Singapore's new government uses domestic savings and foreign investment to finance growth. It joins the International Monetary Fund, the World Bank, and the Asian Development Bank, securing multiple loans. Its currency is tied to the U.S. dollar. The Development Bank of Singapore opens in 1968. This public-private partnership underwrites economic development.
The Monetary Authority of Singapore, the country's central bank, aggressively polices the exchange rate to keep prices stable after the currency is allowed to float freely. After 1975 Singapore's budget surpluses threaten the exchange rate and competitiveness. After 1978, the government abolishes all controls on currency exchange. The Stock Exchange of Singapore opens in 1973.
The 1985 recession prompts major tax relief, stricter regulation of financial futures market and securities industry, and a series of reductions in mandatory contributions to the Social Security-like Central Provident Fund. A Securities Industry Council is created to advise the finance minister. Singapore stops borrowing from World Bank and Asian Development Bank.
Singapore's compulsory Central Provident Fund, founded in 1955, deposits a predetermined portion of worker income into a tax-exempt account, with employer match. The Fund, which covers worker retirement and disability, also creates consistent budget surpluses and a national savings rate nearly 50 percent of GDP. Singapore retires its miniscule remaining debt in 1995.
The 1997 Asian financial crisis inflates Singapore's prime lending rate to nearly 8 percent and devalues its dollar slightly against the U.S. dollar. Debt-free status helps Singapore recover quickly. The lending rate soon falls back to 6 percent, and huge foreign reserves -- the world's largest in per capita terms -- cushion the dollar.
The devaluation of other Asian currencies erodes Singapore's competitiveness. With virtually no official controls on the movement of capital, Singapore cannot use monetary policy to stimulate or suppress economic activity. The government opts to cut business costs by reducing employer contributions to the Central Provident Fund rather than devalue the currency.
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