The IMF continues to be strongly supportive of the monetary and financial policies pursued in Hong Kong. But its most recent report on the SAR points to structural problems in our fiscal arrangements that need to be addressed.
We have just received the report of our annual medical check-up on the economy conducted by the International Monetary Fund. The Concluding Statement of this year's Article IV Consultation on Hong Kong by the Fund has just been published. It is not exactly a clean bill of health, unlike reports of past years, on account of the widening fiscal deficit. But it continues, as before, to be highly supportive of the policies being pursued by the SAR Government, which currently focuses on tackling the twin challenge of a sharp cyclical downturn and structural changes from increasing integration with the Mainland.
As we are all acutely aware, danger signals concerning the state of our public finances have been flashing. Although, as pointed out in the Concluding Statement, the widening fiscal deficit has been caused mainly by the sharp economic downturn, it has become increasingly clear that a structural problem has also developed. For four consecutive financial years, there was a deficit in the recurrent account - recurrent expenditure exceeding recurrent revenue - while Hong Kong has been accustomed to a significant surplus on the recurrent account big enough to finance a large part of capital expenditure. (See, for example, footnote 1 of the 1976-77 Budget Speech.) A deficit in the recurrent account is something that is unprecedented in the recent history of Hong Kong's public finances. But so too is the combination of financial turmoil, economic integration with the Mainland, sharp deflation and growing aspirations of a community that is rapidly gaining in political sophistication. Nevertheless, it is clear that the deteriorating structural problem in our public finances must not be allowed to persist and that it needs, to quote the Concluding Statement, fundamental remedy through the early adoption of a comprehensive medium-term deficit reduction plan.
This is likely to tax the imagination of the Financial Secretary. The stark truth is that deficit reduction and elimination require the cutting of expenditure and the raising of revenue. Both are politically difficult, particularly in the current economic environment. But politics is the art of the possible. I have full confidence that the Financial Secretary, ably assisted by the Secretary for the Treasury, will be able, in the fullness of time, to pull this one off effectively. I believe also that the community recognises the importance of fiscal discipline to the long term stability and prosperity of Hong Kong, and will give the Financial Secretary the support he needs.
We in the HKMA impose upon ourselves the continuous task of identifying, monitoring and managing the risks to monetary stability, in particular exchange rate stability. I hope I can speak frankly to this sophisticated readership without causing alarm. The risk factor at the top of our list is not possible contagion from the debt crisis in Argentina, which used to run a currency board system similar to our own. Nor is it the weakness of the yen and possible impact on the renminbi. It is the current state of our public finances. External shocks can be destabilising, but we have no influence on them, and as long as Hong Kong's fundamentals remain strong we can cope, as we have time and again demonstrated. The associated risks to monetary stability in Hong Kong arising from external shocks can also be managed through open and rational discussions on the relevant issues. If possible, this should be done in anticipation of the shocks materialising - our approach to the Argentina issue is a very good, and dare I say a successful example of this risk management strategy. But when questions are raised about Hong Kong's strong fundamentals - the fundamentals that support monetary stability - it is an entirely different matter. The management of the associated risks to monetary stability cannot be anything else but a credible strategy to return the fundamentals to a position of undoubted strength. I am confident that we will see this.
In case readers have not noticed, the Concluding Statement of the IMF Article IV Consultation "strongly supports Hong Kong SAR's commitment to the linked exchange rate system". It also points out that "Hong Kong SAR's financial system, supported by well-developed legal and regulatory frameworks and a modern financial infrastructure, is among the most advanced in Asia, and indeed globally", and that "the banking sector remains well capitalised, notwithstanding the Asian crisis and the recent downturn". Naturally, we in the HKMA are glad to note these comments.
Joseph Yam
7 February 2002
Related information:
Click here for previous articles in this column.
Document in Word format
