Singapore's policy of slowing the increase in foreign workers could hurt the country's potential growth and lower its competitiveness, the International Monetary Fund (IMF) said in a report issued late Friday.

In its annual review of Singapore's economic and financial policies, the IMF noted that a tighter labour supply due to a slowing inflow of foreign workers and population aging in the medium term will boost wages. The IMF said that with productivity gains unlikely to fully compensate, core inflation will increase temporarily.

IMF said that Singapore is exposed to external risks related to a protracted period of slower growth in advanced and emerging economies.

Singapore could also be hit by a continued buildup and eventual unwinding of excess capacity in China, an abrupt surge in financial market volatility and geopolitical risks, the IMF warned.

Singapore's restructuring efforts can set the stage for a new era of sustainable growth. "However, productivity improvements might take some time to materialise and may not fully offset the effects of declining labor force growth," the IMF added.

The executive board congratulated the Singapore authorities on the success of their macroeconomic management in supporting strong economic activity while keeping inflation under control but noted that there were considerable challenges facing Singapore, particularly those related to trading partners' growth slowdown and global financial market volatility.