CONFIDENTIAL
· 5 ·
(vii)
Economic
10.
roads, fly-overs, land formation, services, housing, schools, and amenities, all seem to be under construction everywhere and the new towns are rising out of the ground. When coupled with a simultaneous boom in the private sector Hong Kong appears to be one vast noisy and dirty construction site.
In contrast, the preparation of nearly 170,000 square miles of country parks proceeded satisfactorily, as did also the improvement of recreational and cultural facilities in urban areas.
This many-sided Government activity was funded by two successive budgets designed to catch up progress lost during and after the recession. In the last two years these lifted actual expenditure by about 40% in real terms an extraordinary achievement. There was an element of calculated risk in that while we knew the growth of domestic demand was excessive in relation to exports, we hoped it would be corrected through market forces in the course of the year. Unluckily not only did overseas demand prove inadequate to pull resources back into the export sector, but domestic demand grew and continued to be the dominant factor in the growth of the economy. In the private sector, this has been particularly evident in a boom in land, housing and commercial premises.
11. Thus the growth of exports in '77 and '78 were 5.4 and 13% against import growth rates of 7.9 and 19% respectively, and the deficit on visible account widened from $1,73 6M in 1976 to $3,868M and $9,133M in the last two years respectively. Correspondingly the weighted index of the international value of the Hong Kong dollar declined from 114 on December 31st 1976 to 106.6 in '77 and 93.0 in '78. To reduce demand for credit during the year Best Lending Rate was raised from 4-3/4 to 91⁄2, and to contract the money supply substantial Government Funds were moved out. These measures have not yet had a marked effect either on the growth of bank advances or on the growth of domestic demand generally. This situation exists in spite of a very large budgetary surplus, and the longer it is allowed to persist the more painful the eventual adjustment will be.
12.
This Government must therefore act more vigorously to reduce the growth rate of domestic demand. This will mean continuing to lean on the banking system to limit
CONFIDENTIAL
/ domestic