Monetary Policy in Singapore and the Global Financial Crisis

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b1110

Challenges for the Singapore Economy

manage the Singapore dollar on a daily basis. On the other hand, there

seems to be a psychological limit to the willingness of the MAS to

push the Singapore dollar 

substantially

downwards if the economy is

moving into a potentially deep recessionary phase, since this conflicts

with its overriding mission (as with other central banks) to preserve

the purchasing power of the local currency in global markets to safe-

guard the value of private savings, compulsory Central Provident

Funds (CPF) and the official foreign exchange reserves.

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Crucial, therefore, to macroeconomic adjustment in Singapore

during severe contractions, are complementary policies which can

take some of the heat out of exchange rate adjustment. Historically

this has been helped by automatic labour market adjustment through

a fall in wages, together with direct cost-cutting exercises by the gov-

ernment, including reductions in employer contributions to the CPF

and price reductions by the public utilities. In 1998, for example, a

package of cost cuts together with improvements in productivity and

wage restraint effectively cut unit business costs by an impressive 12%

in 1999 compared to the previous year (Peebles and Wilson, 2005).

In the past, there is a case for saying that the main brunt of the

burden of adjustment to recessions in Singapore has been borne by

domestic workers through wage cuts and cuts to their employers’

CPF contributions and by foreign workers on short-term contracts

who have been sent home. Interestingly, in the current crisis,

although there has undoubtedly been a significant cut in wages and

exodus of foreign workers, the impact on Singaporean workers was

significantly softened by the Skills Programme for Upgrading and

Resilience (SPUR) and the subsidies to employers provided through

Monetary Policy in Singapore and the Global Financial Crisis

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72

Moreover, even if the TWS$ were depreciated strongly, the competitive benefits

for Singapore’s exports would be small while the pass-through of higher import costs

into domestic prices and costs would be very strong and quick given Singapore’s

dependence on imports. All the evidence suggests that it is income effects not price

effects which drive Singapore’s exports so that the expenditure switching benefits of

a large devaluation are small and transitory. The protection of Singapore’s savings is

part of the implicit social contract between citizens and the government. See Chapter

11 for further details.

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