It will be the 40th anniversary of the currency interchangeability. Now I know there are different views out there. Unfortunately, we don't have many evidence (in terms of research) to either strongly support or contest the agreement.
OK, let me try to enumerate the pros and cons of the current arrangement:
PROS:
1. Stable currency: Speculators would think twice to attack the currency as they have to contend with the combined reserves of 2 countries.
2. Minimal transaction cost between the 2 countries: Arguably this should lead to positive effect on the bilateral trade and investment (however, see CONS no.3)
3. The 'dutch disease' effect of 'oil' on Brunei economy is eliminated: The 'dutch disease' effect is working through the exchange rate where the inflow of oil money results in currency appreciation. Now, because Brunei does not manage the exchange rate (see CONS no. 1) then there is no 'dutch disease' effect.
4. Price stability (low inflation): Credit to Singapore, as they have been doing a very good job in maintaining low inflation.
CONS (for Brunei):
1. Loss of monetary power i.e. we can't use exchange rate as a policy instrument.
2. Some argued that because of 1, Brunei is not able to depreciate its currency in order to achieve price competitiveness. And this has a negative effect on the diversification effort. [But I say, what about the supply-side?i.e. would this ensure that there will be an increase domestic output for exports?]
3. Because of the differences in the structure of the 2 economies, (i.e. Singapore is a more advanced with a higher productivity economy) the minimal transaction cost resulted in making Singapore as the more attractive destination for investment flow from brunei (and not the other way around).
I guess an interesting research question is now: How big is then the benefit to Brunei?
Anyway if you're asking my opinion, I would say let's just maintain the union. But I also think that it's time that there are some Bruneians who are also involved in managing the currency. (Perhaps some Brunei representatives or seconded officers in MAS for hands-on experience, if we are not already doing that).
Oh well, this is just what I thought.
Salaam.
Ps. If anyone is interested, there is a paper by Chan and Ngiam (1992) in The Singapore Economic Review that talks about the currency interchangeability.
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1 comment:
in my humble opinion, brunei actually loses out in the long run. i really love ths topic. u know demand and supply. the more demand, the more favorable the currency gets.
as u compare brunei and singapore currency, obviously we know which currency is in higher demand.
back in 1991 when i was just a student in london, i was given duit sedakah by my relatives, i got few 100 dollar notes of brunei and singapore. happily arrived at paddington station i saw an money changer. i gave my 100 dollar singapore notes, no problem, i got it exchanged for pounds, but then i showed proudly my 100 brunei dollar notes, then to my surprise the man over the counter had to go round the back to make a few phone calls and in the end i got so much lesser pounds.
at the time, didnt think much about it coz the weather was cold (and my mind was thinking of brunei hall's warm heating system!), then i realised brunei's currency aint as well known as singapore's and hence demand.
maybe tourism plays a part in a nation's currency strength i dunno, i m no expert hheheh
ps.
surely there are costs involved in such interchangeability arrangement, whether brunei is the one bearing more of the costs than singapore remains a question to ponder...
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