2008 March « Cheng’s Corner

[Co-authored with Iris Chou as part of the SE2218 requirement]

Introduction
Although the title of this article suggests that the scope is to be limited to ‘Malaysia’ and ‘Singapore’, the outcome would be unsatisfactory if there were no elaborations concerning their historical background and the colonial past. This is especially so given that their monetary arrangements can be traced to the pre-war colonial period, when the British runs the states.

Immediately after the Second World War, Malaysia and Singapore was under the British Military Administration. Plans were made to dissolve the Straits Settlements, with the states of Penang and Malacca merged into the Malay States to form Malayan Union, while Singapore would become a separate Crown Colony under direct British control. Opposition and protests soon followed, and before long the British administration had to give up the plan. The two former states within the Straits Settlements, along with the Malay States, were merged to form Federation of Malaya instead, with the hereditary Sultans assuming greater power than they would otherwise do in the Malayan Union. Singapore was singled out to become a British Crown Colony, and had a different set of administration from the Federation.

Currency board in Malaya and Singapore prior to 1958. Before 1897, there were different types of currencies in circulation in Malaya and Singapore, primarily Mexican dollars (Lee Soo Ann 2007). Banks were also allowed to issue notes, principally backed by the amount of coins deposited in the issuing banks. The primary motivation of such issuance is that notes, being lighter than coins, are easier to carry around. However, there is no effective control over the amount of notes that the banks can issue, and some of the banks had issued notes in amount far exceeded the amount of currencies the banks had. Profitability had overtaken safety of principal as primary considerations in the conduct of banking business, or more commonly referred to as moral hazard problem. During periods which liquidity demand is high, such as the Chinese New Year, such banks would face liquidity crisis, being unable to fulfill the exchange of bank notes for currency. A number of banks failed because of this, most notably the Asiatic Banking Corporation in 1866 and the Oriental Banking Corporation in 1884.

The Board of Commissioners of Currency (“Currency Board”) was set up amid such backdrop, in 1897 (Lee Sheng-yi 1986). Two years later, the 1899 Currency Ordinance was passed, and it declared that the Currency Board is the sole legitimate authority of issuance of currency notes. The value of such notes was backed by a Note Guarantee Fund, with the exchange figure pegged, in 1906, to 2s 4d (two shillings and four pence) to a Strait dollar, or £1: $8.57 (Lee Soo Ann 2007). Since the Pound Sterling was on the gold standard then, such move effectively made the Straits dollar on gold standard, since the currency can be exchanged for a definite amount of Pound Sterling and consequently, to a definite amount of gold. The authority of commercial banks’ issuing currency was gradually suspended over a period of 1904-1909; however the notes were still in circulation until the advent of the Second World War in Malaya and Singapore, 1942.

It should be noted that the Currency Board was set up originally to serve the Straits Settlements of Penang, Malacca and Singapore. However, attracted to the stability and acceptability of the currency, the circulation of the currency soon spread to the Malay States, and before long the Malay States had requested to join the Currency Board arrangement, in 1933 (Lee Sheng-yi 1986). The Malay States eventually joined the Currency Board arrangement in 1939. However, before long the arrangements was forced to be suspended due to the Japanese occupation of Malaya and Singapore.

The arrangement was revived in 1946 upon restoration of British civil administration. The working of the Currency Board was largely unchanged until the dissolution of the Board in 1967 (Lee Soo Ann 2007, Lee Sheng-yi 1986).

The establishment of Bank Negara Malaysia in 1958. Three reports were responsible for the creation of the Central Bank of Malaysia: The International Bank of Reconstruction and Development (World Bank) Report of 1955; the Watson-Caine Report of 1956; and the Central Bank Ordinance and the Banking Ordinance of 1958 (Lee Sheng-yi 1986). The World Bank report highlighted the importance of the local banking sector in the fostering of greater economic growth, and that the establishment of a central bank was favorable to the development of the banking sector. The Watson-Caine Report was chaired by Sir Sydney Caine, the Vice Chancellor of the University of Malaya in Singapore, and G.M. Watson, an executive of the Bank of England. The report strongly recommended the establishment of a central bank, and the transferring of the issuance of currency from the Currency Board to the bank. The two Ordinances were largely the manifestation of the Watson-Caine Report.

