Why is Singapore's money supply growth so rapid that M1 tripled from $31 billion in 1999 to $93billion in 2009? Isn't that inflationary?
By Basant K. Kapur
IT IS helpful to first consider the graph (right), which extends the discussion to 2010. Singapore's M1/Nominal gross domestic product (GDP) ratio remained quite stable from 1999 to 2006, but has trended noticeably upwards since. (M1 is the currency in active circulation plus private sector demand deposits with banks.)
The global financial crisis began in 2007, and central banks in various advanced economies, most notably the United States Federal Reserve, instituted pronounced programmes of monetary easing in response. The consequence has been low nominal interest rates in many countries, and 'abundant liquidity conditions globally', as a Monetary Authority of Singapore review put it last year.
The highly open Singapore economy has of course been significantly influenced by these developments. Funds have come in from abroad, and low, near-zero domestic interest rates have reduced the opportunity cost for both foreigners and local residents of maintaining part of their assets in liquid M1 form.
Moreover, in the past few years, Singapore's exchange rate vis-a-vis major currencies has either been quite stable (when domestic economic conditions were weak) or on a gradual uptrend (when, more recently, inflationary pressures became more pronounced). These have rendered the Singapore dollar an attractive repository of purchasing power.
Whether the rise in the M1/GDP ratio is inflationary is less straightforward. As is well-known, in an open economy like Singapore's, the nominal supply of money goes up when there is a higher demand to hold nominal money balances, not because the central bank chooses to print and issue more currency.
Inflationary pressure can arise from low interest rates, and easier availability of credit, with the former of these in particular also affecting the demand to hold M1 balances.
Low interest rates and easier credit availability positively affect the aggregate demand for goods and services, but this should not have a significant effect on the prices of tradable goods, the supply of which can be augmented through increased imports. (Domestic prices of tradable goods may rise for other reasons, reflecting, for example, worldwide food and fuel price increases.)
For non-tradable goods - such as housing, certificates of entitlement (COEs), various kinds of services - there is clearly the possibility of price increases due to higher domestic aggregate demand, although other factors - such as the property purchases of foreigners - can also play significant roles in affecting prices.
A combination of increased supply and demand-cooling measures are an appropriate policy response as far as housing is concerned, and have been implemented. (Whether supply should have been increased significantly earlier is a different question.)
An accelerated expansion of the road transport network to the extent feasible, and increased convenience of use of public transport, could serve to mitigate the rise in COE prices.
As far as labour services are concerned, a gradual increase in nominal and real wages over time is desirable, and the rate of increase can be higher if productivity growth accelerates - which will also serve to increase the supply of output to meet increased aggregate demand.
If nominal wages during any period rise faster than is considered sustainable, the foreign worker inflow can be liberalised during that period, and subsequently tightened when aggregate demand pressures abate.
The writer is a professor of economics and the director of the Singapore Centre for Applied and Policy Economics at the National University of Singapore.