(Bloomberg) -- The International Monetary Fund urged Hong Kong’s government to boost spending to support the territory’s convulsing economy, citing a range of risks from trade tensions to political unrest.
Greater fiscal support would help bolster growth while maintaining longer-term sustainability, the fund said Wednesday in its latest regular review of the economy, known as an Article IV Consultation.
“Government spending should be increased significantly to cope with the cyclical downturn and address structural challenges of insufficient housing supply and high income inequality,” the IMF said. “If growth falters more than expected, the authorities should provide more near-term fiscal support.”
The IMF projects Hong Kong’s economy will contract by 1.2% this year before gradually recovering to 1% growth in 2020. Gross domestic product shrank sharply in the third quarter as the economy sustained hard hits from both external and domestic shocks.
Read more: Hong Kong Crashes Into Recession Amid Protests
Officials said deterioration of the socio-political situation and delays in tackling housing and inequality issues could further weaken the economy and reduce the city’s competitiveness in the long term.
Another stimulus in the current fiscal year aimed at households and smaller enterprises is needed, the IMF said.
“Additional fiscal spending of about 2.5 percentage points of GDP over two years, that is significantly front-loaded to the current fiscal year, would help those severely affected by the cyclical downturn,” the IMF said. With low tax rates, such support could be better delivered by “targeted spending” for vulnerable households through rent relief and subsidies for low-income students, it said.
Hong Kong Chief Executive Carrie Lam told reporters Tuesday that the government would soon announce new moves to prop up the city’s flagging economy after almost six months of protests and political strife. She didn’t elaborate on what the measures would entail, saying only that they would be “targeted.”
Read more: Lam Vows New Round of Economic Relief Measures
The new effort would follow previous stimulus measures, including a HK$19 billion ($2.4 billion) package in August. In October, Lam added another HK$2 billion in economic support and announced a raft of new polices, including loosened mortgage rules, compulsory land purchases for housing, cash for students and increased subsidies for low-income families.
October retail sales contracted 24.3% by value from a year earlier, the fourth month of double-digit declines. On Monday, Financial Secretary Paul Chan told lawmakers that he expected the first fiscal-year budget deficit since the early 2000s, and said that the turmoil has dragged down economic growth by some 2 percentage points this year.
Protesters and police again clashed in the former British colony -- a special administrative region of China since 1997 -- last weekend, following a lull in violence surrounding local elections in which pro-democracy candidates secured a landslide win.