Under the Central Bank Ordinance, the Central Bank was to have the sole power of issuing currency, and to ensure that such currency is backed by at least 81 percent of foreign reserves and 35 percent of the deposit liabilities of the central bank. The Yang di-Pertuan Agong (the Supreme Head of Malaysia) could vary such percentages on the advice of the government. The Central Bank also could give advances to the government, up to 12.5 percent of the budgetary receipts, and must be repaid within three months after the financial year ended. The central bank was not made independent however; the monetary policies must mirror that of the government policies, but the bank was given opportunity to voice its opposition to the Parliament.

Although the Ordinance had given the power to Bank Negara to issue currency, it did not do so until the currency split in 1967; the function was still carried out by the Currency Board. However, the Central Bank had begun to develop its own monetary policies.

The 1967 currency split. Apparently the political disagreements between Singapore and Malaysia had its spillover effect in the monetary arrangement. On December 12, 1964, the Malaysian Government lodged a “Notice of Replacement” to the Currency Board, intending to take over the issuance of currency from June 12, 1967. There are three main reasons behind such move: Firstly, there were disagreements concerning the ownership, management and control of the reserve assets; secondly, the Malaysian Government favored a more lax standard in the currency reserve ratio; and thirdly, the Central Bank wished to wield greater control over itself.

By the time the Currency Board was dissolved, there was $1,545 million dollars worth of currency in circulation, backed by 109 percent of foreign asset. By 1968, $1,476.5 million of currency was redeemed, of which Malaysia redeemed 63.2 percent, Singapore 35.2 percent and Brunei 1.6 percent. The residual of the reserve assets after redemption was returned to the Governments according to the proportion of the distribution of the Currency Surplus Fund in 1963, of which the Malaysian Government received 74 percent, the Singapore Government 18.3 percent, and the Brunei Government 7.7 percent.

Interchangeability of Malaysian Ringgit and Singapore Dollar until 1973. Despite the currency split, initially the Malaysian Ringgit and the Singapore Dollar was interchangeable at par. Clearing houses were set up in the territories to facilitate physical exchange of the currencies. However, on May 1973, despite the general view that such interchangeability was favorable, the Finance Minister of Malaysia announced the country’s intention to end the currency interchangeability. The move was perceived to be the consideration of Malaysia that such arrangement was disadvantageous to Malaysia in view with respect to the development of financial industry; the development of the financial industry in Singapore would outpace that of Malaysia. Furthermore, the Malaysian Government wishes to bypass Singapore and trade directly with its partners, and a non-par exchange rate would discourage businesses from utilizing Singapore’s services.

However, as early as 1968 there was already signs that the value of the two currencies would eventually diverge. The Malaysian Ringgit was then backed by foreign reserves consist of 90% Pound Sterling; that of Singapore Dollar was only 50%. In the aftermath of the Sterling devaluation in November 1967, it was perceived that the two currencies would devalue as well, given the amount of Pound Sterling kept in the reserves. However, both governments announced almost immediately and concurrently following the Sterling devaluation that the currencies would not be devalued. The reasons behind such move were quite different for the two countries. Malaysia reasoned that it had a strong economic fundamental, that a devaluation of ringgit would not improve its competitiveness, and that it maintains a sufficient amount of reserves to ensure the stability of Ringgit. Singapore appeared to follow Malaysia’s decision, although her Finance Minister explained that a devaluation would increase the country’s import prices and cost of living without corresponding increase in competitiveness.

Malaysia’s Monetary Policy – A Description
In addition to the issuance of currency, as discussed in the Introduction, Bank Negara Malaysia is also assuming the following functions:

To act as banker and advisor to the Malaysia Government;
To promote monetary stability and a sound financial structure;
To promote the reliable, efficient and smooth operation of national payment and settlement systems and to ensure that the national payment and settlement systems policy is directed to the advantage of Malaysia; and
To influence the credit situation to the advantage of Malaysia.

Although Bank Negara Malaysia was formed so as to conduct an independent monetary policy, in reality it was subservient to the macroeconomic policies of the government. The government’s voice is given priority; the Bank can only voice its dissenting opinions to the Parliament. This is contrary to the sense of ‘independence’ that the Bank can conduct monetary policies without any influence from the government, even though some of the conducts may actually put the government at a disadvantage.

