Singapore’s calibration of fiscal policy in 2022 will see it continue its strong, yet uneven economic recovery through the year, says the International Monetary Fund (IMF).
In a report dated July 22, the IMF says that while Singapore’s real GDP growth reached 7.6% and overall activity surpassed pre-Covid-19 levels in 2021 — making Singapore one of the world’s top performing advanced economies — output in tourism-related, consumer-facing and construction sectors remain below pre-pandemic levels.
Despite this “uneven recovery” in 2021, the report, published after official consultations in Singapore, notes: “Singapore’s targeted containment measures, effective vaccination campaign and decisive policy support [have] helped the economy recover impressively.”
This economic recovery suggests that Singapore’s external position remains “substantially stronger than warranted by fundamentals and desirable policies”, says IMF, which adds that Singapore’s large fiscal reserves will continue to act as buffers against large shocks.
Hence, the fund believes “a slower pace of fiscal surplus accumulation may be warranted”.
Singapore plans to go ahead with a higher goods and services tax rate of 8% next year, up from 7% now. The rate will increase further to 9% in 2024.
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Growth is expected to remain “above potential” in the near term and broaden across sectors, supported by widespread vaccinations and pent-up demand as the economy reopens. IMF projects a gross domestic product (GDP) growth of 3.7% for 2022, while headline inflation is expected to remain elevated at about 4.8% in 2022 due to external pressures.
However, IMF adds the caveat that this outlook is “subject to significant uncertainty and risks are titled to the downside”, stemming mostly from the war in Ukraine and the related sanctions, China’s growth slowdown, monetary policy normalisation in advanced economies, and the risk of vaccine-resistant new Covid-19 variants emerging.
IMF recommends that near term macroeconomic policies should focus on “calibrating the pace of normalisation” across policy levers. Monetary policy should aim at managing price pressures considering upside risks to inflation, including from the war in Ukraine and the related sanctions, as well as the tight labour market, while fiscal policy support, targeting affected entities, should facilitate a broadening of the recovery.
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“Should downside risks materialise, fiscal policy should continue to be the first line of defence and Singapore has ample fiscal space to deploy additional policy support,” says the report, adding that Singapore’s calibration of fiscal policy in 2022 is aligned with the strong, yet uneven recovery seen thus far.
The tighter fiscal stance, combined with targeted assistance to vulnerable households, workers, and firms, such as the government’s recent relief package, will support overall policy normalisation by limiting inflationary pressures from public demand while facilitating a broadening of the recovery across sectors.
With the recovery in domestic demand, IMF expects Singapore’s current account surplus to decline to 13.2% of GDP in 2022 from 18.1% in 2021. Over the medium term, GDP growth should converge to 2.5% with Singapore’s current account surplus declining and inflation stabilising at 1.5%, says IMF.
