Monetary Authority of Singapore (MAS) posted a record net loss of $10.9 billion for the year ended March 31, 2011

I am naturally curious to read on for the cause of the massive loss and that being the 2nd loss in the last 40 years. Here are the info that I reaped STRICTLY from the articles from Business Times and Straits Times on Friday last.

Numbers as published:-

  • Total loss – $10.9 billions
  • Investment gains before adjusting for exchange rate revaluation – $12.3 billions.
  • SGD up against USD by 10% for year ended March 31, 2011.
  • SGD up against Euro by 5%.
  • Given the stronger SGD, domestic oil prices up by only 10% as compared to 20% on a global basis.
  • MAS manages $299.8 billions in assets as at year ended March 31, 2011 with foreign financial assets representing $287.7 billions ie. 96%!!!!

Here are the various key points discussed:-

  1. Headline in BT attributed the massive loss to strong SGD(Edgar – Thus exchange rate is said to be responsible for $23.2 billions reversal upon valuation of various balance sheet items.)
  2. ‘With recovery in asset markets over the past two years, MAS’ portfolio, excluding exchange rate effects, has more than recovered from effects of the global financial crisis,’ Mr Menon said. The loss is hence the result of ‘a reporting convention’ as per Mr Menon. If MAS reported its financial results in foreign currencies such as the US dollar or SDRs, as some central banks do, it would reflect a ‘healthy profit’, he noted. (Edgar – I presume he is trying to assure us that the loss is mainly due to a valuation exercise as there is no actual cashflow involved. Are you also telling us that if our reference currency is based on any other weaker currency other than SGD, we would be happy with our performance?) 
  3. But is it not a fact that Singapore’s purchasing power has declined by $10.9 billions? Mr Menon said no as the INTERNATIONAL purchasing power of our reserves is unaffected by the strength of Singapore dollars. I guess he is trying to say the $287 billions worth of foreign currencies would still buy Singapore the same amount of goods and services.
  4. So what have the stronger SGD and $10.9 billions loss bought for Singapore? MAS has essentially shielded the domestic economy from even higher inflationary pressures as the stronger SGD effectively halved the impact of higher oil and food prices.
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Zero GST for basic goods?

food n price to be paid

On Jul 8, 2011, Dr Mukul Asher, my ex-lecturer of welfare economics in NUS back in 1980s, was asked to answer the questions as follows.

  1. What would be the effect of implementing a zero percent Goods and Services tax for basic commodities?
  2. Would it help to lower the cost of living for lower income families in Singapore?

Firstly, he uniquely used the term “basic commodities” while the article is entitled “… basic goods”. I generally interpreted “basic commodities” as totally unprocessed or barely prossessed raw materials. Consequently, he said GST’s orientation would change to tax on value added at manufacturing, wholesale and retail levels. Example – No GST is to be applied on $5 of carrot and $4 of flour imported. When the carrot and flour became a $25 carrot cake, GST is to be applied on $16 value added. He opined that this system would increase cost of administering the tax by authority and compliance costs by businesses. He didn’t elaborate as to how it could be so. Alternatively we could consider the Australian’s where its GST free supplies include health, education, childcare, religious services, certain foods etc.

Secondly, he concluded that GST revenue would drop due to exemption of basic commodities and prompting higher GST rate. Currently we apply GST on almost on goods and services with government sending cheques with GST rebates to selected individuals to offset regressive tax burdens (a system I am in favour with). So when we compare the two methods in totality, will there be a significant change in collection? Which is more efficient and effective?

Thirdly, Dr Asher applied the basic economic concepts of substitution effect on demand and price when he said households would switch demand from “GSTed” items to “non-GSTed” basic commodities leading to an increase in prices of the latter. This also assume supply of basic commodities would generally be unresponsive. Too simplistic an assumption?

As Dr Asher is a professor of public policy at Lee Kuan Yew School of Public Policy, I am sure he has done much more in depth studies and thinking on the issues but the article is too simplistic with conclusions only given cursory elaboration.

Reference – ASHER, Mukul, “Zero GST for basic goods? Bad idea.”, The Straits Times, July 8, 2011.