Prudent fiscal policy can also benefit economy

The Monetary Authority of Singapore (MAS) has, all along, used exchange rate policy to maintain a balance between economic growth and inflation (MAS likely to keep status quo on exchange rate; March 27).

Because Singapore is a small and open economy that engages in and relies heavily on international trade, it is more appropriate to adjust the exchange rate than the interest rate.

If MAS chooses to depreciate the Singapore dollar, this would lead to a fall in the prices of the Republic's exports in terms of foreign currency, which may lead to retaliation from trading partners and the imposition of protectionist strategies against Singapore.

With the uncertain growth in the international trade sector, it is better to maintain a stable exchange rate and stable relationships with trading partners.

A stable exchange rate can also enable the Government to adopt a prudent fiscal policy.

Under this policy, the Government can increase its expenditure slowly to finance research and development so that aggregate demand will not rise too significantly.

In the long run, aggregate supply will increase, keeping the general price level down.

In this way, inflation is not only controlled, but economic growth is also promoted.

Even if there is an increase in inflation, it is estimated that it will increase moderately, which may actually be beneficial.

Moderate inflation signals people to buy goods and services before prices go up, and encourages businesses to invest so as to obtain higher returns when prices increase.

It is possible to maintain a positive economic outlook while keeping inflation under control by simultaneously having a stable exchange rate and adopting a prudent fiscal policy.

Lu Pei Cheng (Ms)