Clarifying Important Issues about the Accumulation of our National Reserves

This speech was delivered on 11 January 2022.

1. Mr Speaker, our huge national reserves are the pride of our nation, but few Singaporeans know the size of our reserves and how the reserves are accumulated, managed and spent.

2. The reserves are actually accumulated through a mechanism which operates on a few key principles put in place in the 1980s by the late Dr Goh Keng Swee. The mechanism essentially uses our large pool of domestic savings to soak up the foreign money that flows into Singapore because of its strategic position as the trade and financial centre of Southeast Asia since the late 19th century.

3. This mechanism has worked well and will put us in a strong financial position for generations to come. However, the “MAS (Amendment) Bill”, (The Bill), that we are debating today will violate a key principle of this mechanism laid down by Dr Goh, and runs the risk of compromising the mechanism.

4. That principle stipulates that the Government must purchase foreign reserves from MAS with government deposits, which is essentially the cash owned by the Government or nation. As the amount of government deposits equals the excess savings in our economy, the accumulation of foreign reserves is limited by the size of our excess savings as envisaged by Dr Goh.

5. However, this Bill opens up the possibility of the Government accumulating foreign reserves through simply getting MAS to print Singapore dollars. This is effected through Clause 2 of this Bill which deletes and substitutes section 23(6) of the MAS Act to allow the MAS to subscribe to the Reserve Management Government Securities (RMGS) although section 23(5) states that MAS shall not directly subscribe for any securities issued by the Government or any public authority. Hence this is a major change in the conduct of our monetary policy. In layman’s terms, while MAS cannot do quantitative easing in the past, it can potentially do so if this Bill is passed. So we have to bear that in mind.

6. My speech today will start off with explaining the reserve accumulation process and the dangers of the Reserve Management Government Securities, and then ends with a call on the Government to be more transparent about our national reserves.

The Reserve Accumulation Process

7. The Government, specifically the MOF, oversees the reserve accumulation and management process, but it is the MAS and GIC which are the operating entities. MAS as the central bank of Singapore has the power to print Singapore dollars as and when the need arises. MAS is also the banker for the Government, holding the nation’s cash in the form of government deposits.

8. MAS buys and sells foreign currencies with Singapore dollars on the foreign exchange market to manage the value of the Singapore dollar. When foreign currencies are bought, they become the Official Foreign Reserves (OFR) of MAS.

9. Under our reserve management arrangement, MAS will keep OFR up to a stipulated amount for managing the Singapore dollar. The stipulated amount currently is about $325 billion. Foreign reserves in excess of the stipulated amount will be transferred to GIC.

10. GIC is a 100% government-owned investment company formed in 1981 to manage the excess foreign reserves as an endowment fund for Singaporeans. Unlike the OFR, an endowment fund can invest in more long term and risky investments to achieve a higher return. As substantial assets have been transferred to GIC over the years, GIC holds most of our national reserves. The balance is held by Temasek Holdings, which is not involved in the reserve accumulation process explained here. The OFR under MAS is also technically not considered part of our national reserves.

11. Given our position as the financial centre of Southeast Asia, there is usually a net inflow of foreign money year after year. So the MAS has ample opportunity to accumulate foreign reserves. The MAS can utilise the government deposits or increase the supply of Singapore dollars to accumulate foreign reserves.

12. In the past, the foreign reserves were mainly accumulated using government deposits. We have substantial government deposits because it is actually our huge excess domestic savings channeled into the public coffers through the CPF system and the structural government surpluses derived from land sales and a whole range of indirect taxes and public services fees. Accordingly, the accumulation of reserves is limited by the amount of excess savings we have.

13. So what do we do when the inflow of foreign money far exceeds the amount of government deposits or our excess savings? We can decide not to accumulate any more reserves or to continue accumulating. If we choose the former, then we will have to either allow our Singapore dollar to appreciate further or to implement new policies to control the inflow of foreign money.

14. If the Government wishes to continue accumulating foreign reserves, MAS will have to print new Singapore dollars, since there are no government deposits to pay for it.

15. This seems to be the case in 2020 and 2021 when the MAS probably increased a substantial amount of Singapore dollars to absorb the sudden surge in foreign money inflow. This in turn has caused the accelerated rise in property prices from 2020 till today.

