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.