IMF Mission to Hungary Reaches Staff-Level Agreement on Third Review and Extension of Stand-By Arrangement

Press Release No. 09/301
September 7, 2009

An International Monetary Fund (IMF) mission, led by James Morsink, held discussions with the Hungarian authorities during August 26-September 7, 2009 as part of the third review of the country’s Stand-By Arrangement (SBA). The IMF mission worked in close cooperation with a parallel mission from the European Commission, carried out in the context of the European Union (EU) balance of payments assistance. At the conclusion of the visit, Mr. Morsink made the following statement:

“The mission reached a staff-level agreement with the authorities on a package of policies that aims at completing the third review under the SBA. We also reached staff-level agreement to extend the SBA by six months (to October 5, 2010) to cover the election period and the transition to a new government. Given Hungary’s allocation of SDR 991 million (about €1,085 million), which has increased international reserves, a disbursement of SDR 50 million (about €55 million) is proposed following completion of this review. The remaining amount under the arrangement would be rephased in four equal disbursements of SDR 725 million (about €800 million) over the remainder of the extended arrangement.

“We expect to finalize a Letter of Intent that summarizes the agreement, with a view to allowing the IMF Executive Board to consider in late September the completion of the third review, extension of the arrangement, and rephasing of the purchases.

“Macroeconomic and financial policies in Hungary are on track. The end-June targets on the central government’s primary balance, inflation, and net international reserves, as well as the target related to government lending to banks, were all met. The end-June target on central government debt (excluding official financing) was not met due to technical reasons, as market financing was used to bridge to the disbursement of the third tranche of EU balance of payments support in early July.

“Hungary’s economic outlook has stabilized since the last review. As before, real GDP is projected to contract by 6.7 percent in 2009 and by a further 0.9 percent in 2010. The current account deficit is narrowing sharply to 2.9 percent of GDP this year. Inflation is expected to rise temporarily to about 6 percent by end-2009, reflecting the increase in the VAT rate and excise taxes, and then to fall to below 3 percent by mid-2010, as the effects of the indirect taxes fade.

“The key objectives of the program remain to improve fiscal sustainability and preserve the stability of the financial sector. To help put government debt as a share of GDP firmly on a declining path over the medium term, the authorities are implementing comprehensive structural reforms aimed at permanently reducing government spending and bolstering potential GDP growth. On the basis of these measures, the fiscal deficit is projected to be 3.9 percent of GDP in 2009 and to fall to 3.8 percent of GDP in 2010. In the financial sector, the core measures strive to maintain strong levels of capital in the banking system and investor confidence.”



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