Hong Kong SAR--Staff Visit: Concluding Remarks
December 15, 2003
A strong economic recovery appears underway, with good near-term prospects for rising growth and an easing of deflationary pressures.
· We now project GDP growth to be around 3 percent in 2003 and in the range of 4½-5 percent in 2004. The recovery will be supported by the boost from Mainland tourism, the strengthening of the global economy, the advent of CEPA and the associated improvement in domestic consumer sentiment.
· We forecast that CPI deflation will moderate to about 1 percent by end-2004 and be over by mid-2005, reflecting a pickup in activity, the stabilization of the overall property market and the end of deflation in the Mainland.
· There are, however, some risks to the strength of the recovery, which is still in its incipient stages. The downside risks include a sharp rise in interest rates and the possible spillovers from a disorderly adjustment of global current account imbalances.
The adoption of a credible plan for medium-term fiscal consolidation continues to be the main macroeconomic policy challenge.
· Despite the recent disappearance of weak-side pressures on the Hong Kong dollar, fiscal consolidation remains crucial to avoid any reversal of market sentiment and thereby mitigate future pressures on the Linked Exchange Rate System.
· Fiscal consolidation will also be important for ensuring continued confidence in Hong Kong SAR's model of small government and low taxation.
Notwithstanding the fact that the economy is still in its early stages of recovery, the timing is propitious for revitalizing the fiscal consolidation effort given that growth prospects are bright and sentiment has turned positive.
· We note that the deterioration of the FY 2003/04 fiscal position relative to the budget can largely be attributed to the negative impact of the SARS epidemic and acknowledge the reasons underlying the postponement of the target date for achieving budget balance. We also recognize that, despite the difficult conditions, significant progress has been made this year in enacting a number of revenue and expenditure measures.
· With the improvements in macroeconomic prospects, the time has now come to build on these underlying gains and push forward to make demonstrable headway towards fiscal consolidation.
· A well-articulated framework that lays out the path and full package of measures for achieving the medium-term objective of budget balance would help build public support for the adjustment program.
Substantive and credible progress toward medium-term consolidation should start in FY 2004/05; this would help to solidify the prevailing positive market sentiment.
· In addition to the automatic improvement from the lapse of the SARS package, we recommend a further reduction of the operating balance by about 1 percent of GDP in FY 2004/05. Setting this target on the basis of conservative growth assumptions would provide a credible start to the fiscal consolidation effort.
· Expenditure restraint may have to bear the brunt of adjustment in the short run. This could include reductions in the civil service wage bill and additional measures to control social expenditures. Some reprioritization of social expenditures may also be warranted.
· Broadening the revenue base and shifting it towards more stable sources remains a key policy priority. We welcome the intention to implement a goods and services tax (GST), and advise moving ahead expeditiously with the planning phase given the long lead times involved. Implementation of a GST is also likely to be essential for achieving medium-term fiscal consolidation. The IMF stands ready to provide technical assistance in designing and implementing a GST.
· We support the intention to issue government debt, subject to the proviso that it be strictly confined to financing infrastructure spending. This would also help to develop the local bond market.
The mission commends the substantial progress made in enacting the main recommendations of the Financial Sector Assessment Program.
· We look forward to further progress in the few remaining areas, including turning the Office of the Commissioner of Insurance into a self-funded and independent regulatory body, and clarifying the distribution of listing responsibilities between the Securities and Futures Commission and Hong Kong Exchanges and Clearing Limited.
· Further progress in cross-border supervisory and regulatory coordination will also be essential as integration of domestic financial markets with those of the Mainland continues.