Financial Secretary Henry Tang welcomes the International Monetary Fund Staff Mission's positive assessment of Hong Kong's macroeconomic policies, adding the Government will continue managing public finances prudently.

The IMF Mission, led by the Asia & Pacific Department's Jahangir Aziz, visited Hong Kong October 13 to 25 for the Article IV Consultation, which involves an annual review of the city's macroeconomic framework, including its exchange rate, fiscal and structural policies. The assessment was made in their concluding statement following the consultation completion.

The mission sees continued expansion in Hong Kong's economic activity. It predicts a 6% to 6.5% increase in the real gross domestic product this year moderating to 4.5% to 5% next year. The growth outlook will depend crucially on external conditions and developments on the Mainland.

Budget balance almost achieved

They noted the Government has continued take advantage of Hong Kong's strong economic growth to strengthen the fiscal position. With the target of reaching a budget balance almost achieved, and in light of the likely spending pressures from an ageing population, the mission believes now is a good time to develop a longer-term fiscal strategy in the face of demographic challenges.

In formulating the strategy, consideration should also be given to the appropriate level of fiscal reserves, which underpin confidence in the predictability of Hong Kong's traditional low-tax environment by providing assurance the Government can meet the challenges of aging-related pressures, even when tested by large unanticipated adverse shocks.

The mission also noted the need to broaden the tax base to stabilise revenue and welcomes the Government's intention to begin public consultation on the feasibility of introducing a low-rate goods and services tax. Meanwhile, the Mission cautions against further tax concessions which, unless taken with great care, could permanently increase the budget's reliance on more volatile non-tax revenue.

Robust public finance system pledged

Mr Tang said: "We will follow the principle of keeping expenditure within the limits of our revenues, strive to achieve fiscal balance and keep the budget commensurate with GDP growth. We will also strive to maintain a robust and sustainable public finance system."

The mission regards the three refinements introduced in May this year as having significantly strengthened the Linked Exchange Rate System, and reiterates its support for the Government's commitment to the currency board. The refinements have successfully dampened speculative inflows related to market expectations of a renminbi appreciation and re-established the traditional tight link between Hong Kong and US interest rates.

The mission notes the Government rightly emphasises the need to continue strengthening market infrastructure and supervisory systems to maintain financial stability. The mission also welcomes the progress made in the introduction of a deposit-protection scheme in the second half of next year and preparations for adopting Basel II requirements.

Financial intermediation

The mission is of the view that the continued success of Hong Kong as an international financial centre hinges upon its ability to assist in the Mainland's financial intermediation and Hong Kong is well positioned to play a significant role in this. Co-operation and co-ordination with the Mainland's financial authorities, which have advanced well, will therefore become increasingly important.

Monetary Authority Chief Executive Joseph Yam welcomed the fund's continued support of Hong Kong's commitment to the Linked Exchange Rate System and the positive assessment on the effectiveness of the refinements to the operation of the currency board arrangements.

"I am pleased to note the mission's encouraging remarks on our efforts to maintain financial stability. I fully agree that Hong Kong, with its sophisticated financial platform, should strengthen its role in promoting effective financial intermediation of the Mainland to sustain its role as an international financial centre," Mr Yam said.

For more details on the assessment click here.