BENEFITS OF GRADUAL APPRECIATION OF SINGAPORE DOLLAR

BENEFITS OF GRADUAL APPRECIATION OF SINGAPORE DOLLAR: 3.

Mdm Ho Geok Choo asked the Senior Minister as the Singapore Dollar Nominal Effective Exchange Rate policy shifts from that of a zero per cent appreciation to one of modest and gradual appreciation, will he provide an assessment on how this policy will benefit or impact us.

Mr Lim Hng Kiang (for the Senior Minister): Mr Speaker, Sir, Singapore adopts an exchange rate-centred monetary policy to maintain price stability for sustained economic growth over the medium-term horizon. Given the small and open nature of our economy and our dependence on trade, the exchange rate has a significant influence on domestic prices which, in turn, is critical for the economic decisions of households and businesses.

In April 2010, MAS announced that it would shift to a modest and gradual appreciation of the Singapore Dollar Nominal Effective Exchange Rate (S$NEER) policy band, in addition to an upward re-centring of the band. This effectively implies a tighter monetary policy stance. This policy decision is appropriate, considering that the Singapore economy has recovered

Column: 21

strongly from the global financial crisis and is expected to continue on a firm path, given improved prospects in the external environment. At the same time, domestic inflationary pressures are likely to pick up in tandem with the rise in global commodity prices and domestic costs. Moreover, the effects of the shift in policy stance work with a lag, and economic activity is already beyond pre-crisis levels. Thus, it is timely to unwind the policy that was put in place during the downturn, and return to a gradual and modest appreciation of the exchange rate. The adjustment to the monetary policy stance at this juncture will thus ensure that economic growth is sustainable going forward.

There are two main ways a stronger Singapore dollar will impact the domestic economy. First, the majority of products we consume and use in production are imported from abroad. A stronger exchange rate will, therefore, reduce the cost of these imported goods for both consumers and producers. Second, the stronger Singapore dollar will help moderate external demand for our goods and services and ease the demand for domestic resources, such as commercial and industrial space, as well as labour inputs. This will help prevent domestic business costs, such as wages and rentals, from rising too rapidly and ensure overall macroeconomic stability.

In the longer term, the steady appreciation of the exchange rate is in line with our strong economic fundamentals. It keeps inflation low and stable, which helps to preserve the purchasing power of Singaporeans’ income and savings. It also provides a stable and conducive environment for businesses to undertake long-term investments, thus enhancing competitiveness and providing the basis for sustained quality economic growth for Singapore.

Column: 22

Mdm Ho Geok Choo (West Coast): Sir, I have three supplementary questions. One, how far would our gradual appreciation policy continue? Is it possible for the Singapore dollar to reach the previous high of 1.3438 against the US dollar? Second question: traditionally, MAS has used the exchange rate as a policy tool. Will there come a time when the Singapore dollar has appreciated to a level deemed too high that interest rate will have to be raised? In that situation, will inflation become a serious issue? The third question is this. If the appreciation of the Singapore dollar continues, would it impact Singapore's position as a major tourist destination now that we have positioned ourselves as such, with the opening of the two integrated resorts (IRs) and the remaking of Orchard Road? How would it affect our export competitiveness?

Mr Lim Hng Kiang: Mr Speaker, Sir, as I explained in my answer, our stance in our monetary policy is taken through the exchange rate, and this works for the medium term. Since we adopted this in the 1970s, it has proven to be fairly effective given our very open economy and our high dependence on trade. Over the years, through our monetary policy, we have kept inflation rate in Singapore low and kept the economy competitive. We have six-monthly reviews on our monetary policy. Obviously, we have decided to maintain this posture and will review it next, when October comes around.

The second question that Mdm Ho has is about inflation. The whole idea is to have the exchange rate put on a gradual and modest appreciation path so as to tighten monetary policy as a way to bring inflation down. But once you use the exchange rate as the key instrument, you cannot use rate of interest, otherwise the two will work in contradiction to one another.

Column: 23

Her third question relates to the impact of the appreciation. As I mentioned, with the exchange rate getting stronger, this impacts us in two ways: one is because we are a very import-dependent economy, it will lower our cost of import resources. At the same time, it affects our exports. But because a high component of our export comes from imported resources, this has not affected our export competitiveness in the long term. As to specifically the impact on the tourist industry, our study shows that even though the currency's exchange rate is an important factor, what really draws people to Singapore are the attractions. I think relative exchange rate is a factor but not the most important factor.