16. The large foreign reserve increases in 2020 and 2021 amounting to $180 billion in total pushed the OFR to $566 billion at end 2021, far exceeding the targeted OFR limit of $325 billion, so the excess is due to be transferred to GIC.

17. However, under the present rule, the foreign reserves cannot be transferred from MAS to GIC if the foreign reserves were not paid for by government deposits. The Government and MAS, the central bank, are independent entities operationally and the Government cannot take assets away from MAS without paying for it.

18. As the Government has no money to pay, we are debating this Bill today to allow the Government to pay with an IOU. Hence this Bill allows the Government to create a new class of IOU called the Reserve Management Government Securities (RMGS) to pay for the foreign reserves to be transferred from MAS to GIC.

19. This Bill thus opens up the possibility for the Government to pressure MAS to print more Singapore dollars to accumulate foreign reserves and then buy them over from MAS with RMGS. Needless to say, this runs the danger of a collapse in monetary and fiscal policy discipline, leading to hyperinflation.

20. Hence, we recommend that there should be a strict annual RMGS issuance limit incorporated into the Bill as a new check to reduce the potential dangers described above. The $580 billion limit for the RMGS proposed in the Bill is far too large.

21. Question 1: We appreciate the two sets of safeguards that the Minister for Finance has explained but how do you explain the fiscal operations in 2020/2021 where one one hand the Government is accumulating about $180 billion of new reserves with RMGS and on the other hand, spending $53 billion on the Covid-19, should this be defined as monetising of government spending too?

Transparency of our National Reserves

22. The Government has always been unwilling to state officially the size of our national reserves, often citing national security as the reason. This reason, however, does not hold water.

23. This is because the Government actually reports our country’s financial position every year in a report entitled the “Government Financial Statements” (GFS).

24. However, few of us busy and pressured Singaporeans know of this report. Because yearly up till 2020, only one hardcopy of the report was available at the National Library. The report went online only after 2020 on SingStat.

25. On the other hand, we can assume that the intelligence agents of foreign countries would not have missed this piece of information. It is rational that the Government announce our national reserves in the mainstream media every year so that Singaporeans will know about it.

26. Question 2: Do the Government still see the need to keep our national reserves figures confidential?

27. According to the GFS for fiscal year 2020, the total financial assets managed by the Government, and belonging to Singaporeans, have grown from $1.35 trillion in 2019 to $1.40 trillion in 2020. Our reserves have continued to increase in 2020 despite the largest drawdown of $53 billion in the history of our nation to combat the Covid-19 pandemic.

28. Our national reserves have continued to increase because we continue to accumulate new foreign reserves to the tune of about $100 billion a year for 2020 and 2021. On top of that, we also earned Net Investment Return of about $40 billion for each of those years. By my estimate, the total financial assets will increase further to $1.5 trillion in fiscal year 2021.

29. Hence it is puzzling why the Government keeps insisting on raising more taxes when our foreign reserves are substantial, still increasing, and earning good yields every year.

30. Mr Speaker, in conclusion, I would like to emphasize on 3 points:

i. The Government should disclose the size of our national reserves to Singaporeans or at least confirm the information that is already made public. Please stop the guerilla-style, selective disclosure of important information. It should also account for the accumulation, management and spending of the reserves.

ii. Given our huge national reserves which is still growing and giving a good investment return, our country’s financial position is healthy and there is no need to raise additional tax revenue through the GST. Many Singaporeans continue to ask me for information on how the Government has spent the $100 billion for Covid-19. Can the Government submit a report to Parliament during the Budget Debate on 18 February before it asks Singaporeans for more money through the GST hike?

iii. There is an economic cost in accumulating reserves too. It is best to stick to Dr Goh’s prudent style of reserve accumulation. Printing money to acquire foreign reserves allowed under this Bill will carry with it a big economic cost. Hence if we really need this Bill, there should be at least an annual RMGS issuance limit incorporated into this Bill as a check on the Government. The proposed $580 billion limit currently provided in the Bill is far too large and is not an annual limit.

31. Mr Speaker, notwithstanding our concerns, we still support the Bill to give our Government maximum leeway in managing our financial affairs but we request the Government to seriously take note of our concerns and not allow monetary and fiscal discipline to be weakened by this Bill. Thank you.

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