TNAG-2446-FCO40-3562-Political-parties-in-Hong-Kong-1992 — Page 61

food items. rentals.

•

ises of about 10%.

ciable

transportation.

recorded

appre-

is

mainly

and services stili

Their development has not shown any High inflation in Hong Kong improvement yet. caused by seven types of factors:

the linked ex-

(a) the government's loosing monetary policy, change rate system and the negative real interest rate

ment;

government's

expansionary

(b) the building of the new airport);

(c)

(d)

(e)

(f)

(9)

The

fiscal

policy

environ-

(including

economic restructuring and labor 'shortage"; "indexation" of public and private sectors wage policy; firm inflationary expectation of the general public; pricing adjustment mechanize of public utilities; and other external factors.

taxes

government's policy to limit the increase of indirect

inflation. and fee charges has some apparent effect on reducing

workers, Another policy of importing the third group of foreign

is also curbing wages. amid a mild increase in unemployment rate,

break- major policy

Nevertheless,

throughs.

there

have been no other

to

rate was

which is

In fact,

some of the monetary developments are contradictory

the efforts.

prime For example, the anti-inflation reduced twice in May 1992 alone by 1.5 percentage point, obviously incompatible with the fighting inflation policy.

anti-

Additionally, the government argues that the large fiscal surplus

of an part recent years is a significant

argument we consider this

recorded in inflationary policy.

However,

dubious,

e

because (a) for many years the large fiscal surplus

by result of mis-estimation rather than

in 1991/92,

surplus was the original

very

was

estimated

mainly

example

design (for

to be

over HK$20

sources

HK$1.4 billion as compared to the actual surplus of billion); and (b) one of the government's major revenue

is

land sales. The economic impact of land sales is similar to debt financing. Unless the value of the fiscal surplus is larger than the income from land sales, the resulting "surplus" be considered to have anti-inflationary effects.

cannot

.pa

Under the

to

the

about

which

an improving local low interest environment, very economy, booming Pearl River Delts, increasing speculative activ- ities, recovering of the Western economies, and building of new airport, we think the inflation rate could return 11% in the second half of 1992. The high inflation rate,

will particularly is very likely to be sustained before 1997,

and will also affecting the livelihood of the lower income group, weaken the administrative capability of the SAR government 1997. In this respect, the government should consider the lowing long-term measures to fight inflation:

Central Bank,

with

(a) establishing a prices as one of its major responsibilities;

after

fol-

stabilizing domestic

system to one

(b) changing the current linked exchange rate