The lack of independence can be elaborated from a comparison of the supposed and the actual conducts of the Bank in relation to the functions listed above.

To act as banker and advisor to the Malaysia Government. The Central Bank Ordinance of 1958 provides that the Bank can carry out monetary policy, regulate financial institutions such as banks and insurance companies, and exchange control. The Bank needs to at all times ensure that the government is informed of its policies. However, should the government disagrees with the policies, the Finance Minister may issue a notice to the Bank stating such disagreements along with the desired policies of the government, and the notice is binding to the Board of Directors of the Bank; that is, the Bank is obliged to carry out the policies prescribed by the government. In an independent central bank, such as the Federal Reserve Board of the United States, such an action is unthinkable. Bank Negara Malaysia, however, was instituted with such subservient role from its inception, and the Bank manifests the policies of the government rather than introduces its own.

To promote monetary stability and a sound financial structure. There is little dispute that monetary stability is conducive and even an essential condition to the long-term growth and prosperity of a country. Monetary stability can be taken as price, interest rate and exchange rate stability. The exchange rate stability is especially crucial to Malaysia, an economy with a fairly large commodity and export-oriented sector. An examination of the stability of the price level, interest rate and exchange rate follows, while also taken into account such monetary measures as money supply and the velocity of money.

A particular case was put below to further illustrate the lack of independence of the central bank.

Some policies that were implemented by the government required the ‘synchronization’ of the monetary policies, and there were spillovers from the result of government policies as well. For example, under the Emergency (Essential Powers) Ordinance of 1969, the Bank can declare a commercial bank under “protected” status in the name of national security, and was given powers to seize control of that commercial bank (Lee Sheng-yi 1986). The government could then appoint directors and executives to oversee the operations of the bank until its condition become sound again. An example would be the conferment of such “protected” status upon Malayan Banking Berhad (Maybank). Following the racial riot in May 13, 1969, Maybank was “protected” starting from December 1, 1969, and had the status revoked only on February 1971. The government had then taken up practically all the outstanding shares of Maybank. The powers conferred upon the central bank by the 1969 Ordinance, and all the Emergencies ordinance in general, were adjudged to be based not on judicial ground but on political grounds, as Wan Sulaiman J put in the judgment of Johnson Tan Han Seng v. Public Prosecutor ([1977] 2 MLJ 66),

The ultimate right to decide if an emergency exists or has ceased to exist … remains with Parliament, and it is not the function of any court to debate on that issue.

The government had great discretionary powers during Emergency and such judgment had caused controversy, especially among the human rights advocates. Nevertheless, the government had since rarely exercised such power in the conduct of monetary policy, but the discretion had never been repealed by the Parliament.

An Examination of the Money Supply

Figure 1

Figure 1 exhibits the trend of growth of money supply M1, M2 and M3 over a period of 40 years. The rate of growth of the money supply is shown below.

Figure 2

The early period (1967-1973) was a period of fixed exchange rate system, and as Malaysia was an economy with a large commodity trade then, it could not effectively had a discretionary monetary policy, and money supply is heavily influenced by the balance of trade. The balance of trade, in turn, was largely determined by the prices of the commodities. In other words, the supply of money was reflective of the external demand. This is especially so given the relatively underdeveloped Malaysian financial system then. The fluctuation of the money supply during the period was very large; the rate of growth of M1 varied between -7.71% in 1967 and +37.55% in 1973, while the corresponding M2 figures are +3.19% and +31.05%.

After the floating of Malaysian Ringgit in 1973 and the effective dissolution of the Smithsonian parity in 1974 only saw Malaysia having a discretionary monetary policy. The lower and upper ranges of the growth rate for M1 were 7.24% in 1975 and 20.88% in 1976, while the corresponding figures for M2 were 14.55% in 1975 and 27.72% in 1976. This was highlighted by the fact that there were no great changes registered during 1979-80 period, where the oil prices increased tremendously. The double-digit growth in money supply was not accompanied by a corresponding increase in the price level; the period registered an annual price level increase of between 1.55% in 1981 and 6.66% in 1980. The growth of money supply accommodated the increase in real output well following the export-oriented industrialization policy, and this was acknowledged by Bank Negara Malaysia.

