THE CURRENCY INTERCHANGEABILITY ARRANGEMENT BETWEEN BRUNEI AND SINGAPORE : RATIONALE AND IMPLICATIONS

Abstract

In the era of increasing protectionism and formation of economic blocks in the world, it will be interesting to evaluate the possible areas of economic integration that Singapore and her neighbours can venture into. Currency union is one form of economic integration. As Singapore already has an interchangeability arrangement with Brunei, a study on the implications and benefits of such an arrangement will provide valuable insights to Singapore's possible scope of co-operation with her neighbouring countries.

This academic exercise will review the historical events that led to the present arrangement. It then explores the scope and extent of the benefits and constraints that resulted from the arrangement on the two economies. Prior to 1973, Malaysia, Brunei and Singapore had a currency interchangeability arrangement. This arrangement between Singapore and Malaysian was terminated in 1973. However, the interchangeability arrangement between the Singapore dollar and the Brunei dollar has continued till today. Various economic and political reasons that were responsible for the contiuation of the currency arrangement will be discussed. Moreover effects and policy constraints of the arrangement will also be looked into.

This study also explores the possibility of currency substitution between Brunei and Singapore as a result of the currency arrangement. This is done by exploiting the relation between the money supply and price level. It is shown that significant improvement in explaining the variation of inflation rate of one country can be obtained by taking the money supply of the country with which her money is substitutable into account. That is, variation in the inflation rate for Singapore can be explained better when the money supply of Brunei is taken into account and vice versa. These results suggest that substitution of the two currencie does exist.

Therefore, contrary to what most people believe, this study shows that the Singapore economy is affected by the arrangement with Brunei. In fact, each of these two countries should include the money supply of the other as an economic indicator so as to provide a better understanding of the impact of money on the economy.