The International Monetary Fund says with some easing of external demand, Hong Kong's economic growth is expected to moderate to 5.5% in 2006, while inflation is expected to rise to 1.5% from 1.1% in 2005.

In its Staff Report on Hong Kong released today, the IMF has given a positive assessment of Hong Kong's economic performance and commends the Government's fiscal and exchange-rate polices.

It expects the economy to have grown 7% in 2005, which is in line with the latest Government projection.

With the recent upturn in domestic prices, the IMF believes the economy's adjustment to the adverse shocks of the past seven years may finally be over, and that external competitiveness has been restored to a level that is consistent with economic fundamentals.      

Longer-term fiscal strategy urged

Projecting a budget balance in financial year 2005-06, the IMF believes this is now a good time to develop a longer-term fiscal strategy to meet the challenges of an ageing population. 

In formulating the strategy, the IMF believes consideration should also be given to the level of fiscal reserves, because adequate reserves underpin market confidence in the Government's ability to meet higher and unanticipated spending pressure without significantly changing Hong Kong's low-tax environment.   

The IMF welcomes the Government's intention to begin public consultation on the feasibility of introducing a low-rate goods and services tax. It also supports the Government's plans to encourage greater private-sector participation in delivering healthcare services.

However, the IMF cautions against further tax concessions before any tax and healthcare reforms.

Positive assessment welcomed: FS

Welcoming the report, Financial Secretary Henry Tang said the IMF's positive assessment was an endorsement of the Hong Kong Government's macroeconomic management. 

"I am confident that Hong Kong, with its sound fundamentals and stable policy framework, will continue to maintain its competitiveness and resilience," Mr Tang said.

The IMF said the continued success of Hong Kong as an international financial centre hinged upon its ability to assist in the Mainland's financial intermediation, a process in which Hong Kong was well-positioned to play given its sophisticated financial infrastructure.

To this end, co-operation and coordination of financial authorities between the two economies would become increasingly important.

On maintaining Hong Kong's status as an international financial centre, Hong Kong Monetary Authority Chief Executive Joseph Yam said efforts over the past years to encourage the Mainland to make greater use of Hong Kong's sophisticated financial platform would consolidate and enhance Hong Kong's position as the pre eminent financial centre for the Mainland.   

Report available online

The IMF mission visited Hong Kong between October 13 and October 25 last year to conduct the Article IV Consultation. 

The Staff Report on the Consultation is the sixth report  the Government has published, following its agreement to participate in the IMF's exercise to increase transparency in its assessment of world economies.