STRONG SINGAPORE DOLLAR POLICY

STRONG SINGAPORE DOLLAR POLICY:

(Impact on inflation and competitiveness): 1.

Mdm Ho Geok Choo:

Mdm Ho Geok Choo asked the Senior Minister how has the strong Singapore dollar helped the average Singaporean to keep high inflation at bay.

Mdm Ho Geok Choo asked the Senior Minister what is the key to Singapore's success in maintaining a strong Singapore dollar policy and how it has contributed to keeping Singapore competitive.

The Minister for Trade and Industry (Mr Lim Hng Kiang) (for the Senior Minister): Mr Speaker, Sir, may I have your permission to take Question Nos. 1 and 2 together?

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Mr Speaker: Please do.

Mr Lim Hng Kiang: Mr Speaker, Sir,Singapore adopts an exchange rate-centred monetary policy to maintain price stability for sustained economic growth. Given the small and open nature of our economy and our dependence on trade, the exchange rate has an important impact on domestic prices. This regime, in place since 1981, has served us well. For example, domestic inflation has been low over a sustained period, averaging 1.7% over the period 1981 to 2007, compared with an average of 5.5% for the OECD countries.

The objective of our monetary policy has always been and will continue to be focused on maintaining price stability over the medium term. An environment of low and stable inflation helps 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 job creation, and providing the basis for sustained economic growth. In turn, the success of our economic growth strategy, which leverages on global and financial market integration, has supported the continued appreciation of the domestic currency consistent with the economy's strengthening economic fundamentals. These include prudent fiscal policy and a large reserve position, flexible product and factor markets, as well as a robust and sound financial system and domestic corporate sector.

Since 2004, MAS has adopted a policy of targeting a modest and gradual appreciation of Singapore's trade-weighted exchange rate, amidst robust economic growth in the economy. In its last two policy announcements in October 2007 and April 2008, MAS said that it would allow a stronger appreciation of the Singapore dollar, through a steeper slope and an upward re-centering of its policy

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band, respectively. This was a considered and measured response to counter the inflationary pressures that were building up, while providing support for sustainable economic growth. In the current environment of high global inflation, MAS' exchange rate policy of a strong Singapore dollar has helped to reduce the cost of our imports. For example, between January 2007 and March 2008, global food prices – measured by the IMF food price index – surged 50% whereas the domestic cost of food imports rose by a much lower 14%.

While MAS' exchange rate policy stance has helped to dampen the effects of global food and oil inflation, we cannot insulate ourselves completely from the effects of higher world prices passing through to the Singapore economy. MAS has to strike the right balance in the setting of its exchange rate policy taking into account both inflation and growth considerations, mindful in particular that external demand conditions have weakened especially in the G3 markets.

The Government has therefore adopted a multi-pronged strategy to cope with inflation, which was announced as early as February this year in the Budget speech. Besides monetary policy, some of the other measures include the diversification of food sources to minimise spikes in prices due to supply disruptions from any one country, as well as raising public awareness of cheaper food choices and substitutes. At the same time, the Government is providing direct assistance to Singaporeans who are adversely affected by the higher cost of living. In addition to the GST Offset Package introduced in last year's Budget, the Government has also announced other relief measures this year, such as Growth Dividends and personal income tax rebates, targeted especially at lower- and middle-income Singaporeans. Together,

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these schemes would help defray a large part of the increase in the cost of living that households would experience this year.

Mdm Ho Geok Choo (West Coast):

Sir, three supplementary questions. I would like to ask the Minister whether there is a clear economic argument from MOF that can be carried to the masses, to assure them that this policy has indeed protected them from some form of inflationary erosion and is probably the best approach that we can take for now.

The second question is: are there any foreseeable downsides of maintaining a strong Singapore dollar? For instance, how is a strong Singapore dollar affecting our exports?

The third question is: has strengthening the Singapore dollar actually affected our tourism industry in any way?

