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Some IMF directors want it stronger but others favour current policy mix

Tackling inflation should remain a policy priority for Singapore, says the International Monetary Fund (IMF).

But given the growth risks, it would be prudent to assess the impact of the monetary tightening already in the pipeline before adjusting the policy stance, the fund’s executive board says in its latest annual review of Singapore’s economic policies.

The report, published as a Public Information Notice on the IMF website, follows discussions in May between IMF staff and senior Monetary Authority of Singapore (MAS) officials and Singapore’s Finance Minister.

In their assessment, the IMF directors note that the pace of economic activity here is likely to decline in the near term given the challenging external environment, with inflation remaining elevated.

‘Against this background, ensuring that inflation expectations remain well anchored is a policy priority,’ they say.

Some IMF executive directors are of the view that this calls for a further ‘rebalancing’ of Singapore’s macro-economic policy mix towards a tighter monetary stance and looser fiscal policy. Specifically, they propose a ‘moderately faster’ pace of currency appreciation.

Most of the directors, however, favour maintaining Singapore’s current policy mix, ‘with the authorities remaining ready to modify the policy stance going forward if necessary’.

MAS makes its stand clear: While agreeing that policies need to be responsive to changing circumstances, it sees no pressing need to rebalance the policy mix.

Monetary withdrawal in the pipeline should anchor inflation expectations, while home-grown price pressures have in part been addressed through administrative steps to ease supply bottlenecks, it says. Further currency appreciation during times of economic uncertainty could increase downside risks and attract speculative capital inflows, it adds.

Here, some IMF directors concede that additional monetary tightening could be ‘difficult’ when the external environment is fragile, ‘but observe that the width of the exchange rate policy band could provide flexibility to cope with adverse shocks’.

In their view, a stronger Singapore dollar would fend off higher inflation, facilitate external adjustment and create room for targeted spending to help the poor cope with rising prices.

MAS also disagrees with IMF staffers’ assessment that the Singapore dollar is ‘weaker than the level implied by its longer-term fundamentals’, maintaining that the local currency is fairly valued.

IMF directors concede that the extent of exchange rate undervaluation is difficult to gauge.

They also maintain that, over the medium term, a ‘broader reorientation’ of Singapore’s policy mix is ‘desirable’.

Singapore’s ample fiscal reserves provide space for more spending on physical and social infrastructure once inflation risks abate, in line with the country’s medium-term priorities, they say.

The IMF review also notes the Singapore economy’s ’sizeable linkages’ to the United States.

A one percentage-point decline in US growth could lower growth in Singapore by about 0.9 of a point, directly and through other trading partners. This is about twice the impact 10 years ago.

Softer external demand will lower Singapore’s economic growth to 4.5 per cent this year and next, the IMF forecasts.

But it is ‘unlikely’ that sub-prime-related losses could trigger any systemic instability in Singapore, it says.

Source : Business Times - 15 Aug 2008