IMF in two minds about Sing$ stance

Aug 15, 2008

IMF in two minds about Sing$ stance

June report called for tightening but focus now is on economic growth

By Bryan Lee

DOES the Singapore dollar need to appreciate faster or is the current currency stance enough to fight off the threat of spiralling prices?

The answer appears anything but clear if the International Monetary Fund's (IMF's) latest assessment of the local economy is anything to go by.

In June, an annual report by IMF staff urged that monetary policy be tightened to fend off the threat of inflation. But since then, many board directors, reflecting on the report, have backed away, citing downside risks to economic growth.

Published on Wednesday on the IMF's website, the report and the board's reactions are less a sign of internal bickering than a reflection of the pace at which conditions are changing for many economies.

In the first half of the year, a relentless surge in oil and commodity prices clearly made inflation the No. 1 threat to economies outside the United States. But the prices of these natural resources have eased since hitting record highs in the past two months, while signs of a wider global slowdown are on the rise.

Singapore is no exception, with the Government downgrading economic forecasts over the past week.

'This reflects how fast things are changing and how reports are being made irrelevant so quickly,' said United Overseas Bank economist Jimmy Koh. 'Given the situation now, the focus is on growth concerns far more than on inflation.'

Singapore sets monetary policy by managing the value of its currency via an undisclosed basket of the currencies of its largest trading partners.

A stronger Singdollar helps alleviate inflation by making imports such as oil cheaper. But it also makes Singapore's exports less competitive, so some local economists have called for monetary easing to help exporters, who are bearing the brunt of the world economy's swift decline.

The IMF report, dated June 30, said a faster appreciation of the Singdollar would be desirable. The investigating team - which met senior local officials, including Finance Minister Tharman Shanmugaratnam, in May - said the currency seemed undervalued when viewed against longer-term fundamentals.

The report noted that this view was disputed by the local authorities, which said strengthening the Singdollar could amplify downside risks when it was unclear where the economy was headed.

The IMF's executive board, in a July 13 statement, mostly concurred with the Government, saying many of its members favoured maintaining the current policy mix in the short term, though some stuck with the report's recommendations.

In the statement, the board said: 'Given monetary policy lags, it would be sensible to assess the impact of the monetary tightening already in the pipeline before adjusting the stance.'

bryanlee@sph.com.sg

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