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Saturday May 25th, 2024

Why Singapore chose a currency board over a central bank

From a speech by Goh Keng Swee, former Finance Minister of Singapore

When the sun never set on the British Empire, the currencies of the British Colonies were issued under the CBS. This provided for 100 per cent backing of the note issue in overseas reserves, namely Sterling deposits in London.

This allowed the automatic conversion of the local currency into the British pound.

The CBS served both sides reasonably well.

Since the 19th century up to about 1929, the pound Sterling was the pre-eminent world currency. Colonies had stable currencies, meaning that the rampant inflation observed today in many ex-colonies did not occur.

The British enjoyed substantial inflows of capital from their Empire and this helped to make London the world’s leading financial centre. To be fair to the British, it should be said that the independent Dominions — Australian, Canada, South Africa and New Zealand — also kept their overseas reserves in London at that time when they were free to keep them elsewhere.

In the post-War years, rapid decolonisation took place. In every instance, the newly independent state established a Central Bank with note-issuing powers.

The requirement of 100 per cent backing in overseas assets was abolished. Singapore stood out as the sole exception.

Retaining the Currency Board

We retained the CBS and when the Monetary Authority of Singapore (MAS) was set up in 1970, it performed all the functions of a Central Bank except for note-issuing powers.

How and why did we preserve such a strange anachronism in this age of electronic finance?

The decision to proceed along these exceptional lines was a collective decision of the Cabinet. Each member reached this decision in this own way and I will explain mine.

When I as studying economics at Raffles College in pre-war days, the Keynesian revolution broke out with the publication of John Keynes’ — The General Theory of Employment, Interest and Money.

Today, critics, including Sir John Hicks, are agreed that it was badly written work and made for difficult reading. I can attest to the latter.

As an undergraduate, I read the book from cover to cover no fewer than three times, some chapters even more. What puzzled me most was that Keynes measured variables and aggregates, such as National Income and Money Supply, in terms of what he called “Wage Units”. I asked my professor what this meant and why Keynes did this, but could not get a satisfactory reply. Nor did the literature of the day prove more helpful.

Years later, the truth dawned on me. The Keynesian remedy for curing unemployment — the burning issue of the day left behind by the Great Depression years — involved serious risk of inflation.

Of course Keynes knew this. The remedy recommended took the form of expansion of bank credit through Central Bank policies to finance government expenditure. The extra spending will create additional demand for goods and services, thereby reducing unemployment.

But if economic variables are measured in wage units, inflation would be factored out as wages will rise in keeping with price increases. If variables such as the consumer price index or interest and aggregates like Money Supply were measured in wage units, their increases would be reduced to the extent to which wages rise.

Balance of payments trouble from Keynesian Stimulus

There is a further difficulty to contend with. The Keynesian system is a closed one, that is, it takes no account of foreign trade.

This is admissible in theory, but in practice, since all modern states engage in foreign trade, a Keynesian stimulus will lead eventually to balance of payments deficits if government do not exercise restraint in time.

A part of the increased incomes people receive will be spent on imports and when exports do not increase in proportion a trade deficit will occur.

In the immediate post-war years, Keynesian economics won widespread acceptance in both academic and government circles in Britain and the United States, Confidence increased in the ability of governments to maintain full employment and stable economic growth through Central Bank credit policies and government fiscal (budgetary) polices.

However by the mid 1960s, certain stubborn difficulties appeared and refused to go away. In Britain, this took the form of balance of payment troubles which led to the devaluation of the pound in November 1967.

America experienced troubles in a different form. Because all major world currencies fixed their par values in terms of the US dollar and the US dollar was pegged to gold at US$35 per ounce, America could not devalue the dollar except by raising the price of gold.

This the government was unwilling to do for political reasons. Eventually, what happened was an increase in inflationary pressure in the US and a decline in confidence over the convertibility of the US dollar at US $ 35 per ounce because of increased US dollar balances accumulated overseas as a result of trade deficits.

