The International Monetary Fund forecasts Hong Kong's economy will grow 3 per cent this year thanks to demand for exports fuelled mostly by the booming mainland.
But the IMF warned deflation, the deficit and the weak local economy posed threats to that growth and urged the government to carry out structural reforms, including spending cuts and a sales tax.
'A strengthening of external demand, supported by robust growth in the mainland, should lead to a modest recovery of domestic demand' this year, the fund said in its annual report on Hong Kong.
'Deflation could begin to ease . . . but weak property prices, high unemployment and other structural factors are likely to continue to dampen domestic demand and the overall level of prices.'
The IMF's paper, coming a week before Financial Secretary Antony Leung Kam-chung delivers his 2003-04 Budget, highlights the biggest problem facing the economy and the government's finances: the deficit. Many hope Mr Leung will come up with solutions to give the economy a boost and ease the mounting deficit, which climbed to $77.3 billion at the end of last month.
Responding to the IMF report, Mr Leung agreed action needed to be taken. 'I will make the appropriate announcement in this respect next week when I deliver my budget speech,' he said. Mr Leung has promised to balance the books by 2006-07.
The IMF's representative in Hong Kong, William Lee, said the fund would be watching for 'a credible downpayment' in the speech. 'We want measures that will close the recurrent deficit. That is what credit rating agencies look at, what global investors look at,' he said.
