Facts about Brunei-Singapore Currency Arrangement

2007 marks the 40th Anniversary of Brunei-Singapore Currency Board arrangements - establishing currency parity between the two countries' currencies. These two currencies are probably the most unique in the world where you do not have to change currencies when travelling to either country. Malaysia used to be part of the original tripartite but left the arrangements sometimes in 1970s. Lately only the Euro is one of the other currencies which actually can be used in a number of countries in the Euro Zone.

One question that people who realised what's going on - is this good for Brunei? To answer that question, we have to do a short course in post-graduate financial economics. But I will try to lay out the salient points. Most countries in the world established either a flexible of fixed exchange rate. A fixed rate mens that government set a rate for the value of the currency and that currency can only be traded or exchange at that particular rate. A flexible rate means that the rate is dependent on the market rate. More demand for that currency means that the exchange rate will be higher. In practise most countries practised a controlled or managed flexible exchange rate meaning that the country decides roughly how much it wants the rate to be and will get the Central Bank (monetary policy) to intervene either by selling or buying the currency in order to affect the supply of that currency until the exchange rate is where they want it to be. Why is this important? A stable exchange rate is important for businesses and even personal. Think how much you have to save for your children's education in the future - you have to know roughly how much the rate would be so that you can save the right amount now.

What happened to the financial crisis in East Asia in the late 1990s? Exchange rates are dependent on how much people want to keep your currency. They will want it if they think that it will be stable - by looking at the country's economic fundamentals - interest rates, inflation rates, political stability, debts, GDP, income etc. Or if they think something will happen to the country eg. political crisis, lower income, they will speculate by 'attacking' it, that is, by selling the currency in droves. For example should a crisis happen (think Brunei - circa 1998 - crisis, low oil prices etc), had Brunei been on a flexible exchange rate, confidence may have suffered and Brunei's currency value in the eyes of the world would be lower and could be 'attacked'. One way to protect against being attacked is to defend it by the Central Bank intervention. But when the whole world is against you, there is no reserves large enough to defend it. Thailand and Indonesia tried it but did not succeed, wasting billions of dollars intervening in vain. Their currencies slumped during the crisis.

A currency board system is an alternative to either fixed or flexible. By tying the Brunei currency to the Singapore currency, Brunei is protected from such attacks on our currency. The downside is that if someone attacks the Singapore currency, ours will be under attack too. So far Singapore has managed to keep its currency fairly stable and hence ours too at the same time. Brunei does not have to spend billions intervening in the market protecting the Brunei currency. But the downside is that we cannot have any monetary policy. We can't control the interest rate through financial tools and we are dependent on Singapore for the actual value of the exchange rate. Given our dependent on oil income, our currency could be stronger now with the high oil price but equally could be weaker when oil prices go down but with a currency board in place, that does not happen.

So far it has been good for Brunei. However, by now you would have realised that this is a difficult policy issue and has many sides to it. So if you are in favour of one argument over the other, please consider all the alternatives and look at the economic fundamentals in Brunei before you jump into any conclusion.

Comments

LSM said…
Although I'm not 100% sure, I think that scanning currency is equivalent to counterfeiting. I remember a Singaporean boy who scanned the $2 bill and showed it off to his classmate got into some serious trouble. For safety's sake, I suggest you remove the images of the money unless you know for sure that it's not illegal to keep them there.
Anonymous said…
I think it clearly shows 'Not Legal' on the scanned dollar.
LSM said…
Not on the back of the bill though.
FlyBoy said…
I suddenly realise that this blog in fact all other blogs including my silly little blog is being monitored by big brother.
I find it interesting that what I am trying to point out is the the more important issue which is the ability or inability to control the value of your own currency. From the comments and the emails I received, people are more worried about whether the original scanned $1 note (in case anyone did not see it originally, it's an ancient $1 note to begin with, which is not even in use in circulation - it has the picture of the HM Sultan Haji Omarali Saifuddien) which I took from someone's website seems to be taking the central issue here. Which is more worrying? $1 note or control of currency? Hello people... are you all asleep or what?
PS. Just to satisfy you all, I have changed the picture.
Anonymous said…
good article. But is it high time for Brunei to have its own Central Bank?
LSM said…
@ bruneiresources

Point taken, dude, but "not in circulation" does not translate into "no longer legal tender". Coins with SOAS III were still acceptable (and probably still are) years after his abdication.

Anyway, don't think I don't value your posts, or this particular one, because I do. The problem is that, as you put it, you'd have to take a post-graduate course in economics to fully appreciate and understand the problem. Yes, most of us are aware that Brunei's currency is pegged to Singapore's but what are the repercussions? My introductory course to Economics didn't say, though you did provide a pretty good overview.

But I think you pretty much summed it up with this:

Given our [dependence] on oil income, our currency could be stronger now with the high oil price but equally could be weaker when oil prices go down...

I'm reminded of the sage advice "Don't place all your eggs in one basket." A better diversified economy would help buffer the blow from a dip in oil prices.

But I suppose the real question I find myself asking is after 40 years of being pegged to the Singapore dollar, is Brunei's economy in any better shape to fend for itself?
Yes LSM! That's the kind of comment, I was waiting for. Are we ready? Anyway, my apologies for the earlier outburst, stressful day. I shouldn't be checking comments that often. I miss my golf...
Anonymous said…
"But I suppose the real question I find myself asking is after 40 years of being pegged to the Singapore dollar, is Brunei's economy in any better shape to fend for itself? "

Nope... last time the rumour was that someone wanted to stop the Bruneian dollar peg to the Singapore dollar inorder to inflate the Bruneian dollar (to buy things cheaper overseas?)... however, others argued back, its not sound.. it may go up for a while, but sooner or later, it will collapse... afterall, revealing the country's asset is a crime hence no one knows how much Brunei has...

so, keep the peg... lets have an 40 year anniversary.... at least when i go overseas, i can use the singapore currency with more ease... (haha)
Anonymous said…
That's a good economics crash course you've just given. I think what Brunei NEEDS now is a good research institute or think-tankers that do nothing but do research on subjects such as this. Debate or discussion of the pros and cons are only credible if we can back it up by proper research (I think we Bruneians love to discuss, just look at the hours of meetings we conduct). I am quite surprised until today no proper research has been conducted on this issue (and many other issues)!
So please Mr Brunei Resources, the next time u meet with those top-top decisionmakers, please suggest for a good think-tank institute.
Anonymous said…
actually there should be 3 think tanks by now. 1 has been setup at foreign affairs and the one at UBD and another one will be set up soon to take over from the ASEAN-EC Management centre
Anonymous said…
3 think-tanks??? And no one has done any research on this subject?? Amazing.....I know there was one (foreign) lecturer who had a paper written on the currency arrangement, but he passed away many years ago. To date I havent seen any other research paper on the same subject. I guess this is not something worthy of a proper research, huh??

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