The fiscal relief and support package launched by the Government to counter the SARS impact, is a timely and appropriate response, the International Monetary Fund says.

Noting that Hong Kong's economy has begun to show signs of recovery from a prolonged cyclical downturn, the fund projects that Hong Kong's GDP growth for 2003 will be at 2.2%, assuming there is a revival in exports and domestic demand in the second half of the year.

The fund expects consumer price deflation to ease to 2%, but weak property prices, high unemployment and structural factors will continue to dampen domestic demand and overall prices.

Structural factors, including price convergence with the Mainland, have become increasingly important in explaining Hong Kong's deflationary process.

On the fiscal side, the fund supports the authorities' objective of balancing the budget by the 2006-07 fiscal year, and agrees that fiscal retrenchment would not be appropriate in 2003-04 because of the weak macroeconomic environment and the need for SARS-related spending.

However, it warns that large and persistent fiscal deficits could undermine the long-term sustainability of public finances and the stability of the linked exchange rate system.

It urges the Government to implement fully and expeditiously the proposed medium-term fiscal consolidation measures, and to introduce additional measures, to achieve the balanced budget objective.

Financial Secretary Antony Leung said: "We welcome the fund's fair and balanced assessment, and its support for the Government's measures to tackle the negative economic impact of SARS.

"We expect the negative impact of SARS to be one-off and short term. It should not affect our ability and determination to achieve the fiscal target by 2006-07."