Mr Speaker, Sir, the House is aware that just over a week ago, to be exact, on the 17th August, both the Singapore and Malaysian Governments announced that they could not reach agreement for a common currency and banking system. As a result, beginning from the 12th June, 1967, Singapore, Malaysia and Brunei will issue their own separate currencies. This House and the people of Singapore are entitled to have a full and frank account of the negotiations and the reasons for its breakdown. I am, therefore, taking the first opportunity available to inform the House of what has taken place. In an open society, Sir, it is not possible to suppress important Government-to-Government negotiations and the reasons for failure to reach an agreement. We are, therefore, releasing the exchange of correspondence and memoranda that have taken place between the two Governments on this subject in the form of a White Paper which will be placed before this House later this afternoon. Mr Speaker, Sir, it all began on the 8th November, 1965, when in my letter to the Malaysian Finance Minister, I suggested that in order to maintain public and international confidence in the economic future of Singapore and Malaysia, the issue of currency under the Currency Board system should continue until the time is more opportune to make a change. Alternatively, Singapore and Malaysia could establish a joint Central Bank. Both these proposals were not acceptable to the Malaysians. In the meanwhile, we agreed that the officials should meet to find another formula for a common currency and banking system. It was then decided to ask for technical assistance from the International Monetary Fund. And at the request of both countries, the I.M.F. sent a preliminary mission to Singapore and Malaysia in December last year. The Mission reported on 1st March, 1966, and noted correctly Singapore's major pre-occupation for the safety of the foreign exchange reserves backing the currency. This is further emphasised by my letter of 21st March, 1966, addressed to the Governor of Bank Negara, Malaysia, in which I stated, and I quote: 'The Singapore Government wishes to be assured that in the event of subsequent withdrawal by either party from the proposed currency agreement, it should have immediate access to its share of the currency reserve.'. and it was also suggested in the same letter that another I.M.F. team be called to provide technical expertise. I quote again from the letter: 'We suggest that one of the major tasks to be set for the I.M.F., should both our Governments decide to call on them to provide technical expertise, is to devise a mutually satisfactory formula to ensure indisputable ownership and prompt division of reserves if and when a currency union, either in the form of a joint Central Bank or as envisaged under the Bank's present proposals, break up.' The reply from the Bank Negara Malaysia dated 20th April, 1966, states, and I quote again: 'We note, however, your concern over the control and management of Singapore's share of foreign exchange reserves in the currency and banking arrangements that we have proposed. We feel that this concern is wholly justified and we have accordingly reviewed this particular aspect of our proposals.' Enclosed with this letter, Mr Speaker, Sir, was also a memorandum setting out in detail the Bank Negara's revised proposals. I should like to quote from two parts of this memorandum. The first, I quote: 'It is clear from the rest of the arguments put forward by the Singapore Minister for Finance that the Singapore Government is concerned chiefly with (a) the need to maintain its sovereign rights in any proposals for future currency arrangements and (b) the need to safeguard its interests in the matter of foreign exchange reserves and the manner in which these reserves are utilised. This concern is of course justified and any fears that the Singapore Government may have on serious breaches of its sovereignty or the deprivation of a major part of Singapore's external assets should be dispelled entirely.' The second quotation from this memorandum on the question of reserves is - I quote again: 'The Singapore Government is probably justified in claiming that the arrangements proposed by Bank Negara on the control and management of the Bank's foreign exchange reserves are unsatisfactory since these do not provide for a "hard core" of assets which would always belong to Singapore and to which the Singapore Government would have immediate access in the event of withdrawal from the agreement by either party. Bank Negara has therefore reviewed that aspect of its proposals relating to the control and management of its foreign exchange reserves and has come to the conclusion that it would be desirable to separate the respective reserves of the two countries at the outset of the proposed arrangements.' Mr Speaker, Sir, it is clear that the Malaysians took cognisance of our concern over the safety of our currency assets. Once it has been accepted that the agreement should guarantee both Governments of their ownership, management, control and immediate access to their respective assets at all times, formal negotiations began in earnest with the assistance of another team of two officials from the I.M.F. In all, Sir, 11 formal meetings were held between the 10th of June and the 5th of July, 1966, chaired by the Governor of Bank Negara Malaysia, Tan Sri Ismail. I would like here to pay tribute to all those who took part in the meetings, including the officials of the I.M.F., for the intense work they put into their difficult task to find a formula for two independent countries to co-operate on a common currency and banking system. Proposals and counter-proposals were made. Many difficulties were encountered and overcome, but even after the eleventh meeting held on 5th July, which happened to be the last of the series, there were still doubts as to how the ownership of the Singapore assets were to be resolved. This was indicated by a letter from the Governor of Bank Negara Malaysia dated 