On 20 January 2022 the IMF published a report on the economy of Hong Kong SAR (China) following discussions under Article IV of the IMF’s articles of agreement.

Hong Kong SAR’s economy has recovered strongly from a number of domestic and external shocks in the last few years, including the effects of the pandemic, Decisive policy action including a large fiscal stimulus have helped to reduce the impact of the shocks and have led to a gradual recovery. The real GDP growth is estimated to be 6.4% in 2021 and 3.0% in 2022.

The downside risks to the economy include continuing uncertainty from the pandemic and strict virus control measures which may restrict tourism and affect retail spending. Downside risks could also arise if the global recovery is slower than expected, or if there is continuing disruption of global supply chains reducing the available goods and harming the economic recovery.

Although on balance the risks are inclined to the downside, the strong external position and the policy buffers in place should reduce the impact on economic growth and fiscal stability.

The IMF considers that a comprehensive tax reform is necessary in the medium term. A comprehensive tax reform could involve broadening the tax base without damaging international competitiveness, and there is also room to introduce a value added tax (VAT) and increase excise taxes. The report suggests that personal income tax could be made more progressive by increasing the tax rates on the highest income brackets. Hong Kong SAR could also consider the introduction of taxes on capital gains and the taxation of dividends.

Closer integration with regional and international economies could increase the status of Hong Kong SAR as a regional trade hub. Consideration is currently being given to the possibility of participation in the Regional Comprehensive Economic Partnership (RCEP).

Further rapid digitalization would benefit the competitiveness of financial services. Initiatives such as the Smart City Blueprint and Fintech 2025 should be implemented, with more resources allocated towards developing digitalized services and promoting financial inclusion.

An increase in the housing supply is required to resolve the imbalance between supply and demand for housing. The IMF report notes that stamp duties have effectively restricted speculative activity and limited external demand in the housing sector. As soon as systemic risks from the non-resident inflow begin to decrease, the report recommends phasing out the New Residential Stamp Duty, the residency-based capital flow management measure and macroprudential measure (CFM/MPM) that is imposed at a higher rate on non-residents compared to the rate imposed on Hong Kong resident first-time buyers.

Leveraging on Hong Kong SAR’s strong corporate insolvency framework, financial policy should aim to facilitate efficient restructuring of viable companies. Hong Kong SAR is planning to introduce a statutory corporate rescue procedure that conforms to international best practice.

Human capital needs to be upgraded through education and training, with emphasis on digital-related technologies. This would help in the process of reallocating labour during the transition to a more digitalised economy.