IMF Concludes 2003 Article IV Consultation with Singapore

The economic downturns and an ongoing industrial restructuring toward capital-intensive sectors, such as chemical and pharmaceuticals, have contributed to rising unemployment. With the economic recovery continuing to gain momentum, the near-term outlook has improved. With broad agreement on the assessment of the economic outlook, the discussions focused on the appropriate policy stance and on structural reforms needed to raise Singapore’s medium-term growth potential. The authorities are encouraged to develop and publish fiscal accounts, and to provide more information on the government’s investment income.


The economic downturns and an ongoing industrial restructuring toward capital-intensive sectors, such as chemical and pharmaceuticals, have contributed to rising unemployment. With the economic recovery continuing to gain momentum, the near-term outlook has improved. With broad agreement on the assessment of the economic outlook, the discussions focused on the appropriate policy stance and on structural reforms needed to raise Singapore’s medium-term growth potential. The authorities are encouraged to develop and publish fiscal accounts, and to provide more information on the government’s investment income.

On March 15, 2004, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Singapore.1


After averaging over 9 percent in the decade prior to the Asian financial crisis, economic growth in Singapore has slowed in recent years. This outcome is attributable to three major recent shocks: (i) the Asian crisis in 1997–98; (ii) the bursting of the tech bubble in 2000-01; and more recently, (iii) the outbreak of Severe Acute Respiratory Syndrome (SARS) in early 2003, exacerbated by uncertainties related to international terrorism and the war in Iraq. The economic shocks have come as Singapore is also facing structural challenges owing to competition from low-cost regional economies, including China and India.

Economic growth registered 1.1 percent in 2003, down from 2.2 percent in 2002. The slowdown was due mainly to the outbreak of SARS in March 2003, resulting in rising unemployment and a sharp economic contraction in the second quarter. Falling domestic demand (particularly investment) contributed to the sharp contraction. However, the economy began to recover strongly in the second half, led by a rebound in the services sector and strong external demand. Inflation remained subdued in 2003 after a period of mild deflation in 2002. Reflecting weak domestic demand conditions and strong external demand, the current account surplus increased sharply to 31 percent of GDP in 2003; official international reserves increased by US$14 billion, to stand at US$96 billion at end-2003. The Singapore dollar depreciated by 3½ percent (period average) in nominal effective terms in 2003.

The government implemented a supportive macroeconomic policy stance to support the economy in response to the SARS-induced economic downturn. Fiscal stimulus was provided through higher development expenditure and two supplementary budgets (consisting largely of targeted assistance to SARS-inflicted sectors, low-income earners and the unemployed, and of acceleration of infrastructure projects). In addition, supply-side measures, including a reduction in the Central Provident Fund (CPF) employer contribution rate by 3 percentage points from October 2003, were taken to reduce business costs. Monetary policy was also eased in mid-2003 with the recentering of the exchange rate band at the prevailing lower level of the trade-weighted exchange rate.

Recent indicators confirm that a strong recovery is underway, and the staff’s outlook is for growth to rebound by around 5 percent in 2004. CPI inflation is projected to remain modest at around 1 percent in 2004, due in part to the soft labor market conditions. While the recovery should continue to benefit from strong external demand, domestic demand should also begin to contribute, with a modest recovery in consumption as confidence improves and the unemployment rate begins to decline, as well as a pickup in investment as the slack in the economy dissipates and inventories are rebuilt. The risks to the outlook are broadly balanced. The main downside risks relate to the sustainability of the global and regional recovery, and the possibility that the high unemployment rate and still depressed property market could become drags on growth. At the same time, there is some upside potential to the 2004 forecast, especially if the pickup of external demand gathers further momentum, and growth in the export sector spills over to domestic demand. Over the medium term, the staff expects growth to be around 4–5 percent.

Increasing competition from low-cost regional economies has raised concerns within Singapore about the economy’s medium-term competitiveness and growth prospects, along with an increasing awareness of the economy’s vulnerability to external shocks (especially in the electronics sector, which dominates the country’s manufacturing exports). The government’s adoption of the recommendations of the Economic Review Committee (ERC) is a response to these challenges. The ERC was established in late 2001 to evaluate Singapore’s long-term strategy and the need for structural change. Finalized in early 2003, the ERC recommendations seek to enhance competitiveness and entrepreneurship and to diversify the economy. Key elements of the strategy include a shift from direct to indirect taxation (including a reduction in personal and corporate income tax rates), reforms to the CPF scheme aimed at enhancing its core retirement savings objective, the divestment of non-strategic government-linked companies (GLCs), and policies to foster greater labor market flexibility and strengthen job training programs.

Executive Board Assessment

Executive Directors noted that the economy had suffered another bout of turbulence in 2003 due to the SARS outbreak, the latest in a series of economic shocks in recent years. Directors commended the authorities for their continued pragmatic use of countercyclical fiscal and monetary policies, noting that supportive policies had cushioned the impact of the SARS-induced economic downturn and were contributing to a strong economic recovery. They emphasized that the most significant policy challenges are to advance structural reforms to enhance the economy’s medium-term competitiveness and growth prospects, and improve its resiliency to external shocks.

