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IMF Gives Hong Kong Positive Appraisal

by Mary Swire, Lowtax.net, Hong Kong
28 May, 2014

Following its recent Article IV consultation with Hong Kong, the International Monetary Fund has commended the special administrative region's track record of fiscal discipline and its new efforts to cast fiscal policy in a long-term framework, as proposed by the Working Group on Long-Term Fiscal Planning.

While, as a relatively small, open economy, Hong Kong can be vulnerable to external economic shocks, the IMF welcomed Hong Kong's "favorable prospects for strong growth, low unemployment and stable inflation" in the short- and medium-term. It noted, however, that it remains susceptible to risks from a potential price correction in domestic property markets.

The IMF noted that Hong Kong has maintained "a prudent and counter-cyclical fiscal policy," with a premium placed on "balancing its budget over the business cycle and maintaining a low tax environment that makes Hong Kong attractive as a global financial center." It found that "fiscal reserves now exceed 35 percent of gross domestic product (GDP) and the fiscal outturn has consistently outperformed the budget (by about three percent of GDP on average over the past 15 years)."

Accordingly, the IMF recommended persevering with these prudent policies. It considered the unwinding of stimulus in the 2014-15 budget to be appropriate, but noted that fiscal policy will need to "strike a balance between addressing population aging and inequality-related needs" in the longer term, "while fulfilling the authorities' commitment to low taxes and fiscal prudence."

With regard to the property market, the IMF said that, after a prolonged rise, both residential and commercial property prices have leveled off, albeit at an elevated level. However, it noted that: "Housing affordability remains a concern, with the highest price-to-income ratio among regional peers." While increased housing supply is seen as the only long-run solution, the IMF acknowledged that the Government has "proactively implemented measures to safeguard financial stability and [to] stabilize the property market." Fiscal measures have included increasing stamp duty on speculative transactions and on buyers who are not permanent residents.

The IMF concluded that these measures "should provide buffers to the financial system in the event of a property price correction," and that they "could be eased in line with the normalization of the market, with a faster reduction in the event of a sharp correction."

The IMF also commended Hong Kong's "high caliber" financial regulation and supervision framework for achieving a high level of compliance with international standards. It added that Hong Kong should continue to strengthen its regulatory regime to uphold market quality and efficiency, particularly noting the Government's moves to introduce an independent Insurance Authority, and efforts to further strengthen the independence of the accounting profession and, through which, auditors' oversight of corporate accounts.


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