11th July, 1966, to the Permanent Secretary (Economic Development Division) who was leading the Singapore team. In it, he wanted clarification as to how the piece of land in Singapore, which is at present in the name of Bank Negara Malaysia, can be transferred to the Central Bank of Malaysia, Singapore. He proposed that while the value of this land would be credited to the account of the Central Bank of Malaysia, Singapore, the title should remain in the name of Bank Negara Malaysia. The implication of this formula was far-reaching. For if we were to agree to this, it follows that all our currency assets would have to be vested in Bank Negara Malaysia and that this statutory body created by the Malaysian Government would be appointing itself the trustee of our currency reserves and assets. In other words, Sir, we would have to hand over legal ownership of all our assets to a bank which was a statutory body of another country and entirely subject to its legislation and control. This does not give us the guarantee over the ownership and immediate access to our assets and foreign exchange reserves on the basis of which we began negotiations. We must ensure that the title to Singapore's assets, be it land or securities, should be vested in Singapore, in the same way that the title to the currency assets of Malaysia are vested in themselves Bank Negara Malaysia. Since the Central Bank of Malaysia, Singapore, has no legal entity, in reply we proposed that both our assets should be placed with the I.M.F. or the Bank of England or any other third party mutually acceptable as both our trustee or, alternatively, that the Deputy Governor for Singapore should be incorporated into a corporation sole and all currency assets of Singapore could be vested in it. The Malaysian Government have always agreed that our assets must belong to us and that they can have no claims on them. The deposit with a third party like the I.M.F. or the incorporation of the Deputy Governor as a corporation sole to hold the assets will ensure that no future government in Malaysia, if it decides to give orders to Bank Negara Malaysia contrary to the letter and spirit of the agreement between Singapore and Malaysia, will be in a position to jeopardise Singapore's assets. The Malaysian Government, however, could not agree that the assets be placed in a third party and considered that incorporating the Deputy Governor for Singapore as a corporation sole meant the creation of two Central Banks. We cannot agree, Mr Speaker, Sir, with this interpretation. Our Attorney-General's Chambers have advised us that this will, in no way, prejudice what we have already agreed to, and that is, Bank Negara Malaysia should have only one legal entity. It saddens me to report, Mr Speaker, Sir, that all the obvious advantages of a common currency, affirmed and reaffirmed by the Governments and people on both sides of the Causeway, have to be thrown away because our proposals to leave the assets with the I.M.F. or the Bank of England or in Singapore with the Deputy Governor as a corporation sole were all not acceptable and the Malaysian Government has no time to consider other alternatives because their printers in London were pressing them to decide on the printing of their new notes immediately. Here, Mr Speaker, I would now like to comment on the few points highlighted by Press reports of the replies to questions by the Minister of Finance, Malaysia, raised in the Malaysian Parliament. It was stated that the draft agreement has been agreed to by officials of the two countries. I will now quote from minutes of the meeting of officials held on 26th June, 1966, made by Bank Negara Malaysia: 'The Singapore representatives pointed out that the clauses which had been agreed to at the past seven meetings at the official level should not be regarded as final and irreversible. They maintained that the officials of both Governments reserved the right to review and change the draft Agreement in whatever way necessary in the light of the Agreement as a whole.' I will now further quote from the minutes of the eleventh and last meeting held on 5th July, 1966, also recorded by Bank Negara Malaysia with regard to the position of the working drafts of the officials: 'It was noted that both the Malaysian and Singapore Governments reserved the right to decide in the final analysis, whether this Clause or any other clauses should be included in the Agreement. * * * Tan Sri Ismail suggested that these final drafts should be transmitted to the respective Governments for consideration. The views and reactions of both the Governments would be discussed at the next meeting.' The drafts are working drafts, subject to further clarification by both sides when any point is in doubt. Nowhere was it stated that the working draft is the final draft. The House may be interested to hear the I.M.F.'s advice on the negotiations. The leader of the second I.M.F. mission in his remarks on the commencement of the negotiations stated that as technicians, the two I.M.F. officials found the Bank Negara's revised proposal as generally workable and sound. However, it was emphasised that there was the need for the two Governments to join issue on fundamental matters which have to be resolved during the course of the negotiations. He described the I.M.F.'s role as that of an honest broker and at no stage did it make any attempt to give policy advice to either Government. The I.M.F., Sir, never recommended acceptance of the so-called final working draft. Now, Mr Speaker, Sir, what are Singapore's plans for the future, if no agreement on a common currency can be reached? I think it is important for all of us to understand the present system on which our currency is based. I shall then explain why it is vital for Singapore's economy to continue with the Currency Board arrangements with 100 per cent backing in foreign exchange reserves for every dollar we issue. Our present currency system is based on what is called the sterling exchange standard. This means that the holder