IMF Executive Board Concludes 2008 Article IV Consultation With Singapore

by Mary Swire, Tax-News.com, Hong Kong

14 August 2008

On July 16, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Singapore.

Beginning their Article, Executive Directors noted that the pragmatic macroeconomic policies and proactive structural reforms have underpinned Singapore's strong economic performance and increased resilience to adverse external shocks.

Directors observed that, given the challenges of weakening global growth, ongoing turbulence in international financial markets, and mounting inflation pressures, the pace of economic activity in Singapore is likely to decline in the near term, with inflation remaining elevated.

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

Directors agreed that, given the uncertainties in the global outlook facing Singapore's open economy, macroeconomic policies should remain flexible and pragmatic and seek an appropriate balance to sustain solid growth while containing inflationary pressures and maintaining macroeconomic stability.

In addition to this, Directors welcomed the recent steps by the Monetary Authority of Singapore to tighten the monetary policy stance further by adjusting the exchange rate target band. Directors noted the staff's assessment that the Singapore dollar remains weaker than the level implied by long-term fundamentals.

However, given the downside risks to growth, many Directors favored maintaining the current policy mix in the short-term, with the authorities remaining ready to modify the policy stance going forward if necessary.

These Directors felt that the extent of exchange rate undervaluation is difficult to gauge, and that given monetary policy lags, it would be sensible to assess the impact of the monetary tightening already in the pipeline before adjusting the policy stance. In this regard, indications of recent easing in wage pressures were welcomed.

A number of other Directors favored the staff's view that a further degree of rebalancing of the macroeconomic policy mix toward a somewhat tighter monetary stance and a looser fiscal policy would be desirable in the current conjuncture from both a domestic and an international perspective.

Given the recent upsurge in inflation, they considered that a moderately faster pace of appreciation would help ensure that price expectations remain well-anchored and facilitate the needed external adjustment.

These Directors acknowledged the difficulty of additional tightening when the external environment remains fragile, but observed that the width of the exchange rate policy band could provide flexibility to cope with adverse shocks.

They also considered that a stronger Singapore dollar would fend off upside risks to inflation, facilitate external adjustment, and create room in the near-term for additional targeted spending to alleviate the impact of rising prices on low-income households.

Directors generally agreed that a gradual external adjustment is warranted in light of Singapore's exceptional trade and financial openness, and also agreed that, over the medium term, a broader reorientation of the policy mix is desirable.

Singapore's ample fiscal reserves provide space for more spending on physical and social infrastructures once inflation risks abate, in line with the authorities' medium-term priorities.

Directors commended the Monetary Authority of Singapore for continuing efforts to bolster the already strong regulatory and supervisory frameworks, including by enhancing stress-testing and crisis management. In their view, this proactive approach has largely shielded domestic financial institutions from the impact of the global financial turmoil.

Nonetheless, Directors noted that the risks of a price correction in some segments of the property market and the possibility of contagion through the trade and financial channels warrant continued vigilance.

And finally, Directors welcomed Singapore's participation in the Fund-facilitated initiative to identify best practices for sovereign wealth funds.

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