In the end, gold convertibility of the US dollar was suspended in August 1971 and, shortly thereafter, the regime of floating currencies came into being. World currencies continue to float till this day.

My Cabinet colleagues took careful note of these dramatic events as they unfolded on the world’s financial scene. None of us believed that Keynesian economic policies could serve as Singapore’s guide to economic well-being.

Printing money is a disaster for small open economies

Our economy was and is both small and open. Financing budget deficits through Central Bank credit creation appeared to us as an invitation to disaster.

There was no effective way of exchange control in an open trading economy like ours to deal with the inevitable balance of payments troubles.

Another contributing factor was the world outlook of my colleagues — the old guard as they are now called. We all grew up under difficult conditions and did not believe anybody owed Singapore a living.

The way to a better life was through hard work, first in schools, then in universities or polytechnics and then on the job in the work place. Diligence, education and skills will create wealth, not Central Bank credit.

Hence, we were not impressed by claims — excessive as they turned out to be — that government could bring about prosperity through spending. It did not surprise us that the Anglo-Saxon countries which adopted such policies got into trouble.

We also noted that the Germans and Japanese did not believe they could “spend their way to prosperity”, as the phrase went. Like Singaporeans, they set store on diligence, education and skills.

Against this background of leadership thinking, it is hardly surprising that the CBS was preserved with its legal requirement to back the currency note issue with at least 100 per cent of overseas assets.

Actually, these assets stand at 110 per cent because it is only after this level has been reached that the earnings of overseas assets can be transferred to the government’s Consolidated Account.

Cabinet’s collective purpose in retaining the CBS was threefold.

Strong currency is best defence against inflation

First, to inform the financial world that our objective was to maintain a strong convertible Singaporean Dollar. This remains the best protection against inflation.

When nearly two-thirds of our citizens’ expenditure is spent on imported goods, a strong Singapore Dollar helps to keep consumer prices down.

The second purpose was to inform our citizens that if they wanted more and better services, they must pay for these through taxes and fees. There is no free lunch here.

Third, we wanted to indicate to academics, both local and foreign; that what is fashionable in the West is not necessarily good for Singapore. A perceptive mind is needed to distinguish the peripheral form the fundamental, transient fads from permanent values.

It is also not surprising that when the Monetary Authority of Singapore (MAS) was set up, the Chairman was by law the Finance Minister. World Bank experts advised us against this since the Chairman should be an independent person with sufficient authority to resist a Finance Minister’s request for money to finance a budget deficit.

The World Bank believed that putting the Finance Minister in charge would be like asking a cat to look after fish. But Singapore has always worked on the principle that government expenditure on education, defence, social and economic services, etc, must be paid for out of government revenues — taxes and fees.

It is the Finance Minister’s prime duty to balance the budget and, if possible, accumulate a surplus for a rainy day.

Successive Finance Minister have been doing just this. They do not need an independent Central Bank Governor to persuade them not to run budget deficits. The World Bank’s anxieties were misplaced.

What would happen if a future government, returned by a complacent electorate, were to do what the World Bank feared?

Democratically elected governments the world over are exposed to the temptation of winning votes though promising better and cheaper services and at the same time lower taxes.

Central Banks bring misery to poor countries

This has happened not only in rich countries but also in poor developing countries. Rich countries have the resources to get by for a few years by borrowing on the international markets, but in poor countries, punishment comes quickly in a cruel way — high rates of inflation, economic decline and political instability.

These three factors reinforce each other in a way which makes escape from misery difficult.

In Singapore, an irresponsible government does not need a Central Bank to finance lavish spending as a means to win popularity.

We have substantial overseas reserves which can serve this purpose. However the recent constitutional amendment contains a provision for an elected president to block this dangerous method of vote catching.

But if the electorate misled by soft-headed opinion makers, persists in wanting the good life without working for it, constitutional safeguards cannot stop foolish behaviour for all times.