of a currency note has a right, guaranteed under the law, to exchange it for equivalent value in sterling. To ensure that this legal right of the currency holder can always be effectively met, the Board of Commissioners of Currency is required under the law, to maintain a 100 per cent backing of the note issue in sterling. This means that for every dollar in circulation, there is 2s. 4d, worth of assets held by the Crown Agents in London on behalf of the Currency Commissioners. This right of automatic convertibility of the dollar into sterling and through sterling to other currencies of the world is important. So long as sterling (or other overseas) assets are not less in value than the total value of note circulation, automatic convertibility is guaranteed both in law and in fact. This system has three important consequences on the economy. First, it allows foreign trade to be conducted without exchange control. From Singapore's point of view as an entrepot trading centre, the absence of exchange control is an essential feature of our monetary system. The second point of the automatic sterling exchange standard is that balance of payments equilibrium is achieved through variations in incomes. For instance, if imports for consumption exceed earnings from exports and services, this is adjusted automatically by the reduction of incomes working through the economy and reducing imports in subsequent periods. As people's incomes contract, they buy less and with reduced expenditure, imports also go down. Similarly, when earnings from exports and services exceed imports in any given period, the tendency is for increasing incomes to lead to increasing expenditure and thus to increasing imports. The third point is that, apart from overseas loans and grants, the Government must balance its budget, both its recurrent and capital development projects. Total Government expenditure must be balanced by Government revenue and borrowing from the public. Where the Government has set aside reserves, say, in the Development or other Funds, these reserves can be run down but in the long term, income must balance expenditure. This is not always the case in other countries. Leaving aside loans and grants from overseas countries, governments can borrow from their own Central Bank. This is a euphemism for printing of currency notes by the Central Bank and handing them over to the government to spend. Such Central Bank loans to the government are sometimes called "credit creation". It is the result of deficit financing, i.e., when government spends more than what it can collect in the form of taxes or borrow from the money market. "Credit creation" in this sense usually leads to more money in circulation chasing the same amount of goods and services leading to rising prices or inflation. In its acute form, it leads to a collapse of the exchange currency, as has happened in some countries. The initial result of government borrowing from the Central Bank (printing new currency notes against loan scripts signed by a government's finance minister) is that the money income of the nation is increased by the amount of the additional notes. As people spend this additional income, prices begin to rise. Where part of the money income is spent on imports, then there will be pressure on the country's foreign exchange reserves. For unless exports keep pace with the increase in imports, the foreign exchange reserves will fall, if expenditure on imports for consumption continues to exceed earnings from exports, it will be necessary for the government to ration the use of foreign exchange. The holder of a currency note then loses his right to automatic conversion on demand into foreign currency. He applies for permission to buy foreign currencies. This is known as "exchange control". Unfortunately, Mr Speaker, Sir, exchange control has had to be imposed in almost all the under-developed countries which have emerged into independence since World War II and which have established their own Central Banks. For our trading economy it is imperative that our money must remain convertible to enable our traders to import almost anything from anywhere either for resale or for our own consumption. There is no rationing of foreign exchange. Obviously, this makes trading much easier and is of great advantage to our entrepot economy. We must continue this practice. It is true, Mr Speaker, Sir, that this system was established by the colonial administration. The Currency Board system is not necessarily defective just because a colonial administration used it. Many newly independent countries have gone on to the central banking system because the Currency Board system prevented them from spending money they were not earning, as no notes could be issued without 100 per cent backing in reserves. In fact, if we look at the matter dispassionately, the Currency Board system has contributed substantially to the financial stability of the present dollar. Under the Currency Board system it is not possible for a country to spend a dollar more than it earns abroad. As a trading community, Singapore cannot afford to have a currency that is less than this. If our word is to be as good as our bond, then Singapore's currency must always remain a freely convertible one, that is a hard currency. We, therefore, propose to continue with the Currency Board system. In other words, Sir, the new currency that Singapore will issue from June next year will at all times be backed 100 per cent by gold or foreign exchange assets, and will remain fully convertible. Singapore will begin its currency board issue on a sound financial basis. Compared to the end of 1965, official reserves, not counting foreign assets held by commercial banks and the private sector, stand at over $1,021 million. This is 10 per cent above the level of official reserves at the end of last year. This amount of official reserves is adequate to finance retained imports into Singapore for 10 months. This liquid position compares favourably with the most solvent nations of the