SINGAPORE has taken the right approach in tackling inflation by allowing its currency to appreciate.
But now, with growth slowing, it should also raise fiscal spending, an Asian Development Bank (ADB) economist said yesterday.
Describing Singapore's monetary policy response to soaring inflation in recent quarters as 'correct', Lee Jong-Wha, head of ADB's Office of Regional Economic Integration, suggested that it now needs to increase public spending 'substantially', perhaps through infrastructure investment, as the economic outlook dims.
He was speaking to reporters after giving a talk on emerging East Asia's policy options in dealing with inflation. Unlike Singapore, some regional economies have been somewhat tardy in monetary tightening.
And rising inflation remains a 'serious threat' to the region's strong growth as 'high import costs of food and fuel threaten to trigger a price/wage spiral, unleashing more inflation', Mr Lee said.
Calling for more 'decisive' monetary tightening in Asian economies, he said clear monetary signals are needed to deal with possible second-round price effects, as core inflation - which excludes food and energy costs - is rising across the region.
While a few central banks in the region have lately begun monetary tightening, ADB says many of them remain behind the curve.
Limited currency flexibility across much of the region has also tied the hands of central bankers in their efforts to combat inflation, ADB notes in the latest July issue of its half-yearly review, Asia Economic Monitor.
In some countries, a slow pace of currency appreciation has in fact fuelled expectations of further strengthening, spurring speculative capital inflows and adding further inflationary pressures.
Mr Lee said the regional economies, especially those with healthy fiscal positions, could consider the selective use of fiscal measures to ease the regressive tax effects of rising food and oil prices.
He also suggested that growth in most of the regional economies would still be fairly robust, even if slower, this year.
The ADB sees economic growth in emerging East Asia easing to 7.6 per cent in 2008 and 2009, from 9 per cent last year, as the region weathers a global economic slowdown and financial volatility, as well as sharp rises in food and oil prices.
But even as growth slows, inflation across the region is expected to rise to 6.3 per cent this year - more than double the past decade's average rate.
While decisive monetary action is crucial to rein in prices, administrative controls such as price-fixing or consumer subsidies would tend only to worsen inflationary conditions and their impact on the poor.
The ADB seminar yesterday - co-hosted by the Lee Kuan Yew School of Public Policy - also saw a panel discussion featuring senior central bankers from Singapore, the Philippines and Indonesia, ING's chief Asia economist Tim Condon, and the Bank for International Settlements' Asia-Pacific chief representative Bob McCauley.
This article was first published in The Business Times on 23 July 2008.
