What Are The Reserves Used For?
What Are The Reserves Used For?
What Are The Reserves Used For?
what are reserves used for?
Provides support in times of crisis
The reserves ensure that Singapore can respond decisively during crises without compromising essential services and incurring debt for future generations. For example:
During the Global Financial Crisis, we drew on Past Reserves to subsidise employees’ wage bills and improve companies’ access to credit.
In our fight against COVID-19, the Government drew about $40 billion from Past Reserves for COVID-19 response measures across FY2020 to FY2022. By tapping on the reserves, the Government was able to fund public health measures as well as economic and social support measures, to save lives and protect livelihoods.
The ability to tap our reserves in a sustainable manner is a significant financial advantage for Singapore. Our situation is quite unlike that in many countries that have to service their debts and other liabilities from their budgets on an annual basis, and consequently either raise taxes or engage in further borrowings so as to service current borrowings.
The few other countries where Governments are able to derive a revenue stream for public spending are typically those with substantial reserves of natural resources such as oil.
when did singapore tapped on its past reserves
Watch this CNA documentary for a first-hand account of the decision-making process behind the two rare occasions that the Singapore government tapped on Past Reserves.
Will the Government return the $40 billion drawn from the Reserves drawn during COVID-19 pandemic?
Contributes to public spending
The reserves support Singapore’s current spending needs through its contribution to the annual Budget. About 20% of annual Government spending is funded by the investment returns on our reserves through the Net Investment Returns Contribution (NIRC). Since FY2020, the NIRC has provided an annual revenue stream of about 3.5% of GDP on average. For the financial year which ended on 31 March 2024, the NIRC was about $22.92 billion.
The investment returns from our reserves provide additional resources for Government spending to benefit Singaporeans. This includes Government investments in education, healthcare, transport infrastructure, R&D and other areas to improve our living environment and to grow our economy.
net investment returns contributions nirc
Today, the NIRC is one of Singapore’s largest sources of Government revenue for annual spending. At the same time, there have been calls to increase the NIRC, above the present spending limit of 50% of the annual investment returns.
The NIRC framework is part of a larger sustainable fiscal system.
The framework balances between the needs of today and tomorrow. It underscores the Government’s commitment to continue growing our reserves, while allowing the Government to tap on part of the investment income for current spending.
If we spend more from NIRC today, we would effectively be reducing the reserves available for future use, which might result in higher taxes in the future or reduced expenditure for our future needs.
Serves as a financial anchor
As Singapore is a small and highly open economy, inflation and aggregate demand are more significantly influenced by the exchange rate rather than interest rates. Singapore’s monetary policy framework, conducted by MAS, is thus centred on managing the exchange rate of the Singapore Dollar against a basket of currencies within a policy band.
The reserves enable MAS to conduct monetary policy and secure macroeconomic stability, by defending the value of the Singapore Dollar from major fluctuations. This helps to protect the purchasing power of Singaporean households and businesses, maintain investor confidence in Singapore’s exchange rate-centred financial system, and secure macroeconomic stability.
Understand more: Net Investment Returns Contribution (NIRC)
The annual Net Investment Returns Contribution (NIRC) amount is published in the Government's annual Budget. NIRC comprises:
Up to 50% of the Net Investment Returns (NIR) on the net assets invested by GIC, MAS, and Temasek; and
Up to 50% of the Net Investment Income (NII) derived from past reserves from the remaining assets.
The NII Framework was introduced in 2001 to protect at least 50% of actual net investment income. NII refers to the actual dividends, interest and other income received from investing our reserves, as well as interest received from loans, after deducting expenses arising from raising, investing and managing the reserves.
The NIR framework was subsequently introduced in 2008, which allowed the Government to spend up to 50% of the expected long-term real return (including capital gains) on the relevant assets. The expected long-term real rate of return (ELTRROR) refers to the investment rate of return that can be expected to be earned over the long term, after netting off inflation. The expected rates of return are based on the judgement of experienced investment professionals in the investment entities.
Spending up to 50% of the expected returns strikes a balance between current and future needs. It allows us to take in some investment returns for spending, while continuing to grow our reserves.
Relevant assets are defined in the Constitution as the net assets invested by GIC, MAS, and Temasek, minus the liabilities of the Government (which include Singapore Government Securities and Special Singapore Government Securities). This ensures that we set aside returns to cover the costs of servicing our liabilities.