The remainder of 1980s saw no contraction in money supply except during 1984, where M1 experienced a very slight contraction of 0.56 percent. During the period, M2 and M3 both increased steadily, with M3 reaching 98% of GDP in 1986. The gap between M2 and M3 was fairly constant throughout the 1980s. It can be said that the development of small-denomination time deposit during that period was far more important than that of large-denomination time deposit and repurchase agreements (repos). The lack of a repo market may signify a lack of competitiveness, or rather, innovation in the banking sector and the highly regulated manner of the financial sector.

Figure 3

In the aftermath of the 1985 recession saw the decrease of the proportion of money supply with respect to GDP. The M2-to-GDP ratio decreased from 77% in 1986 to 70% in 1990, and the figures for M3 were 98% in 1986 to 93 percent in 1989. In absolute terms both figures continued to rise.

Starting from 1989 M2 and M3 started to rise at a double-digit annual rate, as exhibited below:

The growth in the earlier years may had represented capital deepening and the liberalization of the financial sector, but over a longer period of time, such growth proved to be unsustainable without commensurate increase in the GDP growth. The inflow of capital fuelled the speculative bubble in the stock market and the real estate market. Despite its small size compared to the New York Stock Exchange, the activity of the Kuala Lumpur Stock Exchange at times exceeded that of the NYSE! These eventually precipitated in the 1997/98 Asian Financial Crisis, the Malaysian episode.

Following the crisis the growth rate of money supply has become much slower, at least being so for a number of years following the crisis. An observable trend is that, in the years immediately after the crisis, M1 growth rate has outstripped that of M2 and M3. The M1 growth rate was also the one most adversely affected during the financial crisis. In the recent years M2 has grown much faster than M3 and the two has exhibited a convergent trend, the ratio of M2 to GDP being virtually the same as that of M3 to GDP. The latest figure of 2006 shows the former as 135% and the latter as 141%, a margin of only 5%.

An Examination of the Inflation Rate
Price stability is one of the components of monetary stability and such maintenance is conducive to the long-run economic growth of the country. A graph exhibiting the Consumer Price Index is presented below.

Figure 4

The country registered the first major, or rather, very large increase in the price level during the 1973-74 oil shock, where the price of crude oil quadrupled. The CPI had increased by 11 percent in 1973 and 17 percent in 1974. However such inflation rates were not sustained and it quickly returned to a level not exceeding 7 percent throughout the rest of 1970s. A graph showing the percentage change in CPI over the years may better illustrate the point.

Figure 5

The inflation rate also spiked over 1979/80 because of the second oil crisis arising out of the Iranian Revolution, but it was not as severe as that of 1973/74. However, following the second oil shock was the drop of the commodity prices over the 1980s. The drop in prices has affected the balance of payment position of Malaysia, and this in turn affected its inflation rate and its exchange rate (to be discussed below). The export-oriented industry has already been up and running then, and it helped shield the economy from the turbulent change in inflation rate of the magnitude of 1973/74. The inflation rate dropped to the lowest level during the 1985/86 recession. The rate after the recession stabilized at around 4% level up to the 1997/98 crisis. It is not clear by what magnitude this was aided by the low U.S. inflation rate during the period, but as a very open economy, Malaysia certainly benefited from such low external inflation rate.

The 2001 techno slump and the 2003 SARS crisis saw a small increase in the price level, as in the former, the market was in a depression and the latter, the tourism industry had taken the biggest hit.

An Examination of the Exchange Rate
As a country which economy is primarily commodity-related and later, export-oriented, the exchange rates had a tremendous impact on the competitiveness of the Malaysian economy. The index of the Nominal Effective Exchange Rate (NEER) of the Malaysian Ringgit was presented below.

Figure 6

Up to 1985 the Ringgit had appreciated relative to the currencies of its trading partners. The appreciation was rather protracted; the currency greatly appreciated during 1979/80, followed by a fairly stable exchange rate, and a steady appreciation movement up to 1985. The 1979/80 appreciation can be explained by the increase in earnings resulted from the increase in the price of crude oil; Malaysia was (and still is) an important crude oil producer in Southeast Asia. The recession of 1985/86, along with the low commodity prices, prompted the Ringgit to devalue to the 1975 level; the appreciation of 1979/80 was essentially wiped out.