What will happen if the electorate chooses this option is that after a brief period of high living, Singapore will spiral downwards and eventually become another miserable developing country.

In conclusion, I want to correct any impression this article may have given that I think poorly of Keynes as an economist. I do not.

He is the greatest economist the world has produced this century. He introduced a new way of looking at an economic system, in a different way from the classical greats such as Adam Smith, David Ricardo and Alfred Marshall.

The classicals saw the systems as one consisting of producers and consumers, each making his own decision as a producer or a consumer. They studied how a free market harmonises their interests.

 

Keynes looked at how the system functions as whole. Keynes gave birth to a discipline we now call macro-economics.

Another Cambridge economist, Richard Stone, worked out a method whereby the macro-system can be divided into sectors and sub-sectors, examined how these sectors were related to each other and explained how their transactions could be measured.

His landmark world led to the establishment of the United National System of National Accounting. This is the way modern states estimate the level and composition of their annual Gross National Products (GNPs).

The combination of Keynesian theory (now better understood and the lessons of the 1960s) and National Accounting give governments a practical way of evaluating economic performance.

In this way, modern states are able to manage their economies much better than they did in the pre-War years.

The Great Depression which started in 1929 was the result of grave mismanagement by governments and Central Banks of Europe and America. It was in response to the wrong policies of that period that Keynes created his new system of economic analysis.

If one has to fault Keynes on any point, it would be the title of his book. This should have been — The Special Theory of Employment, Interest and Money.

His prescriptions were intended to address the special circumstances created by the Great Depression. By calling it a General Theory, he led lesser minds than his into believing that his prescriptions could be applied under all circumstances, with unhappy consequences, as we have noted.

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Sri Lanka to find investors by ‘competitive system’ after revoking plantations privatizations

ECONOMYNEXT – Sri Lanka will revoke the privatization of plantation companies that do not pay government dictated wages, by cancelling land leases and find new investors under a ‘competitive system’, State Minister for Finance Ranjith Siyambalapitiya has said.

Sri Lanka privatized the ownership of 22 plantations companies in the 1990s through long term leases after initially giving only management to private firms.

Management companies that made profits (mostly those with more rubber) were given the firms under a valuation and those that made losses (mostly ones with more tea) were sold on the stock market.

The privatized firms then made annual lease payments and paid taxes when profits were made.

In 2024 the government decreed a wage hike announced a mandated wage after President Ranil Wickremesinghe made the announcement in the presence of several politicians representing plantations workers.

The land leases of privatized plantations, which do not pay the mandated wages would be cancelled, Minister Siyambalapitiya was quoted as saying at a ceremony in Deraniyagala.

The re-expropriated plantations would be given to new investors through “special transparency”

The new ‘privatization’ will be done in a ‘competitive process’ taking into account export orientation, worker welfare, infrastructure, new technology, Minister Siyambalapitiya said.

It is not clear whether paying government-dictated wages was a clause in the privatization agreement.

Then President J R Jayewardene put constitutional guarantee against expropriation as the original nationalization of foreign and domestic owned companies were blamed for Sri Lanka becoming a backward nation after getting independence with indicators ‘only behind Japan’ according to many commentators.

However, in 2011 a series of companies were expropriation without recourse to judicial review, again delivering a blow to the country’s investment framework.

Ironically plantations that were privatized in the 1990s were in the original wave of nationalizations.

Minister Bandula Gunawardana said the cabinet approval had been given to set up a committee to examine wage and cancel the leases of plantations that were unable to pay the dictated wages.

Related

Sri Lanka state interference in plantation wages escalates into land grab threat

From the time the firms were privatized unions and the companies had bargained through collective agreements, striking in some cases as macro-economists printed money and triggered high inflation.

Under President Gotabaya, mandating wages through gazettes began in January 2020, and the wage bargaining process was put aside.

