SINGAPORE may need to adopt “a slower pace of fiscal surplus accumulation”, the executive board of the International Monetary Fund (IMF) has recommended.

That’s even as IMF directors suggested, in a report on Friday (Jul 22), that Singapore make fiscal policy the first line of defence against downside risks, though monetary policymakers were also advised “to take further action if higher inflation becomes more persistent” than projected.

Noting that post-pandemic recovery is uneven, while outlook risks are “significant”, the board said macroeconomic policies “should focus on calibrating the pace of normalisation to facilitate a broader recovery while managing price pressures and downside risks” in the near term.

Highlighting longer-term challenges such as healthcare, climate change, and infrastructure, the IMF said that higher sales and wealth taxes would raise revenue for some of the fiscal expenditure needed, but also called for higher public spending to meet these needs. Singapore is raising the goods and services tax to 8 per cent in 2023 and 9 per cent in 2024, from 7 per cent now.

Higher public spending “will help reduce Singapore’s large external surpluses”, said the report, which flagged a current account surplus of 18.1 per cent of gross domestic product (GDP) in 2021. It tipped the surplus to fall to 13.2 per cent of GDP in 2022 as domestic demand recovers.

The IMF board said: “Investment in green infrastructure and coastal protection will help build resilience to climate change risks while improving the external position through larger domestic demand. An expansion of social services in areas such as healthcare and unemployment support would reduce incentives for private savings and support stronger consumption.”

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The directors, who found “room for more structural reforms” to tackle inequality, added: “Considering the still uneven recovery, further tightening of the fiscal stance should accommodate continued targeted support for individuals and firms still impacted by the pandemic or other shocks.”

Meanwhile, the IMF board called the tight monetary policy stance appropriate for capping inflationary pressures. Given high residential prices, it also said that a tight macroprudential stance “should be maintained, and further tightened as needed”, as macroprudential policy and a ramp-up in housing supply should together support a soft landing in home prices.

The directors also lauded the government’s longer-term economic transformation priorities, and called for “continuous progress” on climate change, digitalisation and inclusion strategies.

Their report was issued after the conclusion of the latest bilateral Article IV consultation between the IMF and Singapore. Such consultations – a requirement for IMF members – involve a country visit by IMF economists, who typically meet government and central bank officials, as well as lawmakers, business executives, unionists, and civil society representatives.