world. Another strong feature is that Singapore's external debt position at the level of only $58 million is one of the lowest in the world. This amount of external debt represents only 0.5 per cent of current account earnings in recent years. The long-term outlook is equally sound. Soon after the separation of Singapore from Malaysia, the World Bank sent a mission to assess the economic and financial position of Singapore. In the estimation of the World Bank, the foreign exchange gap over the next five years until 1970 will amount to only $350 million. This gap can be easily met. Prospects are good that the Bank itself will be prepared to lend Singapore about one-third of the foreign exchange requirements. The World Bank has already agreed to lend $45 million to the Port of Singapore Authority. Another one-third can be made available through bilateral commercial credits. A loan to finance the construction of the new Jurong Power Station has been negotiated with a Japanese supplier. The remaining amount is therefore a relatively minor sum which can be met by Singapore itself. But even if Singapore borrows the entire shortfall of about $350 million in the next five years to finance a development programme estimated at $1,750 million, the external debt service will amount to only slightly more than 2 per cent of estimated current account earnings in 1970, the last year of the Second Five-Year Plan. In recent years domestic exports have been rising. For the annual period ending June 1966, domestic exports amounted to $1,090 million, or an increase of 24 per cent over the same period in 1965. The volume of trade for the 12 months ending June 1966 showed an increase of $569 million, or just over 9 per cent over the corresponding period of the previous year. Bank loans and advances, always good economic indicators, rose from $1,011 million at the end of June last year to $1,054 million at the end of June this year, reflecting an increase of 4.3 per cent. Revenue from liquor, tobacco and petroleum, the major sources of public finance, have also increased by about 12.24 per cent this year. Finally, Singapore's gross domestic product in 1965 is estimated at $3,023 million, which is an increase of $213 million, or 8 per cent over the 1964 output. This, Mr Speaker, Sir, means that the per capital national income of Singapore, after stagnating in 1964, is again on an upward trend. These indicators reflect an expanding economy at a good rate of growth which can be maintained and even accelerated, given international confidence in our currency and economy, prudent use of resources and hard work on our part. After careful consideration, the Government has decided to continue with a currency board which can issue notes only with full 100 per cent backing in reserves. We have decided to abjure some of the comforts of Central Banking finance which offers flexibility and temporary relief for financial stringency but which often leads to chronic monetary difficulties. No developing country has as yet demonstrated that it can successfully engage in Central Bank credit creation. Calamitous consequences have invariably followed when a developing country indulges in borrowing currency notes printed by its Central Bank. For Singapore, whose economy is open and faces competition at every point from the rest of the world, the most rigorous monetary policies have to be followed. This calls for the tightest economic and social discipline from the people of Singapore. The 100 per cent backed currency system that we will be operating means that if Singapore wishes to spend more, then we must first earn more. Productivity of labour, efficiency of management and the strength of our economic infrastructure have to be maintained and improved continuously. There is no alternative for Singapore. In other words, the luxury of maintaining temporary full employment in an election year, with which some governments have pampered their population by following inflationary policies, low interest rates and easy credits in order to expand consumption and expand employment and temporarily expand imports at the risk of running down their foreign exchange reserves, is not one which will be open to the Singapore Government. Whether it is election year, or any other year, if there is a fall in the dollars we earn either by production and sale of our goods and services, or by brokerage on trade, then the amount of foreign exchange earned will immediately go down, the amount of money available for expenditure will also go down, demands on goods and services will go down and unemployment must go up. This is a rigorous regime but we must accept this austere and severe system of adjusting our consumption to our earnings at all times if we are to maintain our pre-eminence as a great trading centre. Whatever else may be in doubt, the value of our currency and the certainty of its maintaining that value at which prices are being quoted all over the world, can never be placed in jeopardy. So unless we reach a compromise agreement with Malaysia before the 12th of June, 1967, we must constitute our Currency Board, for the old Currency Board consisting of representatives of the Governments of Singapore, Malaysia and Brunei will be dissolved. On the new Currency Board, there will be adequate representation for our bankers, both those representing local banks and banks incorporated overseas. So it shall always be known and manifestly known by banking circles throughout the world that for every Singapore dollar in circulation, there is 2s 4d, worth of foreign exchange, or 0.290299 gramme of fine gold being held by the Board. I am confident that as long as we keep to the mundane policies of a Currency Board and avoid the temptations of the acrobatic heights of high finance covered by the Central Bank credit creation, Singapore, over the next five years, will demonstrate its economic strength and resilience, and continue as a strong financial centre and haven of capital in this part of South-east Asia. Hon. Members: Hear, hear! 3.45 p.m.