HONG Kong should focus on reducing its fiscal deficit at a gradual pace rather than over two years to ensure a balanced recovery now that its economy is returning to normal after the pandemic, the International Monetary Fund (IMF) said.

“Gradual fiscal consolidation would help secure a sustained and inclusive recovery,” the IMF said in a statement on Friday (May 5) after staff met with Hong Kong officials as part of their annual Article IV discussions. The IMF staff noted that despite an “ongoing strong recovery, there remains large slack in the economy” as real gross domestic product (GDP) last year remained 6 per cent below 2018 levels.

Fiscal space remains ample, the IMF staff said, adding that reserves were 27.4 per cent of GDP as of the end of last year.

Hong Kong’s economy expanded 2.7 per cent in the first quarter from a year earlier, topping economists’ estimates and marking the first quarterly gain in GDP in more than a year. That was enough to pull the economy out of recession, driven by a big spending boom as tourists returned.

Challenges remain, though, as the city navigates its rebound amid a slowing global economy and after a prolonged period of economic contraction. Hong Kong’s fiscal deficit ballooned during its isolation, with the budget shortfall for the 2022-2023 fiscal year hitting a whopping HK$140 billion (S$23.66 billion), Financial Secretary Paul Chan said earlier this year.

Pandemic-era measures to support vulnerable households and affected small and medium-sized enterprises “could be unwound gradually to help promote an inclusive growth”, the IMF staff said, adding that additional household support “should be more targeted to low-income households to increase the effectiveness of fiscal policy in stimulating growth, especially private consumption”.

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The IMF said a further adjustment in the property market could still pose risks for the economy after housing prices fell last year. While financial stability risks are limited, “a further market adjustment in the face of rising mortgage rates could suppress private consumption through higher debt servicing burden and negative wealth effects”, it said.

So-called macro-prudential measures in the housing market should be maintained, the IMF said and could be revised if there’s financial stress in the system. Some stamp duties on the property could also be phased out if speculative demand in the market eases, it added.

The IMF projects Hong Kong’s real GDP to grow by 3.5 per cent in 2023 and 3.1 per cent in 2024, adding that exports of tourism services and domestic economic activity are expected to normalise. BLOOMBERG