In order to help mitigate the effects of inflation in Singapore, the Singapore government has considered the use of the exchange rate, supply side and trade policies.
Exchange rate policy is the main policy tool to mitigate the rise in prices of imported factor inputs leading to cost-push inflation. In this case, the MAS should adopt a slow and gradual appreciation of the Singapore dollar so that the price of imports in domestic currency falls. Imported inflation falls due to in the price of raw materials and intermediate goods. Unit cost of production falls leading to a downward shift of the AS, leading to a fall in GPL. This is useful in the context of Singapore, which is a country dependant on imported raw materials. Also, by maintaining a strong Singapore dollar, it will be effective in curbing high imported inflation.
If Singapore experiences demand-pull inflation due to the strong demand for her exports, a gradual appreciation of the Singapore dollar may address this type of inflation. A strong Singapore dollar will lead to the fall in demand for Singapore’s exports and thus export revenue will decrease. At the same time, imports will become cheaper in domestic currency, leading to the increase in quantity demanded for imports. Therefore, this will lead AD to fall and reduce demand-pull inflation.
A strong Singapore dollar would reduce the price competitiveness of Singapore’s exports. However, since it also causes the price of imported goods to be cheaper, this may off-set some of the adverse effects of the strong Singapore dollar on the price competitiveness of the exports. Net exports revenue decreases but only to a small extent and hence, exchange rate policy may not be able to curb demand-pull inflation.
The government should also ensure that the appreciation is gradual and domestic cost pressures are contained, or else the erosion of export competitiveness may be severe, and the fall in AD may be large which will result in negative impact on actual growth and employment.
If the cost-push inflation is caused by domestic cost pressures due to the rise in wages, then the Singapore government can implement supply-side policies. The policies should focus to raise the productivity of workers and firms so that the growth in productivity id greater than the growth in wage. This would help to lower unit cost of production, AS will shift downwards and this causes a fall in GPL.
Growth in productivity can be achieved through R&D and the use of better technology to create more efficient production processes. One policy that has been used to encourage this is the Productivity and Innovation credit (PIC) scheme. Low skilled workers are also encouraged to upgrade their skills so that they can be more productive in the workplace. The SkillsFuture programme is another scheme that provides all Singaporeans with the opportunities to acquire greater skills proficiency, knowledge and expertise.
In the last few years, the government has also curbed the influx of foreign workers with the aim of getting firms to switch to utilise more technology in their production and encouraging the retraining of low skilled workers.
These supply side policies not only curb cost-push inflation but also helps to increase the productivity capacity of the economy, and therefore reduce demand-pull inflation in the long run.
Despite the fact that the Singapore government has been actively promoting policies to raise workers’ and firms’ productivity, the growth in productivity in sectors like construction and services are lagging behind, as the scope for increasing productivity in certain sectors may be limited. Also, newly acquired skills can be obsolete quickly due to the rapid advancement of technology.
The reduction in the inflow of foreign workers has caused the shortage of workers, especially in the F&B and manufacturing sectors. With the supply of labour rising slower than the demand, it will result in labour shortage and cause wages to rise. Thus in the short run. These productivity driven policies may also rise with the restructuring of the economy into a more productivity-based one.
The government may choose to sign the Free Trade Agreements (FTAs) with countries that are important sources of imported raw materials and food products. Though these trade partnerships, Singapore is able to diversify its sources of imports. Should there be a disruption in the supply of these raw materials or commodities in a particular foreign market, Singapore is able to import them from other countries instead and this helps to minimise imported inflation. AS the fall in price of imported raw materials affects the cost of production of firms, AD curve will shift upwards.
In conclusion, the government has to first diagnose and ascertain the type of inflation, then implement the correct effective policies to address the root cause of the inflation problem. IN times when there is a high level of imported inflation and external demand is strong, a strengthening of the Singapore dollar would be the most appropriate policy since alleviation of inflation via this method will not compromise economic growth that much. In times when there is high cost-push domestic inflation with weak external demand, the government should have to rely more on supply-side policies that address rising domestic costs. Singapore government has to consider the combination of policies in order to alleviate inflationary pressure while keeping in mind the other macroeconomic goals. In the last few years, Singapore’s inflation rate has been caused mainly by domestic reasons, namely due to the slow growth in productivity. Therefore, supply-side policies which reduce structural rigidities in the labour market and certain production markets should be the priority of the government.