Credit: Krishna Srinivasan and Lamin Leigh
Singapore’s impressive recovery from the pandemic is outperforming similar economies, with total output exceeding pre-crisis levels last year, but the rebound has also been uneven.
Decisive policy responses, like the Jobs Support Scheme, helped minimize economic scarring, while rapid vaccinations and long-standing robust economic fundamentals helped Singapore navigate global challenges. However, sectors like tourism, aviation, construction, and in-person services are still lagging. Now, the war in Ukraine is confronting Singapore’s policymakers with new challenges and uncertainty as Russia’s invasion and resulting sanctions raise risks for slower growth and faster inflation.
While the recovery is expected to remain resilient, significant uncertainties cloud the outlook, including risks from more supply-chain disruptions, higher commodity prices, rising interest rates in the largest advanced economies, and weaker demand from major trading partners. Central to the evolving risks to the outlook are developments in China, Singapore’s largest trading partner, as well as global economic fragmentation arising from the war in Ukraine.
Given Singapore’s strong economic recovery and rising inflation, the ongoing policy normalization across all the policy pillars remains appropriate. Fiscal policy should continue to gradually normalize in the next year or two while broadening the recovery through targeted support to sectors still hurt by the pandemic. Should further risks materialize beyond what is currently envisaged, Singapore can deploy its ample fiscal buffers to cushion the economic impact.
The shift to tighter monetary policy in October 2021, and out-of-cycle in January 2022, was timely. The more hawkish tightening in April and out-of-cycle in July 2022 reflected careful consideration of the abrupt and rapid shift in the global and domestic inflation outlooks. Further monetary tightening will be warranted if higher inflation proves to be unexpectedly persistent, to preserve price stability and keep inflation expectations well anchored. Such tightening, however, must be nimble and account for the lags involved in the monetary transmission amid potentially greater risks to growth from further normalization in a highly uncertain world. At the same time, macroprudential policies should continue to guard against risks to the financial system, including the buildup of vulnerabilities from housing prices diverging from fundamentals and elevated household and corporate debt amid rising interest rates.
As the pandemic eases—albeit with risks of new vaccine-resistant variants emerging—the focus of Singapore’s policymakers has appropriately shifted to accelerating transformation towards a digital, more inclusive, and greener economy. In this context, the society is appropriately transitioning to a new social compact where more collective action is expected while preserving individual responsibility through incentives to keep people in the labor force. Plans to accelerate digital adoption and innovation, while keeping the appropriate safeguards to preserve financial stability, will help maintain Singapore’s preeminent status as a key regional innovation hub.
While the energy crisis imposed by the war in Ukraine is underpinning the need and urgency to shift to renewable energy, it is also making that shift more challenging in the current conditions of high energy prices. That means any unplanned delay in the climate agenda must be made up later by faster and more decisive action to accelerate the transition and help address one of this century’s biggest challenges to sustainable development.
Krishna Srinivasan is the Director of the IMF’s Asia and Pacific Department.
Lamin Leigh is the Singapore and Malaysia mission chief in the IMF’s Asia and Pacific Department.