Second Reading Speech By The Minister For Health And Second Minister For Finance Lim Hng Kiang On The Currency (Amendment) Bill 2002 at the Parliament, 22 Jul 2002

Mr Speaker, Sir, I beg to move, "That the Bill be now read a second time".

2 Sir, in January this year, the government announced its plans to merge the Board of Commissioners of Currency, Singapore ("BCCS") with the Monetary Authority of Singapore ("MAS"). The merged entity would still be called MAS. This is an organisational change to streamline our institutional structure. There will be no change in the way currency is managed. The Singapore dollar notes and coins that are currently in circulation will continue to be fully backed by the Currency Fund.

Background

3 BCCS was set up in 1967 to implement the currency board system, which Singapore then practised. The features of the currency board system were: First, the exchange rate was fixed between the domestic currency and a specified foreign currency; second, domestic notes and coins were fully convertible at the fixed exchange rate; and third, the domestic currency was fully backed by foreign assets or gold.

4 Singapore has progressively evolved away from the system of a fixed exchange rate since the Singapore dollar was floated in 1973. In 1982, convertibility of domestic currency notes and coins into gold and other foreign currencies on demand was repealed. Today, the exchange rate of the Singapore dollar is managed by MAS, against a basket of currencies of our main trading partners, with the objective of keeping inflation low and maintaining the purchasing power of the Singapore dollar.

5 The only feature of the currency board system that we have retained is the full backing of currency-in-circulation by external assets. Hence, Singapore no longer operates a currency board system except for the full backing of currency-in-circulation. This is required under the Currency Act, and has contributed to confidence in the Singapore dollar. This feature will not change after the merger. Currency-in-circulation will continue to be fully backed by external assets at all times.

6 From a broader perspective, confidence in the Singapore dollar exchange rate derives from the consistency and soundness of our monetary and fiscal policies, as well as our foreign reserves. The merger of MAS and BCCS will enable us to rationalise common functions and realise efficiency gains, without compromising the overriding objective of managing the currency and maintaining confidence in the Singapore dollar. MAS will become a full-fledged central bank.

7 This Bill seeks legislative amendments to the Currency Act to effect the merger of MAS and BCCS. This Bill also contains other amendments which are intended to update and streamline certain procedures and provisions in the Currency Act.

8 Sir, I shall now highlight the main amendments proposed in the Bill.

BCCS Funds

9 Currently, the Currency Act requires that the face value of the currency issued by BCCS must be at least 100% backed by external assets in the Currency Fund. A separate fund - the Currency Reserve Fund - serves as a buffer for the Currency Fund, as the value of the external assets that make up the Currency Fund may fluctuate. All dividends, interest, or other revenue from the Currency Fund and the Currency Reserve Fund are paid into a Currency Fund Income Account. All expenses incurred by BCCS are charged to this Currency Fund Income Account.

10 With the merger, the Currency Fund and the Currency Reserve Fund would be combined as one fund, which would still be called the Currency Fund. The new Currency Fund would continue to provide at least 100% backing for the currency-in-circulation at all times. Clause 6 amends Section 21 to provide that assets in the Currency Fund in excess of 100% of the face value of currency in circulation could be transferred to MAS' other funds at any time. Section 21 is also amended to provide that any deficiencies in the Currency Fund will be made up from MAS' funds. If MAS' funds are insufficient, the balance of the deficiency will be paid out of the Consolidated Fund.

11 Clause 7 repeals Sections 22A and 23 pertaining to the Currency Reserve Fund and the Currency Fund Income Account. Under the new arrangement, income from the Currency Fund will be ploughed back to the Currency Fund itself, and expenses arising from currency issue and investments will be charged against the Currency Fund.

Definition of Legal Tender

12 Currently, Section 13 provides the legal tender limits for the various denominations of the currency. The notes and coins issued by BCCS are legal tender up to the value specified in Section 13 for the purpose of discharging any debt or paying for goods and services.

13 Over the years, BCCS has regularly received queries from the public regarding the definition of "legal tender". Some members of the public were unclear whether merchants could refuse to accept certain coins of small denomination.

14 The payment for goods and services is essentially a contractual agreement between a willing buyer and a willing seller. Neither party can be forced to enter into the transaction unless he willingly does so. In order to clarify the intent and purpose of the law, Clause 5 will amend Section 13 to allow a merchant to specify that he will not accept one or more denominations of notes or coins as payment for his goods or services. If the merchant does not specify any conditions on how he would like to be paid, then he must accept legal tender for the settlement of the debt, or else the debt may be forgiven.

Conclusion

15 The proposed amendments in this Bill are part of the legislative amendments required to implement the merger of BCCS with MAS. The proposed transfer of past reserves from BCCS to MAS as past reserves would require amendments to the Constitution. This will be covered separately in the Constitution (Amendment) Bill, which would be presented for Second Reading at the next available sitting. The Constitution (Amendment) Bill will also propose the deletion of BCCS from the Fifth Schedule of the Constitution.

16 Mr. Speaker, Sir, I beg to move.

22 Jul 2002