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An Analysis of Macroeconomic in Singapore

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This paper is to assess a country’s current macroeconomic position and discuss what policy options have been adopted by the monetary and fiscal authorities in the past years in order to correct any inflation, unemployment or growth problems that exist. In this paper, Singapore’s economy will be discussed.

Like most other countries, Singapore wants growing living standards, high employment and low unemployment, as well as avoidance of recessions and inflation. These things are known as the targets of policy. Instruments are the policies used to achieve the targets. Two main instruments that are used in the economy are fiscal and monetary policies. The macroeconomic policy problem is to choose appropriate values of the policy instruments in order to achieve the best possible combination of the outcomes of the targets. This is continually changing problem because targets are perpetually being affected by shocks from various parts of the world economy.

Singapore is an important hub for the South East Asian region. It has a highly developed and successful free market economy, and strong service and manufacturing sectors. Singapore’s economy always depended on international trade and on the sale of services. Its major industries include petroleum refining, electronics, oil drilling equipment, rubber products, processed food and beverages, ship repair, entrepot trade, financial services and biotechnology. It is moving to reduce its reliance on the manufacture and export of electrical products by developing its chemical and petrochemical industries.

Singapore’s small population and dependence on external markets and suppliers has pushed Singapore toward economic openness, free trade, and free markets. This and the Government’s dominant role in planning and regulating economic development have been the key factors in Singapore’s consistently strong economic performance. Singapore is an economy characterized by a seemingly paradoxical adherence to free trade and free markets in combination with a dominant government role in macroeconomic management and government control of major factors of production such as land, labour, and capital.

Recent GDP History

Singapore is blessed with a highly developed and successful free-market economy, a remarkably open and corruption-free business environment, stable prices, and the fifth highest per capita GDP in the world. Exports, particularly in electronics and chemicals, and services are the main drivers of the economy. Mainly because of robust exports, especially electronic goods, the economy grew 10.1% in 2000. However, following the worst economic downturn in Singapore’s history in 2001, 2002 saw a modest GDP expansion of 2.2%. This was one of the lowest growth outcomes in the Asia region in 2002.


GDP (US$bn)81.981.491.584.987.089.7

GDP per capita (US$)211902090122768205442088721184

Real GDP growth (% change YOY)-

(Monetary Authority of Singapore ‘s Annual Report 2002/2003)

(MAS’ Annual Report 2002/2003)

Growth for 2003 are no better, Singapore’s GDP contracted by a record 11 per cent annualized in the June quarter 2003 (compared to growth of 1.4 per cent annualized in the March quarter). The weak performance stems from both internal and external factors. Internally, the delicate improvement in the services sector in the fourth quarter of 2002 dissipated in the first half of 2003. Uncertainties associated with the war in Iraq and the SARS outbreak hit the hospitality, retail sales and travel-dependent services sectors hard. External demand remains sluggish. Manufacturing output, which has largely propelled growth in recent years, has not provided a major boost in 2003, with cumulative output for the January-May 2003 period rising just 0.4 per cent year-on-year; a 6.0 per cent year-on-year rise in manufacturing output in the first quarter was followed by a 7.5 per cent year-on-year drop in output in the second quarter. The key electronics sector is still sputtering given the lack of global IT demand; biomedical and chemical exports initially propped up growth, although biomedical output slid in the second quarter.


In all economies, changes in the general price level reflect the consequences of the complex interactions among numerous factors, both at the macro and the microeconomic levels. Although many of these relationships are not completely understood, there is general consensus that an important determinant of inflation directions is excess capacity – the extent that the productive capacity of an economy exceeds the demand places on it. Formally, we define economic excess capacity as the output gap:

The output gap measures the difference between actual GDP growth and the growth in GDP potential. A positive gap would imply that actual GDP growth exceeds its potential growth rate. This would occur during the peaks of the business cycles, and then would translate into sharp temporary spikes in productivity and a higher level of resource utilisation. As demand exceeds the potential of the economy, the economy ‘over-heats’ and inflationary pressures increase. On the other hand, a negative gap would imply that actual GDP growth is lower than the potential rate, and this would then translate into declines in productivity, higher unemployment and below full capacity.

It is worth noting that an economy may still experience deflationary pressures even if it is growing at a fast pace, so long as the actual growth rate is below its growth potential. Therefore, whether deflation occurs depends on whether a negative output gap exists and not simply the rate of output growth. Singapore is involved in such situation. Economic indicators suggest that excess economic capacity has existed in Singapore since early 2001 with falling growth, rising unemployment and lower capacity utilisation in office and factory space.

