Inside Hong Kong, the currency board system is referred to as the Linked Exchange Rate System.
"The mission continues to support the Linked Exchange Rate System," the IMF said after its annual consultations with Hong Kong.
"It is a simple, transparent exchange rate arrangement that has, over the past 25 years, proved to be an anchor of monetary and financial stability in Hong Kong SAR.
"It was also clear, in discussions with both the government and the private sector, that the Linked Exchange Rate System continues to work well, acting as an important anchor of monetary and financial stability."
The IMF's praise for Hong Kong's sustainable hard peg comes two months after the global monetary watchdog sounded warnings on Sri Lanka's unsustainable soft-peg.
A soft-peg is unsustainable because the central bank will buy treasury bills and print domestic money after it sells dollars to intervene (sterilized intervention) against an anchor currency.
The Hong Kong Monetary Authority also intervenes routinely but it engages in non-sterilized interventions, allowing the domestic monetary base to shrink or expand in line with its exchange rate interventions.After some tightness earlier in the year, capital has flooded into Hong Kong in the past two months, as the little financial centre stood tall as a beacon of stability as currencies of larger countries like Korea fell.
Sri Lanka's central bank has 'sterilized' interventions by printing more than 120 billion rupees since mid-September stampeding the country into a balance of payments crisis.
It also cut reserve ratios releasing a further 24 billion rupees to the banking system.
Sri Lanka's foreign reserves have fallen 30 percent to 2,374 million dollars by end-October from 3,424 million dollars at end-August.
Opposition lawmakers have told parliament that the end-November foreign reserves were 1.9 billion dollars.
In contrast to Sri Lanka's profligate government, Hong Kong runs a frugal and benign government with large fiscal surpluses.
Though expected to spend more in the coming year it had recorded a 7 percent of gross domestic product (GDP) fiscal surplus in 2007, and has fiscal reserves of around 30 percent of GDP according to IMF.
Fiscal prudence comes automatically in a currency board environment as predatory government activity to scam the poor and old people in the form of high inflation fired by money printing (central bank credit) and currency depreciation is not possible.
Even at 2,374 million dollars, Sri Lanka's foreign reserves are now insufficient to cover its monetary base of 270 billion dollars.
In contrast by October 2008, Hong Kong's currency board had 396 billion HK dollars worth of assets, enough to cover 109 percent of its monetary base.
But its total reserves, including fiscal funds are in excess of 1,300 billion Hong Kong dollars, or 165 billion US dollars.
When the sterling floated in 1972, after the Bretton Woods system collapsed amidst US money printing, Hong Kong went into a floating exchange rate, leading to an extremely volatile period as inflation and growth zoomed and dived.
In 1983, following US monetary tightening and an attack on its currency which sent the Hong Kong dollar as low as 9.6 against the US unit, it set up a currency board at 7.8 Hong Kong dollars against the dollar.
The IMF said there was no overvaluation of the currency, though the peg had been maintained at the same exchange rate for more than 25 years.
"On balance, the Hong Kong dollar continues to be valued broadly in line with fundamentals," the IMF said.
A currency peg is de-stabilized when the central bank buys treasury bills to finance government expenditure, which creates inflation and progressively 'overvalues' the currency.
This hurts exporters and domestic industries and retards economic 'growth.'
In the past two years Sri Lanka attracted speculative capital with high domestic interest rates maintained through discretionary central bank intervention, following foreign state borrowings.
This caused the exchange rate (and interest rates) to initially appreciate, somewhat similar to what happened in Iceland after it sold a so-called Glacier Bond.
"[T]he real effective exchange rate of the rupee is overvalued, and the de facto peg risks contributing to external instability by attracting speculative inflows that could reverse quickly," the IMF said in October of Sri Lanka.
Some of the speculative capital attracted by the central bank when it opened treasuries markets to foreigners, also known as 'carry trades', have left the country in the last two months.
When such carry trades unwind, currencies get hit.
Under a currency board however, capital inflows do not result in high interest rates, or incentives for further 'carry trade'. Instead interest rates fall in an automatic adjustment, discouraging additional speculative flows.
In October 2008, the aggregate balance of the Hong Kong banking system (similar to excess liquidity) rose to 31 billion Hong Kong dollars against 4.6 billion in August.
In late 2008, Hong Kong's short term interest rates on exchange fund bills (a deposit security issued by HKMA) turned negative amidst unprecedented inflows.
Iceland went into a spectacular meltdown in the current global crisis as it first had a soft exchange rate peg and then a more flexible rate, via a central bank which worsened imbalances through discretionary interest rates.
But the popular media and some economists have simply interpreted it as an excessive growth of the financial sector, without asking why the financial sector grew in the direction it did.
Much smaller countries, such as Caribbean islands, as well as Hong Kong, have built up large financial sectors with no disruption to their economies by resorting to either a currency board mechanism or dollarization.
Currency boards also allow intellectually advanced economies to be built, leveraging on brain rather than brawn.
The IMF said most of the low end manufacturing in Hong Kong has now shifted to the Pearl River Delta area of China.