Figure 7

The exchange rates remained stable until 1993, when a large amount of capital entered the country, causing the currency to appreciate. When the investors and speculators withdrew money or attacking the ringgit, the value fell tremendously, by a magnitude of -3.4% in 1997 and -22.2% in 1998. The Ringgit was pegged 3.80 to the dollar on September 2, 1998, and thereafter the exchange rate was determined by the fluctuations of the U.S. Dollar against other currencies, until the peg was removed in 2005.

Singapore’s Monetary Policy – A Description
The monetary policy of Singapore is focused on sustainable growth by ensuring price stability (MAS Monetary Policy 2007). The Monetary Authority of Singapore (MAS) policy regime was put into place in 1971. Following its establishment, from 1971 to 2004 the monetary policy of Singapore focused on managing the exchange rate. This is an effective tool in controlling inflation because the economy is small and open. The Monetary Authority of Singapore periodically adjusts prices using a trade-weighted exchange rate rather than a traditional fixed exchange rate. The reasoning put forth by the MAS is to promote price stability and sustainable growth. If the band in which the Singaporean dollar is kept remains relatively stable, this will be followed by price stability. Adjustments are made to the band as needed to keep inflation low or control other factors, like employment. The difference with respect to the Federal Reserve or European Central Bank is that the MAS utilizes periodic adjustments rather than short term nominal interest rates. Factors that determine the exchange rate include world inflation and domestic price pressures (MAS Monetary Policy 2007). In short, McCallum refers to inflation as a “main target variable” and the exchange rate as “an instrument” to control it (McCallum 2006).

A quote from Dr Goh Keng Swee will illustrate the point further:

In Singapore, which of the monetary aggregates does the MAS watch, M1, M2 or M3? The answer is none. This does not prevent the Government from regularly publishing data on our M1, M2 and M3. …

Why do we ignore our Ms? For the very reason Western central banks have to watch theirs. Their public sector accounts are in a state of chronic deficit; ours are in a state of chronic surplus. We are in a state of chronic surplus because employees have 50 percent of their pay packets sequestered in the Central Provident Fund. Further, the Finance Ministry does not part easily with the revenues harvested by its assiduous tax collectors.

So the MAS is probably the only central bank that does not have to watch the Ms. What then does it watch? It watches the foreign exchange rates. …

The MAS manages the Singapore dollar against a basket of currencies. The currencies in it are Singapore’s major allies and challengers in business. (Singapore’s Exchange Rate Policy MAS 2001)

Since 1973, the Singapore dollar ceased to be fixed, and became floated against a weighted basket of foreign currencies. Singapore was considered a developing country due to its per capita income in the beginning of the 1960s, but due to its status as a financial center, it has historically been viewed as a developed one (Lim).

The state monetary policy is reviewed by the MAS on a semi-annual basis to ensure its consistency. A Monetary Policy Statement (MPS) is published in April and October explaining MAS’s assessment of Singapore’s economy, as well as the monetary policy for the next six months (MAS Monetary Policy 2007).

The Monetary Authority of Singapore and the Board of Commissioners of Currency Singapore
Singapore kept the currency board arrangement after the currency split in 1967, and the Currency Board became the Board of Commissioners of Currency Singapore (BCCS). Its function was still the same as that of the old currency board. When the MAS was formed in 1971, the BCCS was retained, thus making the MAS a central bank without the authority to issue currency. However, as the Singapore Government consistently maintained a governmental budget surplus, and that the surplus was deposited to the MAS, the MAS was able to carry out monetary policies in an effective manner. The MAS was designed to had no complete independence from the government from the start, as the government was confident that it would continue to practice financial prudence, and that an independent central bank, whose independence is to shield the bank from government fiscal imprudence, would be an independence of no purpose.

The BCCS was subsequently dissolved in 2002 and its function was assumed by the MAS.

An Examination of the Exchange Rate
There are a few characteristic of Singapore economy that makes exchange rate highly important to its economy:

The economy is extremely open; trade volume often exceeds GDP;
There is a phenomenon of liquidity drain caused by the government budgetary surplus and the CPF contribution, and the purchase of foreign currency is a method of injecting liquidity back to the economy.

Depending on the condition of the economy, such as its competitiveness and the cost of living, the MAS sets the exchange rate band for the Singapore dollar and allows it to fluctuation within that band. The NEER for Singapore Dollars is shown below.