(Economic Survey of Singapore Second Quarter 2003)

The adverse effects of the weak global economic environment have affected more than just Singapore’s exports. Private investments have also fallen sharply because firms have been reluctant to add on more capacity in the face of uncertain demand. While domestic consumption has held up better than the other categories of real expenditures, its rate of growth has also been affected.

(Economic Survey of Singapore Second Quarter 2003)


The general weakness of the global economy in 2002 as well as continuing over-capacity in the high-tech sector provided little impetus for an increase in prices of traded goods during the year. Imported inflation in 2002 was, consequently, weak. Domestic price pressures were also contained due to weak economic conditions and rising unemployment. Reflecting these developments, most broad measures of prices in Singapore fell in 2002.

The CPI fell by 0.4 percent in 2002, compared with a 1.0 percent increase a year ago. The drop was attributed to both domestic and external factors. Domestic sources were responsible for 0.1 percent of the decline in the CPI while external factors reduced CPI by 0.3 percent. The main items contributing to the fall in overall prices were energy prices and accommodation costs. The 2.2 percent fall in housing cost, in particular, reflected both lower electricity tariffs and accommodation cost. While the 1.0 percent decline in the transport and communications index was partly due to lower petrol prices, the reduction in road tax implemented during the year also helped to keep transport costs down.

In order to quantify the deflationary impact of the recent economic over-capacity, the potential output growth for the Singapore economy between 1986 and 2003 has been estimated to compute the output gaps for the period. In the 1986-2003 periods, there were 3 significant episodes of negative output gaps – (1) the 1985-86 recessions (2) the Asian financial crisis and (3) the post dot-com bust. In addition, there were 2 other periods of smaller negative output gaps – although the Singapore economy continued to register positive growth – during the US recession in 1991-92 and the global electronics downturn during 1996.

(Economic Survey of Singapore Second Quarter 2003)


Singapore’s labour market remained soft in 2002 due to a slow recovery in external demand. A second consecutive year of below-trend growth saw total employment contracting by 22,900 in 2002, after a marginal decline of 100 in 2001. This was attributable to the persistent decline in employment in goods-producing industries. Retrenchments, however, slowed from 25,800 in 2001 to 19,100 in 2002. Supported by higher seasonal hiring at year-end, the overall seasonally adjusted unemployment rate declined to 4.2 percent in December 2002. For the whole year, the unemployment rate averaged 4.4 percent, compared to 3.3 percent in 2001.



Unemployment Rate (%)

Productivity Growth (% change)-

Employment Growth (% change)-

Average Monthly Earnings (% change)

Unit Labour Cost (% change)3.8-

Balance of Payments

Singapore’s overall balance of payments turned in a small surplus of $2.3 billion in 2002, following the $1.6 billion deficit in 2001. This was mainly due to an expansion in the current account surplus, which more than compensated for the slightly larger outflow from the capital and financial accounts. Both the goods and services accounts showed an improvement. Reflecting these developments, Singapore’s official foreign reserves rose by $2.8 billion to reach $142.7 billion as at end-2002 (equivalent to 8.2 months of current imports).



Goods Balance24011.820298.521201.426460.333214.0

Exports of Goods184538.1197539.9241114.9222967.2229864.6

Growth Rate (% change)-

Imports of Goods160526.3177241.4219913.5196506.9196650.6

Growth Rate (% change)-13.610.424.1-10.60.1

Services and Other Balances7024.15438.41693.02453.3276.6

Current Account Balance31035.925736.922894.428913.633490.6

As % in GNI22.018.314.518.921.8

Capital and Financial Account Balance-31613.0-21929.3-3600.0-27861.3-28318.9

Balancing Item5557.73513.6-7459.0-2654.2-2885.2

Overall Balance4980.67321.211835.4-1601.92286.5

Official Foreign Reserves124584.4128457.0139260.0139942.1142721.3

Fiscal Policy

Singapore government pursues conservative fiscal policies designed to encourage high levels of savings and investment. The government also invests heavily in the country’s social and physical infrastructure, including education and transportation, and provides subsidies for public housing and sometimes for the purchase of shares in government-linked companies when they are initially listed on the stock exchange. For most of the years since the 1970’s, Singapore government has had a budget surplus. However, due to counter-cyclical measures implemented amid the Asian economic crisis, the government’s budget went into a deficit of USD 243 million (about 0.3 percent of GDP) in fiscal year 1998.

