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was still a need to strengthen fiscal discipline. While he recognised the
potential effects of uncertainty on the Hong Kong economy., he felt that
economy had already now regained its confidence, and that it was more
important to follow policies that were consistent with steady growth and low
inflation. In his view, the main purpose of monetary policy was to control
inflation, not to maintain a particular exchange rate. It would therefore be better if the authorities allowed the exchange rate to appreciate, and used
higher interest rates to control inflation. He recognised that this was not
the preferred policy of the authorities. Therefore, fiscal policy would have
to play a key role, and yet it continued to be too expansionary. The
authorities should also consider issuing short-term bills in order to absorb
excess liquidity. Fiscal policy had an important role to play in smoothing out
commercial activity. Tabata was surprised that no deposit insurance scheme
had yet been introduced to the Hong Kong banking system, and was also
concerned that the banking supervision relied on external auditors rather than
on site examinations.
4.
Spencer (New Zealand) said that policy since 1983 had been aimed at
maintaining confidence and growth in the period up to 1997. This approach had
been successful and the authorities deserved great credit. However, inflation.
was now becoming a problem, in spite of the sensible policies taken recently
to dampen pressure in the property and labour markets. Monetary policy
remained chronically weak. This was due to the use of the peg to the dollar.
While productivity increases in Hong Kong warranted a currency appreciation,
the US dollar remained weak. The only way to secure a real appreciation in
the exchange rate was for domestic inflation to rise significantly above US
levels. He noted that the staff were less sanguine about costs associated
with the exchange rate link than they had been at the 1990 Article IV
discussions. If the authorities were going to continue with this exchange
rate policy, then labour market and fiscal policy would be that much more
important. He was concerned at the seeming lack of a willingness to allow a
free flow of skilled labour into Hong Kong, and that expenditure had grown faster than GDP in the past three years. He thought that the staff suggestion
of broadening the tax base was very sensible. However, he did not expect the
advice to be followed by the Hong Kong authorities because, in his view (which
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