Exchange market pressure and the central bank policy: the Singapore case

Abstract

The Singapore economy is affected by major worldwide events such as worldwide recession, oil crisis and the stock market crash. These events are examples of the exchange market pressure(EMP) which have a direct impact on the exchange rate, and ultimately reducing the country's international trade competitiveness. Due to these external shocks, policy options such as changes in the exchange rate or external reserves or a combination of both are adopted to counter them and to stabilise the economy. This project aims to examine the policy options undertaken by the government to counter the effects transmitted by the EMP. This is done firstly by identifying the market pressures that have occurred from 1981-1989. The most significant event was the oil crisis which occurred in 1979/80. During the crisis, oil prices soared , affecting net importers of oil badly. As Singapore was a major net re-exporter of oil due to its refinery business, it benefited greatly from the crisis. This resulted in higher export earnings during the period and led to an increase in aggregate demand and money supply, push ing the Singapore dollar up to a great extent. Another source of market pressure was the double-digit inflation which continued from the second half of 1970s to the early 1980s. The inflationary pressure were transmitted through to our import channel where grave inflation was thus experienced. With this, Singapore's Consumer Price Tndex(CPT) soared to a large increase and caused the domestic currency to appreciate. The worldwide recession also contributed to the fluctuations in the exchange rate. As Singapore's economy was closely knitted to the US economy, the downturn in the US economic growth also affected Singapore's GDP and the level of employment.