The NIR component was an enhancement in the following ways:
Expanded the definition of investment returns to total returns, including capital gains (both realised and unrealised). This is more aligned with our asset allocation that is focused on maximising total returns over the long term. A spending rule based only on interest and dividends could have led to a bias toward investments that generate income rather than capital gains. This would be inconsistent with our objective of maintaining a diversified investment portfolio aimed at achieving long-term returns.
Long-term expected rates of return (rather than year-on-year actual returns, comprising dividends and interest, under the NII component) rates of return are used used to smooth out the volatility of Government spending. For example, it ensures that the Government does not overspend in a bull market, and end up finding itself short of resources in a bear market.
Real rates of return, i.e., net of inflation, (rather than nominal returns), are used to protect the purchasing power of our reserves. Otherwise, in a scenario of sustained high inflation globally, even if we were to earn reasonable nominal investment returns, our past reserves would be gradually eroded in real terms.
spending framework
Together, the NIRC enhances revenues and ensures a fair balance between current and future needs.
Process to Determine the ELTRROR
Are we "over-saving"?
Holds our Land Bank
Land is scarce in Singapore, and it is our main natural resource. It is thus protected as part of the reserves.
Our Past Reserves are used to fund land-related projects such as land reclamation and the creation of underground space2 like the Jurong Rock Cavern as well as specific land acquisition projects like Selective En-bloc Redevelopment Scheme (SERS)3. This is a form of asset conversion, from a financial asset to a physical asset. The land created or acquired forms part of our State land holdings and is protected as Past Reserves. Further, when such land is subsequently sold, the proceeds accrue fully to Past Reserves to ensure that there is no draw on Past Reserves.
Spending from Land Sale Proceeds
When is State land considered disposed?
Why is it important for State land to be sold at fair market value?
Financing Climate Action
Guarantee CPF Interest Rates
CPF monies are invested by the CPF Board (CPFB) in Special Singapore Government Securities (SSGS) that are issued and guaranteed by the Singapore Government. This arrangement assures that CPFB will be able to pay its members all their monies when due, and the interest that it commits to pay on CPF accounts.
This is a solid guarantee. The Singapore Government is one of the few remaining triple-A credit-rated governments in the world. To elaborate:
The Government is in a strong net asset position, i.e. its assets far exceed its liabilities (CPF liabilities in the form of SSGS are a part of these liabilities). The strong net asset position can be seen from the NIRC that is available for spending on the Government Budget. Over the past five years, the NIRC has provided an average revenue stream of about 3.5% of GDP per annum.
What this means is that even after deducting all the Government's liabilities, the remaining net assets produce significant returns. The NIRC is drawn from returns on assets in excess of the liabilities, and is not the returns on gross assets. Further, as stipulated in the Constitution, the NIRC recorded in the Government Budget only comprises up to 50% of the expected returns on the reserves. The NIRC figures are submitted to the President's Office and audited by the Auditor-General's Office.
If the Government's assets had not been adequate to meet its liabilities, there would have been no contribution from the investment returns on reserves in the Government Budget.
No CPF monies go towards government spending. Government borrowings from Singapore Government Securities (SGS) and SSGS cannot be used to fund expenditures. Under the Government Securities Act (enacted in 1992), the monies raised from SGS and SSGS cannot be spent.
These funds are comingled together with other sources of government funds (e.g., unencumbered assets5 such as government surpluses and land sales receipts) and deposited with MAS as government deposits.
In the process of conducting monetary policy, MAS may convert these funds into foreign assets through the foreign exchange market, accumulating foreign assets in the form of official foreign reserves (OFR), in order to moderate the appreciation of the Singapore dollar exchange rate. Excess OFR above what MAS requires to conduct monetary policy and ensure financial stability are ultimately transferred to GIC to be managed over a longer investment horizon, providing backing for longer-term Government liabilities like SSGS.
This CNA documentary explains how Singapore’s reserves guarantee CPF interest rates.
Understand more: Which investment entity invests CPF monies?
Are MAS and Temasek involved?
Understand more: How CPF interest rates are determined
Footnotes
[2] Past Reserves are used to fund only expenditure directly related to the creation of land, but not for the construction of infrastructure on the land.
[3] Past Reserves are used to fund only the land component of the total compensation of the acquisition costs.
[4] These include land reclamation projects, building of infrastructure such as polders and seawalls, and the installation of equipment like pumps and localised flood barriers.
[5] Unencumbered assets refer to assets which are not matched to any liabilities. The Government has large, unencumbered assets, which are not matched to liabilities. These assets were accumulated through past government surpluses, land sales receipts and the investment income earned on those assets over the years.
