Evaluate whether focusing on exchange rate policy would be more effective than discretionary fiscal intervention in helping Singapore recover from the COVID-19-induced recession
The COVID-19 pandemic has caused a sharp downturn in economic activity both in Singapore and around the world. This has been driven by a combination of supply chain disruptions, widespread travel restrictions, and a sudden drop in demand. As a result, Singapore’s economy is expected to enter a recession, with GDP growth forecasted to range between –4% and –1% for the year.
Source: Macroeconomic Review, April 2020, MAS
b.Evaluate whether focusing on exchange rate policy would be more effective than discretionary fiscal intervention in helping Singapore recover from the COVID-19-induced recession. [15]
Introduction
The COVID-19 recession was driven by a combination of demand and supply shocks: plummeting consumer and tourist demand, global supply chain disruptions, and a fall in business investment. In response, the Monetary Authority of Singapore (MAS) and the Singapore government deployed different tools—monetary policy centred on the exchange rate, and large-scale discretionary fiscal policy.
Exchange Rate-Based Monetary Policy in Singapore
Unlike most countries that rely on interest rate adjustments, Singapore adopts an exchange rate-based monetary policy due to its highly open economy and large dependence on trade. MAS manages the Singapore dollar (SGD) against a trade-weighted basket of currencies using a Band, Basket and Crawl (BBC) framework. The central bank allows the SGD to move within an undisclosed policy band, gradually appreciating or remaining flat, depending on economic conditions.
During periods of high inflation, MAS typically adopts a modest and gradual appreciation of the SGD. This helps reduce imported inflation by making imports—such as food, raw materials, and fuel—cheaper. However, in recessionary periods, such as during the pandemic, MAS moved to a zero percent appreciation stance to avoid putting further pressure on exporters and support economic stability.
This neutral policy stance was appropriate for several reasons:
There was no inflation to suppress. In fact, deflationary pressures were mounting due to the collapse in demand and oil prices.
A continued appreciation of the SGD in a recession would have further reduced export competitiveness, worsening the downturn for export-oriented sectors like manufacturing and logistics.
On the other hand, deliberate depreciation of the SGD was also not a viable option. This is because Singapore is heavily reliant on imported inputs and raw materials. A weaker SGD would have raised the cost of production (COP) for businesses, possibly triggering cost-push inflation without a corresponding boost in exports, thereby worsening business conditions.
Thus, MAS’s exchange rate stance helped prevent the recession from worsening, but it was largely a stabilising measure rather than one that could actively stimulate demand or generate significant economic recovery.
Discretionary Fiscal Policy and Its Role in Economic Recovery
Given the limitations of monetary policy during this unique crisis, discretionary fiscal policy became the central tool for addressing the economic downturn. Fiscal policy, in this context, involves deliberate increases in government spending (G) and transfers to directly boost aggregate demand.
The Singapore government rolled out multiple fiscal stimulus packages in 2020, totalling nearly S$100 billion, with key measures including:
The Jobs Support Scheme (JSS), which subsidised a portion of employee wages to reduce retrenchment.
Direct public sector hiring, including Safe Distancing Ambassadors and healthcare support roles.
Bringing forward infrastructure spending on transport and construction projects to stimulate demand and employment.
Cash transfers and rental relief to support households and small businesses.
These interventions resulted in an increase in G, causing a rightward shift in the AD curve, thereby increasing real national income (NY) and reducing cyclical unemployment. This was especially important given the scale of job losses in sectors like tourism, aviation, and retail.
However, discretionary fiscal policy is not without limitations:
Leakages—especially Singapore’s high marginal propensity to save (MPS) and marginal propensity to import (MPM)—mean that the multiplier effect of government spending may be smaller than in more closed economies. This reduces the final impact on GDP.
There is a potential trade-off with inflation if fiscal stimulus is too large and the economy is already recovering or nearing full employment, especially in sectors like construction where capacity constraints can emerge.
Not all sectors benefited equally. For example, the aviation and tourism industries—severely hit by border closures—did not experience a meaningful recovery simply due to increased government spending elsewhere. Their recovery is heavily dependent on global reopening and international travel flows, which are outside the government’s immediate control.
Despite these limitations, fiscal policy played a direct and targeted role in stimulating demand, protecting jobs, and supporting vulnerable sectors during the peak of the crisis.
Conclusion
In conclusion, while exchange rate policy helped cushion the impact of the recession and stabilise the external sector by avoiding export-damaging appreciation or inflation-inducing depreciation, it was not designed to actively stimulate aggregate demand. In contrast, discretionary fiscal policy was essential in providing immediate, large-scale support to households and businesses, directly addressing the sharp fall in consumption and investment caused by the pandemic.
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