IMF Supports HK's Policy Framework to Deal with Challenges Ahead

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Last updated at: (Beijing Time) Tuesday, February 05, 2002

IMF Supports HK's Policy Framework to Deal with Challenges Ahead

An IMF Staff Mission to HK supported the government's policy framework to deal with the challenges ahead.
The mission supported the government's approach in dealing with these challenges through maintaining the rules-based and transparent economic policy framework, focusing ear-term policies on facilitating the adjustment process, and continuing reforms to support the economy's growing integration with the mainland.

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Moderate Recovery Expected

An International Monetary Fund (IMF) Staff Mission to Hong Kong supported the government's policy framework to deal with the challenges ahead, said a government's press release on Tuesday.

It expected a moderate recovery for Hong Kong in the near-term, depending on an upturn in external demand and noted that the longer-term outlook depends on Hong Kong's success in capitalizing on the opportunities arising from growing integration with the Chinese mainland.

Government's Approach Supported

GDP Growth in Forecast

The assessment was made by the IMF mission in their concluding statement at the end of their visit to Hong Kong for the annual Article IV Consultation with China in respect of the Hong Kong Special Administrative Region, which involved a review of Hong Kong's exchange rate, fiscal and economic policies.

According to the mission's forecasts, Hong Kong's real GDP growth will be around zero in 2001, which is in line with the government's projection. It also projected Hong Kong's GDP to rise by one percent for 2002, based on a rebound in U.S. economic growth in the second half of the year.

Reform for Further Development

The mission considered that Hong Kong was facing the twin challenges of a sharp cyclical downturn and structural changes from increasing integration with the Chinese mainland. In this connection, the mission supported the government's approach in dealing with these challenges through maintaining the rules-based and transparent economic policy framework, focusing ear-term policies on facilitating the adjustment process, and continuing reforms to support the economy's growing integration with the mainland.

The reforms seek to further develop the financial markets, upgrade the skills of the labor force and ensure the flexibility of goods and factor market in support of the linked exchange rate system.

Markus Rodlauer, the assistant director of Asia and Pacific Department of the IMF, who led the mission, said: "The authorities have set out an appropriate framework for dealing with these challenges, and we are confident that these challenges will be met."

Stability of Link Plays Critical Role

As in the past, the mission strongly supported Hong Kong's linked exchange rate system. It noted that the link had been a centerpiece of Hong Kong's rules-based policy framework, and an important feature of the "one-country, two-systems" principle. The stability of the link has played a critical role in boosting confidence in Hong Kong as a financial center. Underpinning the link has been prudent fiscal management, flexible markets, a robust financial system and large foreign exchange reserves.

The mission noted that this year's widening in the fiscal deficit has been caused mainly by the sharp economic downturn, and that it would not be advisable to take measures with immediate large effect to counteract the cyclical shortfall in revenues in light of the weak and uncertain economic outlook. Nevertheless, the mission expresses concern about a structural deterioration of the fiscal position in recent years, and recommends an early adoption of a comprehensive medium-term deficit reduction plan which should aim to reverse the rising trend of government expenditures as a share of GDP and fortify the revenue base.

Mission's Support Welcomed

Financial Secretary of Hong Kong Antony Leung said: "We welcome the IMF mission's assessment of the Hong Kong economy. We agree with the Mission that, to ensure the sustainability of our monetary and financial policy framework, we need to cope with the challenges posed by the cyclical and structural adjustments. This would include moving back to a balanced budget within a reasonable period of time."

Chief Executive of the Hong Kong Monetary Authority Joseph Yam welcomed the mission's support for the linked exchange rate system. He said: "In an unusually difficult year when Hong Kong suffers from a sharp downturn, the IMF's endorsement of Hong Kong's policy framework, including the link, is important to bolster the international financial community's confidence in our system."

The IMF mission was in Hong Kong from January 11 to January 24 for the Article IV Consultation visit to the Hong Kong Special Administrative Region. It held discussions with the private sector and government officials.

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