Jamus Lim, Alvin Tan on inflation, SGD moves and latest support package

THROUGH the use of monetary policy, Singapore’s central bank has strengthened its exchange rate by “at least 5 per cent” on an annualised basis in a bid to manage rising inflation, said Minister of State for Trade and Industry Alvin Tan on Tuesday (Jul 5).

This has helped to keep domestic food inflation at one-fifth that of global inflation, Tan said in response to an adjournment motion by Sengkang GRC MP Jamus Lim from the Workers’ Party.

In a speech on how macroeconomic policy can tackle rising cost of living challenges, Associate Professor Lim told Parliament more can be done to strengthen the Singapore dollar (SGD).

“This will reduce the costs of imported goods and services, and since so much of what we consume is imported, a strong SGD can in turn lower domestic inflation as well,” he said.

Lim noted that while the Monetary Authority of Singapore (MAS) has moved thrice since October to tighten monetary policy, “it is unclear how much this effort to strengthen the Singapore dollar has succeeded”, with only the most recent move “sufficiently aggressive”.

And after 3 separate efforts to strengthen the SGD, it was getting close to 4 per cent weaker against the US dollar (USD) than when the exercise first started, he added.

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He also said standard metrics for comparing the under or overvaluation of the SGD suggest that it is “significantly undervalued”, adding that there is “latent demand” for the SGD as an “attractive, safe-haven currency in these tumultuous times”.

“Paradoxically, we may not need to spend very much to prop up our currency. It may be as simple as ceasing interventions that restrain our exchange rates and allowing foreign exchange markets to work more efficiently. This is a luxury that precious few countries can afford but one that we can leverage on,” Lim said.

In response, Tan said the MAS takes many different factors into account when deciding the extent to which it is tightening the exchange rate.

“Foremost is the fact that strengthening the exchange rate cannot fully offset global prices without causing immediate negative consequences for growth and therefore the labour market,” he said.

Tan added that this is the reason many advanced central banks are guarded in the speed and extent to which they hike interest rates, given that monetary policy action has “attendant spillover effects” that must be taken into account in an uncertain and challenging economic environment.

Meanwhile, Lim also said monetary and exchange rate moves should occur alongside fiscal policy.

He suggested that support should be offered in a timely, targeted and temporary manner to those who need it most, while fiscal balances should not be building up excess surpluses at this time.

“Increased revenues resulting from higher collections of various taxes and duties should, as far as possible, be rebated back to citizens. This ensures that the government does not enjoy a windfall gain while our citizens suffer,” he said.

Referencing the government’s S$1.5 billion support package announced last month, Lim said more can probably be done.

He noted that revenue in Financial Year 2021 was S$74.8 billion, S$13.4 billion higher than the previous year, with the jump in property stamp duty alone worth S$6.8 billion even as personal and corporate income taxes have fully recovered.

“Yet, the last package only amounted to S$1.5 billion, a fraction of this revenue increase,” he said.

Lim added that it is important to avoid indexing economy-wide wages to inflation.

“While tempting - since it automates the process of wage adjustment to rising inflation - the experience of emerging economies in the 1980s and 1990s is a testament that this well-meaning policy can end up institutionalising inflation,” he cautioned.

One example of policy that follows the principles he outlined, he said, is to make adjustments for Singaporeans on fixed incomes.

“In practical terms, this means adjustments to those that rely on Comcare and CPF (Central Provident Fund),” he said. “We have to remind ourselves that - while financial markets can and do adjust returns to reflect higher inflation - this is not the case for those locked into a fixed income stream.”

He said Comcare assistance should be permanently and universally increased by a margin that reflects the excess inflation experienced by families for this year, whereas a temporary increase in CPF interest rates of around 2 percentage points for a 6-month period can be rolled out.

In his response, Tan said a judicious blend of tight monetary policy and targeted supportive fiscal policy carefully calibrated is most appropriate.

“Timely, targeted and temporary”, said Tan, is precisely what the government has done with the S$1.5 billion support package.

“The combined Budgets of 2020, 2021, together with monetary policy decisions, both fiscal and monetary policy together supported Singapore’s GDP (gross domestic product) by about 1 percentage point and prevented the deterioration of unemployment rate by 4 percentage points even as the combined expansionary monetary macroeconomic policy responses were non-inflationary,” he said.

He added that the current round of combined fiscal and monetary policy responses is expected to contain medium-term inflation without significant loss of output or inadvertently adding further to the tightness of the economy.

On indexing financial assistance payments to inflation, Tan said the government regularly reviews its schemes to take into account needs and affordability, and inflation is one of the factors taken into account.