IMF Executive Board Concludes 2010 Article IV Consultation and Proposal for Post-Program Monitoring with Hungary

Public Information Notice (PIN) No. 11/15
February 3, 2011

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2010 Article IV Consultation with Hungary is also available.

On January 31, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation and Proposal for Post-Program Monitory with Hungary.1


Hungary was hit hard by the global crisis, given large underlying vulnerabilities and considerable integration with international markets. The adoption of a sustainable fiscal stance and policies to safeguard financial stability in the context of substantial assistance from the IMF and European Union helped avoid a financial meltdown, but could not avert a deep recession. Economic output fell nearly 7 percent in 2009 because the global retrenchment in trade sharply reduced exports while financial strains and limited policy space weighed on domestic demand.

The economy has begun to rebound with exports increasing for six consecutive quarters and employment rising since February 2010. More recently, signs of a pick-up in private consumption have also emerged. As a result, GDP growth is expected to be around 1 percent in 2010 and the sharp correction in the current account, which reached a surplus early in the year, has begun to slow. The recovery is nonetheless fragile and large vulnerabilities persist. In this environment, risk premia remain elevated and volatile.

The government that took office in mid-2010 has used its considerable political mandate to fundamentally reorient fiscal policies. Following the considerable structural fiscal adjustment by the previous government, the new authorities embarked on tax cuts and targeted support to small and medium-sized enterprises, aimed at jumpstarting growth. The government has sought to maintain its previously agreed deficit target of 3.8 percent in 2010 via temporary levies on primarily foreign-owned financial institutions, retail chains, telecommunication and energy companies, as well as the diversion of second pillar private pension contributions to the budget. The government is not seeking a renewal of the now expired IMF/EU-supported program.

The financial sector has remained resilient throughout the crisis. After initial strains in late 2008, banks substantially increased liquidity and capitalization to adequate levels. However, more recently, profitability has begun to fall sharply amid rising non-performing loans. As the financial sector began to stabilize in early 2009, the Central Bank (MNB) reduced the policy rate by over 600 basis points from a crisis high of 11.50 percent. The MNB paused in mid-2010 and has tightened interest rates by 50 basis points since November in response to a sharp rise in risk premia and higher headline inflation prints.

Executive Board Assessment

Executive Directors commended the ongoing recovery of the Hungarian economy in the aftermath of a sharp fall in output in 2009 and welcomed the improvement in capital and liquidity financial indicators. Given the still fragile state of the economy and continued large vulnerabilities, notably the dependence on foreign funding, Directors underscored the importance of implementing a consistent medium-term macroeconomic framework that reduces uncertainty and lowers risk spreads.

Directors noted that the main challenge will be to establish a sustainable fiscal stance over the medium term. While the recent tax reduction could improve competitiveness, it also entails a substantial fiscal cost. Directors stressed that measures taken thus far to offset this revenue loss, including levies on select industries, are in large part temporary and distortionary. They noted that the unwinding of the defined-benefit private pension pillar, in particular, is a source of concern as it increases medium-term fiscal risks while reducing transparency.

Directors pointed toward a need for durable expenditure rationalization in the near term, notably better targeting of social benefits and restructuring of state-owned transportation companies. In this context, they welcomed the authorities’ plan to detail a comprehensive set of structural fiscal reforms in February.

Directors underscored the importance of addressing financial sector vulnerabilities.The ongoing rise in credit losses, driven in part by the impact of the strong Swiss Franc on the balance sheets of households indebted in foreign currency, has placed new burdens on banks. In this context, Directors welcomed efforts to support distressed mortgage holders, as long as moral hazard and fiscal costs are contained. They noted that bank earnings are already under pressure due to the disproportionately large levy on assets that could also dampen credit growth and undermine the economic recovery.

Directors welcomed action to strengthen the legal authority of the Hungarian Financial Supervisory Agency. They noted, however, that the weakening of the Financial Stability Council reduces the capacity to monitor and control systemic risk.