Sri Lanka’s macro-economists advising President Rajapaksa the printed money and triggered a collapse of the rupee from 184 to 370 to the US dollar from 2020 to 2020 in the course of targeting ‘potential output’ which was taught by the International Monetary Fund.

In 2024, the current central bank governor had allowed the exchange rate to appreciate to 300 to the US dollar, amid deflationary policy, recouping some of the lost wages of plantations workers.

The plantations have not given an official increase to account for what macro-economists did to the unit of account of their wages. With salaries under ‘wages boards’ from the 2020 through gazettes, neither employees not workers have engaged in the traditional wage negotiations.

The threat to re-exproriate plantations is coming as the government is trying to privatize several state enterprises, including SriLankan Airlines.

It is not clear now the impending reversal of plantations privatization will affect the prices of bids by investors for upcoming privatizations.

The firms were privatized to stop monthly transfers from the Treasury to pay salaries under state ownership. (Colombo/May25/2024)

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300 out of 1,200 Sri Lanka central bank staff works on EPF: CB Governor

ECONOMYNEXT – About 300 central bank staff out of 1,200 are employed in the Employees Provident Fund and related work, Governor Nandalal Weerasinghe said, with the function due to be transferred to a separate agency after a revamp of its governing law.

“When it comes to the EPF there is an obvious conflict of interest. We are very happy to take that function out,” Governor Weerasinghe told a forum organized by Colombo-based Advocata Institute.

“We have about 300 staff out of 1,200 including contract staff, almost 150 of permanent staff is employed to run this huge operation. I don’t think the central bank should be doing this business,”

The EPF had come under fire in the past over questionable investments in stocks and also bonds.

In addition, the central bank also faced a conflict of interest because it had another agency function to sell bonds for the Treasury at the lowest possible price, not to mention its monetary policy functions.

“There has been a lot of allegations on the management of this fund. This is the biggest fund of the private sector; about 2.6 million active, I think about 10 million accounts.

“When it comes to EPF, obviously there’s another thing. We obviously have, in terms of resources, on the Central Bank, that has a clear conflict because we are responsible for the members.

“We have to give them a, as a custodian of the fund, we have to give them a maximum return for the members.

“For us to get the maximum return, on one hand, we determine the interest rates as multi-policy. On the other hand, we are managing public debt as a, raising funds for the government.

“And on the third hand, this EPF is investing 90 percent in government securities. And also, interest rates we determine, and they want to get the maximum interest. That’s a clear conflict, obviously, there’s no question.”

A separate agency is to be set up, he said.

“It’s up to the government or the members to determine to establish a new institution that has a trust and credibility and confidence of the members that this institution will be able to manage and secure an interest and give them a reasonable return, good return for their lifetime savings,” Governor Weerasinghe said.

“The question is that how whether we have whether we can develop that institution, whether we have the strong institution with accountability and the proper governance for this thing.

“I don’t think it should be given completely to a private sector business to run that. Because one is that here we have no regulatory institution. Pension funds are not a regulated business.

“First one is we need to establish, government should establish a regulatory agency to regulate not only the EPF business fund, there are several other similar funds are not properly regulated.

“Once we have proper regulations like we regulate banks, then we can have a can ensure proper practices are basically adopted by all these institutions.

“Then you can develop an institution that we who can run this and can be taken back by the Labour Department. I’m not sure Labour Department has the capacity to do all these things.”

While some EPF managers had come under scrutiny during the bondscam and for questionable stock investments, in recent years, it had earned better returns under the central bank management than some private funds that underwent debt restructuring according to capital market analysts with knowledge of he matter. (Colombo/May24/2024)

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Desperate Sri Lankans seek risky foreign jobs amid tough IMF reforms

ECONOMYNEXT – After working 11 years in Saudi Arabia as a driver, Sanath returned to Sri Lanka with dreams of starting a transport service company, buoyed by Gotabaya Rajapaksa’s 2019 presidential victory.