Figure 8

Throughout the years there has been an inflow of foreign investment, and it tends to cause the Singapore Dollar to appreciate. The MAS can purchase foreign currencies with Singapore Dollar to increase its foreign reserves, while at the same time putting the money back to active circulation. This would keep the exchange rate at a desired level, while at the same time prevent deflationary pressure.

Since Singapore Dollar is managed against a basket of currencies, the movement of the value of the currencies had an effect on the exchange rate of the Singapore Dollar. The period up to 1980 was one of devaluation, reflecting the U.S. Dollar as having a significant weight in the basket, U.S. being an important trade partner of Singapore and its largest foreign investor for quite some time. From 1980 up to the 1985/6 recession Singapore mainly follows a high-wage policy in order to shift to capital-intensive industries. The exchange rate reflected an appreciation trend. In the wake of the recession, the Singapore Government cut the wages of the working force by reducing the employers’ CPF contribution and depreciated the currency, by a magnitude of -15% in 1986 and the depreciating trend continued until 1991.

Figure 9

Since 1991 the Singapore Dollar had appreciated at a more moderate rate compared to the earlier period, and the trend has been maintained except for the recessionary periods of 1997/98, 2001 and 2003, where there were the Asian Financial Crisis, the techno slump and the U.S. terrorist attack, and the SARS outbreak, respectively. During the Asian Financial Crisis, the Singapore Government responded by implementing a wage cut and depreciating the Singapore Dollar by -22.16 percent. In the aftermath of the SARS outbreak the currency depreciated during 2003 and 2004, and has since maintained an appreciating trend.

An Examination of the Money Supply
The money supply of Singapore is largely determined by its earning power, owing to the Currency Board arrangement. The money supply for the various years is shown below.

Figure 10

Throughout the period the money supply was constantly increased, but the later years, that is, from 1997 onwards, there has been periodical contraction of money supply, reflecting the increasingly interlinked Singapore economy with the rest of the world, and the volatility that it carries along. The growth rate of M1 closely mirrored that of the GDP growth rate, resulted in a fairly constant M1 to GDP ratio over the years. In contrast, the M2- and M3-to-GDP ratio had tended to grow much faster than the GDP. Except for 1985/86, the growth rates of M2 and M3 were well above 10%, with the 1973 growth of M2 at 38%. Up to 1997 M2 had generally exhibited a divergent trend relative to that of M3, reflecting the increasing importance of repurchase agreements in the financial sector. Since 1997, however, the two figures had tended to merge, with M2 rising fast while M3 fluctuated at more or less a constant level.

Figure 11

Figure 12

An Examination of the Inflation Rate
In the early years Singapore exhibited a similar inflationary trend as that of Malaysia: 19 percent in 1973 and 22 percent in 1974. As the years pass by, however, the inflation rate tends to decrease, as depicted by the CPI graph below. The CPI has been increasing at a decreasing rate, exhibiting a convex shape. This is especially true in recent years.

Figure 13

With the chronic surplus ‘problem’ in Singapore, deflation becomes a more realistic concern during recessions. Such deflation happened in 1976, with a 2 percent decrease in CPI. It happened again during the 1985/6 recession; however the deflation was more of the outcome of the wage cut. After that recession the inflation rate had become remarkably stable, with the CPI increased by only 37 percent from 1987 to 2006, a 20 year period. The low inflation rate can also be credited to the U.S. monetary policy under the Federal Reserve Board Chairmen Paul Volcker and Alan Greenspan, which fought inflation and kept the rate low. The low inflation rate of the European Union and Japan, two of Singapore’s important trade partner, may also contribute to the low inflation over the period. The figure below shows the inflation rates over the years.

Figure 14

A Comparison of the Various Monetary Measures of Malaysia and Singapore
As the character of the two countries is not entirely the same, there can be no way of ascertaining which policy is “better”; however the quantifiable outcome can be put side by side to see whether the countries had achieved its monetary objectives, that is, to maintain monetary stability. We had prepared a series of graphs to facilitate the comparison. Due to the volume of data generated during our study, we were able only to select a few key measures of comparison for discussion here. More comparison can be found in the Appendix 2 of this paper.

