IMF expects H.K. economy to grow 3% this year

Asian Economic News, March 3, 2003

HONG KONG, Feb. 25 Kyodo

Hong Kong's economy will grow by 3% this year, up from an expected 2% expansion in the past year, as external demand is strengthening, supported by robust development in mainland China, an International Monetary Fund (IMF) staff mission said Tuesday.

Yet, the IMF noted the territory's government needs to adopt concrete measures to tackle its bulging fiscal deficit problem in the next fiscal year, beginning April 1.

After a 10-day visit in Hong Kong earlier this month, the IMF mission said in a statement that the deflationary spiral haunting the territory could begin to ease.

However, weak property prices, high unemployment and other structural factors are likely to continue to dampen both domestic demand and the overall level of prices, the mission said.

''The medium-term outlook depends on how Hong Kong meets the challenges of integration with the mainland (China) and rising regional competition,'' it said.

However, the IMF said the continued deterioration of the city's fiscal position has made it the main source of potential macroeconomic vulnerabilities.

''The mission welcomes the authorities' objective of achieving a balanced budget by fiscal year 2006-2007. However, a well-specified deficit reduction plan will be essential to bolster market confidence in Hong Kong's macroeconomic policies,'' the IMF said.

The deficit in the current financial year ending March 31 is likely to rise to about 6% of gross domestic product (GDP). The territory already posted a deficit of HK$63.3 billion, about 5% of GDP, for the last fiscal year.

''Such large and persistent fiscal deficits could undermine the long-term sustainability of the public finances and the stability of the linked exchange rate system,'' the IMF warned.

The IMF supported Hong Kong's commitment to the linked exchange rate system, under which the territory's currency is pegged to the U.S. dollar, saying the peg remains robust.

Noting that successful fiscal consolidation will require significant cuts in government expenditures, the IMF said the city will face difficult challenges, particularly since spending on education, health, and social services will come under increasing pressure and there is a need to upgrade the education system to remain competitive.

The mission welcomed the Hong Kong government's plan to reduce the civil service establishment by 10% by the financial year of 2006-2007.

It advised the territory to take substantive measures to broaden the tax base and stabilize revenues in the medium term.

''In our view, a low rate goods and services tax would be the best option and, given the long lead time required for its implementation, preparation for its introduction would need to start soon,'' the IMF said.

Hong Kong's Financial Secretary Antony Leung is expected to announce measures to cut expenditures and raise revenues in his budget speech next week.

It is widely tipped that Leung will propose tax hikes and increases in government fees.

Last week, the 178,000-strong civil service agreed to take a 6% pay cut in two years to bring their salaries down to the 1997 levels, in a bid to help ease the chronic fiscal deficit problem.