Mr Lim Hng Kiang: Mr Speaker, Sir, I think the key message we want to get through to Singaporeans is that we face global inflation – energy prices are up, food prices are up, wage costs in some countries have also gone up. Therefore, there is no way we can completely insulate ourselves from these global forces. What we can do, as I explained in my answer, is a multi-pronged approach. First, we have a stronger Singapore dollar so as to dampen import inflation. Second, we look at supply constraints and release some of these supply constraints which cause some domestic cost increases, whether it be office space or residential land, and even labour constraints and also new sources of food so that we are not impacted by any disruption from any single country. Third, of course, is a more direct fiscal approach of assisting lower income and middle-income Singaporeans directly through the various policies and distributions like the Growth Dividends and the GST offsets.

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I think this broad strategy works, as it has panned out. Compared to many countries where the inflation rate is much higher, our inflation rate here is still high compared to our recent history but lower than what other countries have faced, and lower than if we had done nothing. I think this is a considered approach and it has gone some way to mitigate the impact. But we cannot completely shield ourselves and we cannot hope, over the next few months, to bring our inflation down to 1%-2% as we were very accustomed to, because the global trends have changed.

Second, as I have mentioned, we need this balance – a strong Singapore dollar helps to lower imported inflation but, at the same time, it affects our exporters who have to compete. The saving grace is that, being a global phenomenon, the competitors of our exporters also face cost pressures and therefore the situation is not as bad as in the 80s where Singapore alone faced much higher inflationary pressure and cost pressure compared to our regional surrounding countries. The situation today, in the light of a more widespread inflationary and higher cost trend, is that our exporters are keeping up.

Third, the impact on tourism. We have been fairly successful in attracting tourist arrivals to Singapore and so tourist arrivals have continued to grow at a fairly decent 4%-5%. Our biggest constraint is really the shortage of hotel rooms and this is part of the supply constraint that we face in different sectors of our economy. To this end, URA and STB have been very active in promoting new sales of sites and we should see the entry of additional hotel rooms soon and that will help alleviate the pressure in the tourism sector and help bring us to the target that we are aiming for, which is to double the visitor arrivals by 2015 and to triple tourism earnings by 2015.

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Dr Lily Neo (Jalan Besar): Mr Speaker, may I ask the Minister whether there is an upper limit or threshold on the Singapore dollar's appreciation to mitigate inflation, after which it will be counter-productive or it will result in side-effects?

Mr Lim Hng Kiang: As our MAS' policy statement puts it, we strive to aim for a modest and gradual appreciation. This means that we try to prevent sharp volatility of the Singapore dollar so as to create as stable a condition and environment for both importers as well as exporters as much as possible.

Mr Low Thia Khiang (Hougang): Sir, the Minister said that the Government takes a multi-pronged approach to mitigate high inflation in Singapore. But I thought there is one particular approach that the Minister had not considered or it is not up in the Government's sleeves, and that is, the tax-cut approach, for instance, cutting GST rate or petrol tax.

Mr Lim Hng Kiang: Mr Speaker, Sir, our approach is aimed at the medium term. The GST adjustments that we put in are necessary to have a better balance between direct and indirect tax. So I do not think it is useful for us to tweak the GST tax rate in response to a short-term phenomenon which is the cost increases we face. I think we should look for an array of tools or instruments with a medium-term outlook.

The petrol tax is, in fact, very modest if you compare it to many countries, particularly in Japan or Europe. Our petrol tax rate is not out of sync compared to other countries.

Ms Sylvia Lim (Non-Constituency Member): Sir, the Government had previously predicted that inflation would actually ease off in the second half of this year due to the effect of the GST hike last year being dissipated over the year. Given that now there is an unprecedented

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inflation in food and oil, does the Government see a risk in inflation rate in the second half of this year not actually easing off?

Mr Lim Hng Kiang: Mr Speaker, Sir, that is still our central scenario, that is, in the second half of the year we should see an easing-off of inflationary pressure both for domestic reasons as well as for external reasons. For domestic reasons, because of the way we calculate the inflation, the impact of the GST, it would ease off after July and also the impact of the annual values of HDB flats. For external conditions, you can see that the sharp run-up of food prices, for example, the momentum ought to ease off towards the second half of the year or, at least, this is what most analysts are projecting.