and it seems, from recent events, that the very premise on which this panacea of exchange rate depreciation is based may be seriously flawed. for the market exchange rate of the hong kong dollar has strengthened over the past two or three weeks to the extent that it has been necessary for the hkma to inject liquidity into the system in order to dampen excessive volatility. the market has, all of a sudden, chosen to ignore the continuing problems of deflation, unemployment and budget deficit, and the possible implications of these for the exchange rate. the clear message from the market now is that, were the hong kong dollar to be allowed to float, its exchange rate would rise rather than fall. before you reach for your telephones, let me stress that we have no intention of trying this out. monetary affairs are, as i have said, unpredictable, and the direction and magnitude in the movement of the hong kong dollar exchange rate, if it were allowed to float, is anyone's guess and may not have any bearing on the underlying economic fundamentals. we have no wish to find out. and, in answer to the many dramatic statements made over the past couple of weeks or so, our somewhat relaxed attitude towards small deviations in the exchange rate on the strong side of 7. 80 does not mean that we are any less committed to maintaining the link. minor fluctuations in the market exchange rate on the strong side of the link are a feature of our monetary system, and they are nothing to get too excited about. and there is an effective mechanism for us to ensure that these fluctuations are not so large as to undermine credibility and confidence in the link. it is, however, worth putting into perspective some of the reasons for the sudden strengthening of the hong kong dollar, because they have a significance that goes beyond short - term fluctuations in the market. the trigger, you may recall, was the political pressure from outside for a revaluation of the renminbi. the read - across to the hong kong dollar, combined with a realisation that the hong kong economy was not doing so badly after all, led to a scramble to cover short positions. this came against the background of quite volatile movements in the global currency markets, which included, most notably, a sustained weakening of the us dollar against other currencies. at the risk of stating the obvious, an orderly depreciation of the us against other currencies is in hong kong's interests

in which there have been underlying improvements in the hong kong economy. deflation, under the discipline of the link, has made hong kong more competitive : it is now a less expensive city in which to do business or take a holiday. the real effective exchange rate for the hong kong dollar - which is a true measure of the competitiveness of an economy - has declined by 24 % over the past five years. recent research carried out by the hkma also points to a much greater degree of flexibility in wage adjustments than the official statistics might suggest. a key component of our economy - the export of goods and services - has continued to grow strongly throughout the whole of the last five quarters. in 2002 hong kong enjoyed a balance of payments surplus in the current account equal to about 11 % of our gdp, and this surplus has been sustained into 2003 : it means, in dollar terms, that hong kong as an economy has been earning around us $ 1. 5 billion in foreign exchange every month. in short, it appears that sars, despite the large human cost, has had only a short - lived and superficial effect on our economic development. or, to use the language of economists, the impact of sars was a temporary demand shock rather than a permanent loss in output. structural issues the evidence suggests, then, that hong kong is back on the path to broad - based economic recovery. let us hope that this is indeed the case. since the outbreak of the asian financial crisis more than six years ago, we have had much bad news and very little good. we are all ready for a break, and, equally important, i think we are in a position for making the best of it. but we should not assume that all our problems will be solved by economic recovery. many of them will be, of course, and the others will be much reduced. yet there are structural issues that have to be faced, and dealing with them may take effort, imagination and a strong will. one of these issues is the fiscal deficit. this was around hk $ 62 bn, or 4. 9 % of gdp in the last fiscal year, and, according to the government's latest estimates, may exceed that figure for the current fiscal year. economic recovery will undoubtedly help contain or reduce the deficit. but the larger, structural questions, such as how to produce a more stable revenue base, will still be there, and they will involve difficult choices. as we know, this much - debated question is