The Central Provident Fund (CPF) is a compulsory savings program that requires 20 percent of an individual’s salary be placed in a tax-exempt account, with employers contributing another 10 percent. The CPF is the basis for the extraordinarily high gross national saving rate of over 60 percent of GDP. Employers’ contribution amounted originally to 20 percent of an employee’s salary prior to the recent crisis, but was halved to 10 percent since the beginning of 1999 as part of a broad business cost-reduction package implemented by the government. However, a partial restoration of employers’ contribution is expected by mid-2000 to ease the build-up of wage pressures emanating from a faster and stronger-than-expected domestic and regional economic recovery. Individual CPF accounts may be used, in part, to finance housing purchases and investment in stocks and other instruments approved under the CPF investment scheme.

An expansionary fiscal policy stance was maintained in 2002, as the economic recovery from the recession in 2001 remained weak. The sizeable off-budget packages announced in 2001 were generally continued through 2002 to alleviate the burden on households and businesses.

The Singapore 2003 Budget was announced in Parliament on 28 February 2003. There will be no change to the top marginal tax rate for individuals, as well as the corporate tax rate, which will both remain at 22%. However, the Minister for Finance reiterated his commitment to reduce the corporate tax rate and the top marginal tax rate for individuals from 22% to 20% by 2005.

Monetary Policy

The Monetary Authority of Singapore (MAS), the country’s central bank, engages in limited money-market operations to influence interest rates and ensure adequate liquidity in the banking system. The MAS’ key objective is to maintain price stability, which it achieves largely through an exchange rate policy. There are virtually no controls on capital movements, thus limiting the scope for an independent monetary policy to either stimulate or restrain economic activity. The average prime lending rate among the leading banks is currently at 5.8 percent, after peaking at about 7.8 percent in the first half of 1998 amid the Asian financial crisis.

Due to subdued inflationary conditions and the uncertain economic outlook, MAS has maintained a neutral policy stance since the beginning of 2002 with a 0% appreciation path for the Singapore Dollar Nominal Effective Exchange Rate (S$NEER). This was centered on the level of the S$NEER prevailing at the start of the year. This policy stance was maintained after reviews in July 2002 and January 2003. Overall monetary conditions in Singapore remained easy throughout the year, with domestic interest rates trending lower in the second half of 2002, reflecting the soft global interest rate environment and slack liquidity conditions in the money market.

Singapore has no exchange rate controls. Exchange rates are determined freely by daily cross rates in the international foreign exchange markets. At the same time, the MAS uses currency swaps and direct open market operations to keep the Singapore Dollar within a desired range relative to a basket of currencies of the country’s major trading partners. It seeks to maintain a strong currency to check inflation, given Singapore’s extreme exposure to international trade. The government also imposes certain restrictions to limit the internationalization of the Singapore Dollar, including a requirement for banks to consult the MAS before extending credit in excess of SGD 5 million (about USD 3 million) to non-residents. It has recently opened up its Singapore Dollar debt market to foreign companies and financial institutions, however, on condition that the funds are converted to foreign exchange prior to use abroad.

(MAS’ Annual Report 2002/2003)


As a small, open and trade-dependent economy, Singapore’s economic future depends on its ability to form economic and strategic links with countries within and outside its region. Therefore, Singapore government should expand their external ties by embracing globalization through the multilateral trading framework of the WTO, regional co-operation as well as bilateral Free Trade Agreement.

Singapore government should also introduce further reduction to corporate and personal income taxes to make the Singapore market more attractive to the potential investors and to encourage more local entrepreneurship. Labour market will become more flexible and production will become more competitive if the burden of taxes on the economy can be kept as low as possible. Promoting local entrepreneurship will create more export market and broaden the economic base.


I.”Principles of Economics” (Ninth Edition), Lipsey + Chrystal.

II.”An Encyclopedia of Macroeconomics”, Brian Snowdon and Howard R. Vane.

III.”Economics”, John Sloman.

IV.”An Introduction to Macroeconomics”, Paul Wonnacott and Ronald Wonnacott.

V.”Macroeconomics Analysis and Policy”, Lloyd G. Renolds and Dennis Starleaf.







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