importing inflation because of an undervalued currency. The evidence points to the opposite. Import prices rose by only 2% last year. Moreover, since we introduced the linked rate system in 1983, the currency has actually increased in value by nearly 10%. This has enabled us to benefit from lower import prices than would otherwise have been the case. Yet domestic inflation has remained high.
Index
120
Effective Exchange Rate Index of the Hong Kong dollar (quarterly average: 24-28.10.83 = 100)
115
110
105
100
95
26.
Q4 Q2 04 02 04 02 04 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 04
83 84
89
85
86
87
88
90
Since the adoption of the linked rate system in 1983,
the currency has increased in value by nearly 10%
91
Year
Secondly, the link has clearly proved its value to Hong Kong since 1983. We have enjoyed a robust and stable currency despite traumatic political and economic events. Consequently, I want to take this opportunity to reaffirm the Government's commitment to the link as an essential element in the stable financial system which is so important for Hong Kong.
27.
Another suggestion is that government expenditure is somehow a source of inflationary pressures. The fact is that government spending has only a limited impact on inflation. This is not hard to explain since Hong Kong's public sector accounts for only a relatively modest share of GDP.
28.
The Government is also urged to do more to beat inflation by raising productivity. I fully agree with this advice. We take very seriously the need to exploit opportunities for economy and efficiency and indeed are effectively keeping growth in the civil service to zero. We shall be pushing on with public sector reform. We are creating an Efficiency Unit. We are encouraging greater accountability, and considering privatization of commercial-type operations. For the community at large, our training programmes are being upgraded to enable workers to enhance their skills and to find new ones, and to switch from declining industries to jobs in growth sectors.
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