Why we can’t try to fully offset the impact of global rise in prices with a strong Singapore dollar

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Let’s understand why we cannot try to fully offset inflation with a strong Singapore dollar.

The rise in prices that the world and Singapore is facing is the result of demand and supply factors and a tight labour market.

1. Demand factor

The ease of pandemic curbs has released pent-up demand due to the curbs. The post-pandemic rebound in demand, on the back of substantial fiscal and monetary policy stimulus, was stronger than expected.

2. Supply factor

Supply cannot keep up with demand. What happens when demand exceeds supply? Prices go up.
Why can’t supply keep up with demand? Supply chain disruptions.
Intermittent movement restrictions in various economies caused bottlenecks across production chains, for example by interrupting freight handling in major ports. Thus the demand pull price pressures are accentuated by supply-side disruptions, worsening inflation.
The most significant supply shock has, of course, been the Russia-Ukraine war. It has driven energy prices up worldwide and you need energy for – well – everything.

3. Tight labour market

Companies laid off staff during the pandemic due to reduced activities. While labour force participation has gone up, it is still below pre-pandemic levels. In the case of Singapore, we lost 15% of our non-resident workforce since Dec 2019.
Job vacancies are at record high levels with broad based increases across sectors. In Singapore, the vacancy-to-unemployment ratio is at its highest level since 1998.

Taming inflation

Monetary policy dampens inflation by reducing aggregate demand to bring it in line with aggregate supply.
In most countries, this is achieved through higher interest rates that dampen consumption and investment demand. Singapore’s monetary policy is centred on managing the exchange rate of the Singapore Dollar.
As MOS Alvin said in Parliament, strengthening the Singapore dollar will have immediate negative consequences on growth. Why? This is because a stronger exchange rate not only help to directly reduce imported inflation, it will also restrain export demand, though this will provide relief to labour market pressures.

Understanding the nature of the global rise in prices

It is important to understand the global nature of the price pressures we are facing. The magnitude of the rise in prices of energy and food that we see is such that it is not possible to completely insulate the domestic economy from these increases.
Trying to tame inflation with a strong Singapore dollar alone will also lead to unemployment. And no strong Singapore dollar can help anyone who is unemployed.

Targeted help without exacerbating inflationary pressures

As the Managing Director of MAS Ravi Menon said, the government has stepped in forcefully to support vulnerable groups who are less able to bear the sharp price increases.
The government has been careful that fiscal support does not add stimulus to the economy that could exacerbate inflationary pressures, he added.
Fiscal support has been targeted at the more vulnerable groups and designed to avoid stoking inflation or distorting price signals.
In Parliament, WP Jamus Lim had lamented how ‘more of us have to think twice before turning the air conditioner on’ because the price of electricity has gone up. Imagine if the government gives everyone money or absorbs all increase in tariffs so that everyone can happily turn on that aircon without thinking twice, then they will be adding to the demand-side pressure on inflation instead of dampening inflation.
This is why support measures are targeted at the more vulnerable who are disproportionately affected by inflation.

A strong Sing dollar and foreign exchange

The appreciation of the Singapore Dollar led to a negative foreign exchange translation effect of S$8.7 billion.

The Singapore Dollar strengthened 4% against the Pound Sterling, 5% against the Euro, and 9% against the Japanese Yen.

Overall, MAS records a loss of $7.4 billion for FY2021/2022.

As a result of the loss, MAS did not contribute to Singapore’s consolidated fund, out of which government expenditure is made for the financial year. This means there is no Net Investment Returns Contribution from MAS for FY2021/2022. 

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