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

savings deposits at banks, coupled with concerns over future pension payments, could induce households to save more in order to achieve a specific savings goal. as a result, consumption falls instead of rising, as one might normally expect in an environment of low interest rates. at the same time, the increase in savings causes the interest rate level to decline further. this effect is reinforced if households assume an increasingly long phase of low interest rates. despite these monetary policy challenges and potential side - effects, in switzerland the negative interest rate is currently indispensable, owing to the overvaluation of the swiss franc and the globally low level of interest rates. nonetheless, the challenges and side - effects show clearly that we must aim for a normalisation of monetary policy over time. the question is, how can such a normalisation be effected? current monetary policy in an international context to answer this question, i would like to place current monetary policy in an international context. in addition to the snb, virtually all major central banks are currently pursuing a monetary policy of low or negative interest rates. by dint of bold and decisive policies, central banks have managed to prevent the global financial crisis from turning into a second great depression. yet, despite highly expansionary monetary policies around the world, many large advanced economies have not recovered as strongly as hoped. in switzerland, the recovery has been relatively robust by international standards. yet inflation in our country, as in many other countries, is still lower than we would like. so the past few years have shown clearly that an expansionary monetary policy is not a panacea for catalysing growth in the major advanced economies. expansionary monetary policy is no substitute for necessary structural measures and it must not delay them. monetary policy influences the economy ’ s growth potential only insofar as price stability reduces uncertainty. beyond this, it has no effect on economic growth in the longer term. for this reason, longer - term growth prospects can only be improved through structural measures. for instance, the promotion of education, research and development can increase productivity growth. good economic conditions support growth : if entrenched labour market structures are dismantled, competition is encouraged, and contracts are reliably enforced, the economy page 8 / 16 becomes more efficient. a pension system that is sustainable in the long term can allay people ’ s fears about an uncertain income in their old age, and thereby avoid an excessive propensity to save. if such reforms in the major world economies