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The Singapore dollar is expected to strengthen as the city-state’s economy rapidly expands, the IMF said on Friday.
Singapore, unlike many other economies, uses exchange the rate rather than interest rates to conduct monetary policy.
In a report after annual consultations with Singaporean authorities, the IMF said the Singapore dollar “would likely strengthen in real effective terms over time as reforms promote faster productivity growth and the domestic economy continues to expand.”
The Singapore dollar “appears to be somewhat weaker than its medium-term equilibrium level although considerable uncertainty clouds this assessment,” said the report by the fund’s board.
In a surprise move in April, Singapore unexpectedly revalued its currency and said it was seeking further strength to contain inflation.
The Monetary Authority of Singapore (MAS), the country’s de facto central bank, revalued upward its targeted trading band for the currency and said it would now allow a “modest and gradual appreciation” of its currency, shifting from “zero appreciation.”
This decision caught many analysts by surprise and several characterized the MAS policy move as “aggressive,” but the central bank said it was necessary to curb inflationary pressures before they got out of hand.
Singapore’s monetary policy is conducted through the local currency, which is traded against a basket of currencies of its major trading partners, within an undisclosed band known as the nominal effective exchange rate.
The IMF report forecast that Singapore’s economy would expand a rapid 9.9 percent this year before slowing down to 4.9 percent next year.
The government last week upgraded its growth forecast for this year to a blistering 13 to 15 percent, setting the stage for Singapore to become the world’s fastest-growing economy this year. The new estimate, up sharply from an earlier prediction of 7 to 9 percent, outstrips forecasts of around 10 percent growth in regional powerhouse China and comes despite lingering worries over the US and European economies.
The IMF said Singapore’s exchange rate regime “remains appropriate” and that the exchange-rate centered monetary framework was proving to be an important source of stability in challenging times.
The fund also said that while building strong foreign exchange and fiscal reserve buffers was a central element of Singapore’s economic strategy, “a slower pace of reserve accumulation could be expected given Singapore’s demographic profile going forward.”
Singapore has foreign exchange reserves worth hundreds of billions of US dollars, including those in one of the world’s largest sovereign wealth funds.
The city-state is Southeast Asia’s wealthiest economy in terms of GDP per capita, but its dependence on trade makes it sensitive to economic problems in developed nations such as key European and US markets.