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BUDGET 2008: STRATEGY – Five-pronged strategy to fight inflation

A key problem is imported inflation, especially of food and oil

SINGAPORE will adopt a five-prong strategy to tackle inflation which is expected to stay high at 4.5-5.5 per cent this year, more so especially in the first half, said Finance Minister Tharman Shamugaratnam.

This includes steps like diversifying the Republic’s food sources and more fundamentally, keeping the economy competitive.

Inflation is a concern ‘not expected to go away soon’, he warned, adding that Singaporeans have to brace themselves for more cost rises.

Over the last year, global oil prices have spiked by 50 per cent, raw food prices by 55 per cent and commodity prices by 31 per cent. These have cascaded down into higher transport costs, more expensive manufactured goods, and costlier consumer foods.

‘We cannot say how long it will last, but we have to expect that it will remain high, in the first half of this year especially. For example, China’s worst winter in 50 years will likely add pressure to prices of certain foods in the next six months,’ he added.

While last July’s Goods and Services Tax (GST) increase had partly contributed to inflation, this has been compensated for by substantial GST offsets – spread over four years – for most Singaporeans, Mr Tharman said.

‘The key problem we face going forward is that of imported inflation caused by high global prices, especially of food and oil.’

Outlining his five-prong anti-inflation plan, Mr Tharman said that this firstly involves the Monetary Authority of Singapore’s (MAS) use of the exchange rate to moderate imported inflation.

‘Had the MAS not allowed the Singapore dollar to appreciate over the last two years, our CPI inflation in the last quarter would have averaged 6.5 per cent, instead of the 4.1 per cent that was actually recorded,’ he said.

However, there is a limit to this strategy as it can hurt the Republic’s economic performance and growth, he warned.

An overly strong Singapore dollar can bring inflation down, but at the cost of lower growth and higher unemployment.

Secondly, Singapore is stepping up the diversification of its food sources so as to minimise spikes in the prices of imported foods.

The Agri-Food and Veterinary Authority of Singapore (AVA) is helping private importers buy from new overseas sources and the government will also continue to work with retailers to increase public awareness of cheaper food choices and substitutes.

The third way has been the government’s support of home ownership, especially through the heavy subsidies provided to lower-income Singaporeans to own a home.

This insulates Singaporeans, especially retirees, from increases in rental costs which are a significant long-term concern in other countries, he said. In the US, for example, about a fifth of older Americans rent their homes, with rentals accounting for close to one-third of their monthly expenditures.

Fourthly, the government provides assistance directly to Singaporeans who face problems coping with the cost of living, such as through the Workfare Income Supplement scheme and GST Offset Package.

‘This approach of helping those in need directly is better, and more sustainable than taking reflex actions such as imposing price controls on essential goods,’ he said, adding that the latter will only lead to negatives like hoarding and black markets.

Finally, the government aims to keep the economy competitive and build up capabilities for strong economic growth.

‘This is the best offset to global inflation – to educate and train up our people, attract new investments, create jobs, and sustain good growth of incomes for our whole population.

‘If global inflation stays high, all countries will be affected by it and we will not be able to totally insulate ourselves. But there is no reason why we cannot keep growing, and keep outperforming,’ he stressed.

 

Source: Business Times 16 Feb 08

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