The International Monetary Fund has welcomed the Government's proactive and concerted policy efforts to tackle the global financial crisis, adding economic recovery is now under way in Hong Kong.

In the IMF Mission's preliminary assessment report published today, the fund projects the city's economy will contract 2% this year, with growth steadily strengthening to 5% next year.

Unemployment is forecast to drop in the coming months while consumer price inflation is projected to be close to naught by the end of 2010.

Financial Secretary John Tsang welcomed the fund's support for the Government's policy efforts and its fair and balanced assessment of Hong Kong's overall economic situation, adding the Government will continue to stabilise the financial system, support enterprises and preserve employment until the recovery is firmly in place.

The fund noted the local banking system has proved to be resilient to the dramatic events in the global financial system over the past year, remaining healthy, liquid and well capitalised.

Financial stability

It supported the proposed increase in the deposit protection limit, which will be in line with coverage in other jurisdictions. While the continued strict enforcement of the existing regulatory regime will be essential in maintaining financial stability, it said there is a role for introducing countervailing prudential measures.

The fund also backed the expansionary fiscal measures announced earlier this year, supplementing the stimulus introduced last year. Given the downside risks to the global economy, it recommended maintaining a supportive fiscal stance in the 2010-11 budget and further modernising the budgetary management systems.

It maintained its support for the linked exchange rate system which has proved to be an anchor of Hong Kong's monetary and financial stability.

The fund expects present accommodative monetary conditions will remain in place for an extended period but later the recent extraordinary expansion in the Aggregate Balance will unwind. It said clear communication with the public and financial markets during this period will be essential to prevent unnecessary turbulence in foreign currency or money markets.

Monetary Authority Chief Executive Norman Chan said he is glad the fund supports the countervailing prudential measures, adding the authority will be vigilant in maintaining banking and financial stability in Hong Kong.

Renminbi business

Recognising the city's status as an important international financial centre, the report said it has significant potential to provide a range of financial services to the Mainland. The fund encouraged the Government to continue finding ways to develop Hong Kong as an offshore renminbi business centre.

It also suggested the Government consider introducing a broader range of user fees or price-based measures to ensure the efficient use of medical services, and supplementary sources of financing should be phased in at an early stage to ensure over time private financing sources contribute to a larger share of healthcare spending.