However, the COVID-19 pandemic in 2020 and an unprecedented economic crisis in 2022 shattered his dreams. Once an aspiring entrepreneur, he became a bank defaulter.

Facing hyperinflation, an unbearable cost of living, and his family’s daily struggles, Sanath sought greener pastures again—this time in the United Arab Emirates (UAE).

“I had to pay 900,000 rupees ($3,000) to secure a driving job here,” Sanath (45), a father of two, told EconomyNext while having a cup of tea and a parotta for dinner near Khalifa University in Abu Dhabi.

Working for a reputed taxi company in the UAE, Sanath’s modest meal cost only 3 UAE dirhams (243 Sri Lankan rupees). Despite a monthly salary of around 3,000 dirhams, he limits his spending to save as much as possible.

Sanath has been in Abu Dhabi for 13 months but had to wait six months before driving a taxi and receiving no salary.

TOUGH REALITIES

“I had to get my UAE driving license. I failed the first trial, and the company paid 6,500 dirhams on my behalf, agreeing to deduct 500 dirhams monthly from my salary,” he explained.

“So far, I have repaid only 3,000 dirhams.”

To raise the 900,000 rupees for the job, Sanath borrowed money from friends and pawned jewelry.

“I don’t know if I was cheated by the agent, but I must repay that money and also send money for my family’s expenses,” he said, glancing at a photograph of his family in a Colombo suburb.

Working night shifts in busy Abu Dhabi, Sanath said, “If I can secure 9,000 dirhams monthly through taxi driving, I will earn 3,000 dirhams in the month after deductions for the license fee and any traffic fines.”

Sanath came to Abu Dhabi with seven other Sri Lankan men through an employment agency in the Northwestern town of Kurunegala.

“Only two of us have withstood the tough traffic rules and payment deductions for offenses,” he said. Some of his colleagues are still job-hunting, while others have returned to Sri Lanka.

Sanath is one of around 700,000 Sri Lankans who have left the island in the last two years due to the economic crisis that forced the country to adopt difficult fiscal and monetary policies, including higher taxes and costly borrowing, exacerbating the cost of living.

FOREIGN EXCHANGE EARNERS

From January 2022 to the end of March 2024, at least 683,118 Sri Lankans migrated for foreign employment through legal channels, according to the Sri Lanka Foreign Employment Bureau.

They have sent $11.31 billion in remittances through official banking channels during the same period, central bank data shows.

Many Sri Lankans leave on visit visas, hoping to find jobs later, often guided by friends already working abroad. The economic crisis has pushed them to seek better opportunities abroad, despite the risks.

Sri Lankan authorities struggle to stop such risk-takers, who sometimes resort to illegal migration, despite warnings about human trafficking.

In Myanmar, 56 Sri Lankans caught in an IT job scam were detained earlier this year, and the government is still repatriating them.

At least 16 retired Sri Lankan military personnel have been killed in the Russia-Ukraine war after being misled by unscrupulous recruiters. Officials estimate that over 400 retired military officers may have left for similar reasons.

DISPERATE TO LEAVE

In March, Foreign Minister Ali Sabry warned against visiting any nation on open visas, urging Sri Lankans to emigrate only through registered agencies.

Despite the risks, many Sri Lankans are desperate to leave.

Abu Salim, a 32-year-old former rugby player, came to Dubai on a visit visa hoping for a banking job, which he never got.

Now freelancing in an insurance firm, he said, “I survive, and my relatives don’t see my struggle. It’s stressful, but still better than Sri Lanka right now.”

Suneth, a former top garment merchandiser, is also job-hunting in Sharjah after quitting his initial job in Sharjah.

“My worry is the visa. I must find a new job before it expires,” he said.

Many Sri Lankans in the UAE work multiple jobs, compromising their sleep and health to make ends meet. (Abu Dhabi/May 24/2024)

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