Govts can 'tackle rising prices using policy tools'
Alvin Foo
Fri, May 23, 2008
The Straits Times
PRIVATE economists in Singapore have taken issue with a former top civil servant who said no government can fight inflation effectively.
They said that while inflation is a difficult problem to tackle, policy tools such as adjustments to exchange rate settings can help address rising prices.
In the Pioneers seminar on Wednesday, Mr Ngiam Tong Dow, 70, criticised a recent move by the Monetary Authority of Singapore (MAS) to let the Singdollar appreciate further against a trade-weighted basket of currencies.
Economics-trained Mr Ngiam, who was chairman of the Economic Development Board from 1975 to 1981, also said a committee tasked to look into inflation in the 1980s was 'a public relations exercise'.
'As the Government, we must be seen to be doing something,' he explained.
The lively policy debate comes ahead of Singapore's April inflation figures - due to be released today.
Economists predicted that annual inflation probably accelerated to a new 26-year peak of 7 per cent last month, fuelled by rising electricity tariffs and toll road charges, record oil prices, and higher food costs.
No economists contacted by The Straits Times yesterday agreed fully with Mr Ngiam's views.
They say governments typically combat rising prices using three policy tools.
The most popular method is to raise interest rates to dampen domestic consumption and encourage savings.
Another way is to allow the local currency to appreciate. The third way is to tighten government spending.
HSBC Bank economist Robert Prior-Wandesforde estimated that the effect of the MAS' appreciation policy over the last 18 months suppressed inflation by about 0.5 percentage point.
He said of Mr Ngiam's remarks: 'Yes, we shouldn't exaggerate the effect of exchange rate policy on inflation...but I won't necessarily use those words.'
The economists said the MAS' policy had a direct and an indirect effect in cooling inflation - as imports become cheaper - making it more than just a public relations exercise.
Mr Prior-Wandesforde said: 'This shows everyone that the MAS is serious about inflation, and it helps the public to manage wage and price expectations.'
CIMB-GK economist Song Seng Wun agreed, saying: 'It helps somewhat to cushion the effect of soaring prices.'
However, he added, this effect is limited, as the Singdollar cannot appreciate to the same extent as the prices of rice and crude oil are rising, for instance. A strong Singdollar, though, could hurt export competitiveness.
Mr Song also believes the Government can fight food inflation - a recent concern - by seeking and offering alternative, cheaper food items.
It can also soften the blow of soaring food prices by offering targeted assistance to lower-income households.
He said: 'This targeted approach is more effective here than a general blanket subsidy because we have a small population base relative to Malaysia and Indonesia.'
Mr Ngiam also felt that the best anti-inflationary weapon the Government has is FairPrice supermarkets. The cooperative was set up in 1973 to counter local importers who formed cartels to jack up prices of essential food items.
Mr Song said: 'NTUC has a lot of clout over vendors and suppliers, so it can help to cushion the impact of inflation, and gives the man on the street more protection.'
The MAS anticipates inflation this year to be in the upper half of the 4.5 per cent to 5.5 per cent range.
Economists expect inflation to peak next month before easing in the second half of the year because of the dissipation of the effect of last year's goods and services tax hike.