Despite the different character of the two countries, some of the outcomes were remarkably similar, reflecting the generally outward-looking nature of the two economies.

Ratio of M2 to GDP

Figure 15

The two countries had exhibited a generally upward trend, although the Singapore path may be more volatile than that of Malaysia. As the market continue to develop and the capital deepening in progress, the trends are expected to increase into the future. However, such deepening may prove to be problematic for Singapore, as the country had already had a large amount of capital per worker. Unless the total factor productivity can be increased, Singapore had to utilize the additional capital at a lower rate of return in the future.

Annual Rate of Change of M2

Figure 16

The earlier years saw a generally similar trend, and that similarity had ended since 1985 following the 1985/6 recession. In the aftermath of the recession, Malaysia sought to develop its heavy industry, and during the 1990s rosy picture of the Malaysian economy encouraged the entry of foreign capital and hot money. This can be seen in relation to Singapore’s trend: from 1990 to 1998, there has been spikes in the Malaysian path, reflecting the flow of money in and out of the country. This was subsequently put to a halt during the Asian Financial Crisis, and the flow of money to park in Singapore, along with the uncertainty in Hong Kong, caused a great increase in the Singapore’s increase of M2 during 1997. Since 1997 Malaysia had its M2 increase faster than Singapore, largely thanks to its capital control, but Singapore had seen its M2 growth accelerated in recent years.

Consumer Price Index

Figure 17

In the early years Singapore and Malaysia exhibited similar trends in CPI. Interestingly, Prior to 1990 Singapore had a more volatile inflationary profile than Malaysia, due to its lack of control over external factors, and the increasingly effective central bank powers in Malaysia. Singapore had managed to reduce its inflation rate since then, and the divergence of the CPI since 1990 is obvious.

Nominal Effective Exchange Rate

Figure 18

The Singapore Dollar had a much more stable NEER compared to that of Malaysian Ringgit, a product of deliberate and careful management of the exchange rate by the MAS. The 1997/98 Asian Financial Crisis had seen Malaysian Ringgit dropped in value by 38 percent against the U.S. Dollar, and 2 percent relative to the basket of currencies of which Ringgit was traded against. Recently both currencies had appreciated, although Singapore Dollar tended to appreciate to a greater magnitude than Malaysian Ringgit.

Annual Change in NEER

Figure 19

Singapore demonstrated a much more stable change in NEER compared to that of Malaysia, and the extremes are smaller for Singapore. The smaller change had contributed to the stability of Singapore Dollar, and it is very important to maintain investor confidence.

Conclusion
Although very different in geographical, economic and political character, Singapore and Malaysia nevertheless had the common goal of maintaining monetary stability and ensuring a high rate of growth. The two countries had made the central bank subservient to the government, although for quite different reasons. The monetary tools the central banks use to effect monetary policy were also different. However, despite these differences, the monetary policies of the two countries, coupled with the government policies, enabled the two countries to uplift themselves from poverty in the 1950s to prosperity in the 21st Century. It is hoped that the two countries would continue to exercise prudence in the conduct of the monetary policies to ensure that the citizens and investors could best realize their economic potential.

Appendices

Methods of Data Gathering and Sources of Data
We have utilized various sources of information in completing the time series. We had referred heavily to the various issues of the Bank Negara Malaysia Annual Report and Monetary Authority of Singapore Annual Report, primarily in such data as M1, M2 and M3. Although the annual report of Bank Negara Malaysia readily provides an index of exchange rate to a basket of currencies traded in Kuala Lumpur, the data is fragmented and did not provide a good continuity. There is no such data provided by the Monetary Authority of Singapore’s Annual Report. Therefore, in such areas without continuous data, we referred to the International Monetary Statistics subscription of International Monetary Fund.

In some of the indices, primarily the Consumer Prices Indices, the numeraire changed rather frequently, resulting in a re-adjustment of base value every few years. Although it is far from an ideal measure, we adjusted the indices so as to provide a measure of continuity needed in our analysis.

Some data are quite crude and should be viewed with caution, particularly the velocities of money, as we do not include gross national income (GNI) in the computation of such velocities. Nevertheless, in our opinion, such velocities are not crucial in the analysis, and are provided for a clearer view of the economic situation.

Charts for monetary data of Malaysia and Singapore

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