IMF Concludes Article IV Consultation With Hong Kong

by Mary Swire, Tax-News.com, Hong Kong

12 December 2008

The International Monetary Fund last week published the conclusions of its Article IV Consultation with Hong Kong, which ended on December 1.

Whilst observing that Hong Kong's economy has undergone a "remarkable metamorphosis" over the past decades, with almost all manufacturing operations moving to the Pearl River Delta, and the strong institutional framework, flexible labour and product markets, and status as a global financial center having been leveraged by the authorities to transform it into a dynamic, knowledge-based, service economy, the IMF nevertheless warned that:

"However, as one of the most open economies in the world and with its focus on financial and trade services, Hong Kong SAR (Special Administrative Region) is highly exposed to the unfolding crisis in international financial markets and to the slowdown in the global economy. There are now clear signs of economic deceleration."

In a statement, the Executive Board announced on Monday that:

"Looking ahead, Directors considered a possible worsening of international financial market turbulence as the key risk for Hong Kong SAR over the short-term. They expressed confidence that the government is set to act expeditiously if global market volatility creates further disruption in the workings of the local financial system, or if the negative impact on Hong Kong SAR's growth prospects becomes more profound."

"Directors were reassured by the resilience of Hong Kong SAR's banking system to date, but cautioned that credit growth could slow sharply and credit quality could deteriorate alongside the economic downturn. Hong Kong SAR's banks have managed risk prudently and provisioned for losses, and are well positioned to handle such conditions. Directors considered the introduction of a time-bound, blanket deposit guarantee and a contingent facility to provide capital to Hong Kong SAR's banks as timely and warranted."

In the area of tax policy, the IMF revealed that:

"Most Directors agreed that, if substantial increases in the tax burden are to be avoided, steps will need to be taken to increase private financing of healthcare spending. Greater cost containment, more efficient provision of services, and some form of user fees will also likely be needed. An integral part of reform would be to maintain public support for those with chronic illnesses or disabilities, or for those who have insufficient means to cover their healthcare needs."

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