The Executive Board of the International Monetary Fund (IMF) this week published the findings of their Article IV consultation with Singapore, which was concluded on September 5th, 2007.
The Executive Directors commended the authorities' continued prudent macroeconomic management and proactive approach to structural reform, which have underpinned impressive growth and enhanced the economy's resilience to shocks. Inflation remains low, overall wage growth is contained, and asset markets are generally orderly.
Directors stated that they considered the near-term outlook to be positive, and noted that a further deepening of structural reform will support sustained robust growth over the medium term.
Directors observed that large net fiscal reserves, which are the result of past prudence, provide scope for fiscal expansion aimed at addressing challenges related to globalization and aging. They commended Singapore's proactive steps and policies to further move the economy up the value-added chain and, looking forward, suggested that consideration be given to streamlining tax incentives and accelerating divestment of nonstrategic government-linked companies.
Additionally, the directors welcomed recent efforts to support low-income workers and plans to reform the Central Provident Fund (CPF), and additionally welcomed the implementation of the Work Income Supplement scheme as a positive step.
They encouraged the authorities, nonetheless, to consider a further expansion of the social safety net, including the possible introduction of an unemployment insurance scheme, while preserving work incentives.
Directors also recommended additional efforts to enhance financial security in retirement, and suggested that options allowing more but simple investment alternatives for CPF savings could be explored.
The IMF Board commended the Monetary Authority of Singapore's (MAS) vigilance as the financial sector further integrates into the global system, and praised the implementation of the Financial Sector Assessment Program (FSAP) recommendations.
While noting that local banks' direct exposures to the rapidly growing asset management industry appear limited, they stressed the importance of strengthening cross-border risk management in financial institutions and monitoring.
Also noted was the fact that the exchange-rate-based monetary policy framework has served Singapore's small, open economy well. As inflation expectations are well anchored, they agreed that the present monetary policy stance of targeting a gradual nominal effective exchange rate appreciation remains appropriate.
Many Directors viewed MAS sterilization operations as a legitimate domestic policy instrument for containing inflation, while some noted that the authorities should avoid sustained sterilized foreign exchange intervention. Some Directors emphasized that greater transparency in exchange rate management would support the maintenance of price stability.
Most Directors considered that the large current account surplus can be explained mainly by structural and cyclical factors. They agreed that the surplus will narrow as cyclical factors dissipate and structural factors gradually shift in the direction of reducing surpluses.
Rapid acceleration of aging will reduce national savings and the economy's increased resilience to shocks will reduce the need for maintaining large fiscal reserves, the Board observed.
Directors noted the staff's assessment that, as part of this adjustment process, the Singapore dollar is expected to appreciate in real effective terms, and that it appears currently undervalued relative to its long-term equilibrium level.
Most observed, however, that the range of estimates of the deviation of the real exchange rate from its equilibrium level is wide and provides for an inconclusive assessment.
While the view was held that large current account surpluses and large-scale sterilized intervention could suggest that the exchange rate may be undervalued, a number of other Directors noted that the absence of sustained price and wage pressures over longer time periods is an indication that the exchange rate is in line with fundamentals.
Finally, the Directors welcomed the authorities' agreement to undertake a fiscal Report on the Observance of Standards and Codes (ROSC) in 2008, and urged the authorities to publish consolidated public sector accounts, including more information on the financial position of the Government of Singapore Investment Corporation.
The full text of the IMF Article IV Consultation with Singapore can be found in the Tax News Resources section.
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