While the near-term economic outlook has brightened, Directors observed that there remains a sizeable output gap, unemployment is still high by historical standards, and the recovery has been based on external demand. They therefore encouraged the authorities to maintain a supportive macroeconomic policy stance in the period ahead, until the recovery broadens.

On fiscal policy, Directors endorsed the package of measures taken last year to cushion the impact of the SARS outbreak, which included providing assistance to SARS-afflicted sectors of the economy and a package of rebates, incentives, and infrastructure projects. They also welcomed civil service wage restraint, as an important wage-setting signal to the private sector, given the soft labor market conditions, and a reduction in the employers’ contribution to the Central Provident Fund, as a means to reduce business costs.

Directors endorsed the authorities’ intention to maintain a supportive fiscal stance in the coming year, as outlined in the recent budget proposal for fiscal year 2004/05, and plans to continue cutting income tax rates and reorienting the tax system toward taxes on goods and services. They also supported reducing unemployment through job training and search programs, and saw some additional scope for a strengthened and well-structured social safety net for the unemployed. While supporting continued flexibility in the fiscal position, Directors endorsed the authorities’ intention to achieve budget balance over the medium term to address concerns about rising health care and pension costs.

Directors endorsed the easing of monetary policy in mid-2003 in response to the economic downturn. In the absence of inflationary pressures, and with domestic demand still weak, they considered it appropriate to maintain a supportive monetary policy stance. Directors observed that Singapore’s exchange-rate-centered monetary policy framework has continued to serve the economy well. They generally were of the view that once the recovery takes hold, there would be scope for some tightening of the current easy monetary policy stance, consistent with the price stability objective which, together with the economic recovery, would enable Singapore to contribute to an orderly adjustment of global current account imbalances. Directors welcomed ongoing initiatives to enhance the transparency of the monetary policy setting process and disseminate operational background materials, and encouraged the authorities to continue these efforts, which have improved the effectiveness of the monetary policy framework.

With regard to structural reforms, Directors supported the authorities’ efforts to enhance the economy’s competitiveness and flexibility. In view of increasing competition from abroad, they urged the authorities to continue to facilitate Singapore’s shift from lower-end manufacturing and services to higher value-added activities, by providing a policy environment conducive to stimulating private and foreign direct investment. In this regard, Directors welcomed the authorities’ endorsement of the Economic Review Committee recommendations, emphasizing, in particular, the importance of initiatives to lower income tax rates, enhance labor market flexibility, and reduce the government’s role in the economy through the divestment of government-linked companies. They encouraged the authorities to consider accelerating the divestment of GLCs, where appropriate.

Directors highlighted the importance of recent steps to encourage a higher level of savings for retirees under the CPF scheme. They supported initiatives to enhance the returns to the CPF assets by permitting savers to invest in privately managed investment funds and giving the fund more marketable instruments, and to refocus the fund on its core function as a retirement scheme, including by reducing its role in housing finance. Although Directors supported a reduction in the CPF’s contribution rate to reduce employers’ costs, they considered that an early return to a stable contribution rate would be useful.

Based on the findings of the Financial System Stability Assessment (FSSA), Directors highlighted the resiliency of Singapore’s financial system, despite a number of economic shocks in recent years. They commended the high degree of observance of international standards and codes, and ongoing initiatives to further strengthen corporate governance and the legal and regulatory framework for risk-based supervision. Directors supported the ongoing review of the Monetary Authority of Singapore (MAS) Act to strengthen the MAS’ accountability and independence. To further enhance financial sector stability, they encouraged the early implementation of the FSSA recommendations, including those to strengthen the MAS’ macroprudential monitoring and further improve the transparency of supervisory actions.

Directors also saw scope to enhance the transparency of fiscal policy information. They welcomed the authorities’ intention to improve the published database in terms of timeliness, frequency, comprehensiveness, and format, and they emphasized the importance of developing a consolidated set of fiscal accounts. They also encouraged the authorities to undertake a fiscal Report on the Observance of Standards and Codes. Directors welcomed the authorities’ decision to publish the Staff Report, the FSSA and its Supplement, and other papers related to the Article IV consultation.

Directors commended the authorities on their continued commitment to multilateral trade liberalization and strong support for free trade, which has resulted in a number of free trade agreements. They concurred with the authorities that such agreements could serve as a catalyst to broader trade liberalization initiatives.

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF’s assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

Singapore: Selected Economic Indicators

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Sources: Data provided by the Singapore authorities; and IMF staff estimates and projections.

Contribution to GDP growth.

Fiscal year beginning on April 1.

Overall balance excluding capital revenue, investment income, net lending and fund transfers.

IMF, Information Notice System monthly index (1990=100); period average.


Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities.

Singapore: Staff Report for the 2003 Article IV Consultation
Author: International Monetary Fund