Directors noted that the central bank’s recent tightening amid elevated risk premia and incipient price pressures helped anchor inflation expectations and protect the financial sector. However, Directors underscored that there is still substantial slack in the economy, as evidenced in particular by high unemployment. They emphasized that a sound medium-term fiscal framework would create room for monetary easing.

Directors expressed concern over the weakening of economic governance, noting that steps to lessen the independence of both the Fiscal and the Monetary Policy Councils and the reduced role of the Constitutional Court in assessing budgetary matters undermine key checks and balances. Directors underscored that these steps run counter to the authorities’ stated goal of restoring investor confidence and lowering borrowing costs.

Directors welcomed the use of post-program monitoring, which will maintain a close policy dialogue between the Hungarian authorities and the Fund.

Hungary: Selected Economic Indicators, 2006–11


2006 2007 2008 2009 2010 2011







Real economy (change in percent)







Real GDP

3.3 0.8 0.8 -6.7 1.1 2.8

   Total domestic demand 1/

0.3 -2.3 0.7 -12.6 -2.4 2.3

      Private consumption

2.1 -1.7 0.6 -6.8 -2.3 2.1

      Gross fixed investment

-3.2 1.7 2.9 -8.0 -2.5 0.7

   Foreign balance 1/

3.0 3.0 0.2 5.9 3.5 0.6


18.7 16.2 5.7 -9.6 13.8 8.9


14.9 13.3 5.8 -14.6 11.9 9.4

CPI (end year)

6.5 7.4 3.5 5.6 4.2 3.9

CPI (average)

3.9 7.9 6.1 4.2 4.9 4.1

Unemployment rate (average, in percent)

7.5 7.4 7.8 10.1 11.1 11.2

Gross domestic investment (percent of GDP) 2/

24.0 23.5 23.7 19.2 18.3 18.8

Gross national saving (percent of GDP, from BOP)

16.4 16.6 16.4 18.7 19.5 19.0

General government (percent of GDP), ESA-95 basis 3/




Overall balance

-9.3 -5.0 -3.7 -4.4 -4.0 5.6

Primary balance

-5.4 -0.9 0.4 0.3 0.1 9.5

Primary structural balance

-6.1 -0.9 0.2 2.8 0.8 -0.3


65.7 66.1 72.3 78.4 79.5 69.9

Money and credit (end-of-period, percent change)




Broad money

13.6 11.0 8.8 3.4 4.1 8.3

Lending to the private sector, flow-based

20.6 18.5 12.2 -2.3 1.0 5.0

Interest rates (percent)




T-bill (90-day, average)

7.0 7.6 8.9 8.9 ... ...

Government bond yield (5-year, average)

7.4 7.0 9.3 9.3 ... ...

Balance of payments




Goods and services trade balance (percent of GDP)

-1.4 0.9 0.4 5.1 6.5 5.7

Current account (percent of GDP)

-7.6 -6.9 -7.3 -0.5 1.2 0.1

Reserves (in billions of euros)

16.4 16.4 24.0 30.7 33.5 38.0

Gross external debt (percent of GDP) 4/

96.5 103.2 116.0 146.2 144.2 139.5

Exchange rate







Exchange regime


Present rate (December 15, 2010)

Ft 207.3 = US$1; Ft. 274.4 = €1

Nominal effective rate (2005=100)

93.9 99.6 100.9 91.8 ...

Real effective rate, CPI basis (2005=100)

95.4 106.4 110.2 103.8 ...

Quota at the Fund

SDR 1038.4 million



Sources: Hungarian authorities; IMF, International Financial Statistics; Bloomberg; and IMF staff estimates.

1/ Contribution to growth. Calculated using 2000 prices. It includes change in inventories.

2/ Includes change in inventories.

3/ Consists of the central budget, social security funds, extrabudgetary funds, and local governments. It includes the IMF staff assessment of the impact of all government announced measures (October 2010), including the full amount of the bank levy in 2011.

4/ Excluding Special Purpose Entities. Including inter-company loans, and nonresident holdings of forint-denominated assets.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:


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