2 September 1998, Prime Minister Dr Mahathir Mohamad sacked his deputy (and, concurrently Minister of Finance), Anwar Ibrahim, from all government posts. The official announcement of the dismissal gave no reasons for this first ever sacking of a deputy prime minister in Malaysia. But the event appeared to be the culmination of a series of uneasy policy differences, even skirmishes, between Mahathir and Anwar over the management of a looming economic crisis. The dismissal of Anwar, who had been widely touted to be Mahathir's ‘anointed successor’, was immediately followed by Anwar's expulsion from his party, the United Malays National Organization (UMNO), the dominant party of the ruling coalition (Barisan Nasional, BN, or National Front). The moves against Anwar constituted a pre-emptive strike to deny Anwar any chance of challenging Mahathir, let alone succeeding him as the prime minister or UMNO president.

That an economic crisis, and one with international origins, should have joined, indeed provoked, a political crisis that threatened the survival of the incumbent leadership was not, in and of itself, without precedent in Malaysia. During the late 1980s, Mahathir's leadership was openly challenged and very narrowly avoided defeat in UMNO's party election of 1987.