IMF Mission to Hungary Reaches Staff-Level Agreement on Fifth Review
Under Stand-By ArrangementPress Release No. 10/38
February 15, 2010
An International Monetary Fund (IMF) mission, led by James Morsink, held discussions with the Hungarian authorities during February 3-15, 2010 as part of the fifth 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 fifth review under the SBA. We expect to finalize a Letter of Intent that summarizes the agreement, with a view to allowing the IMF Executive Board to consider the completion of the fifth review in March.
“Reflecting the reduction in Hungary’s macroeconomic and financial vulnerabilities, the authorities are taking decisions about drawing on a review-by-review basis. As at the last review, they do not intend to draw the amount that would be made available upon completion of this review (SDR 725 million or about €800 million). The cumulative IMF resources from the fourth and fifth reviews (SDR 1,450 million or about €1,600 million) that would remain available subject to satisfactory policy performance help to provide insurance against the impact of any unforeseen deterioration in external financing conditions.
“The significant strengthening of policies over the past 1½ years has improved confidence and placed Hungary on a path towards stability and growth. Government spending has been reduced in a durable way, while the fiscal deficit target was increased to 3.9 percent of GDP in 2009 to avoid exacerbating the economic contraction. In the financial sector, liquidity support was provided in a timely way, and bank supervision and the remedial action framework were substantially enhanced. By better anchoring market expectations, these measures have helped to create room for cautious reductions in the policy interest rate.
“The end-December targets on the central government’s primary balance, central government debt, CPI inflation, and net international reserves, as well as the targets related to government lending to banks and strengthening the remedial action and resolution regime, were all met.
“Looking ahead, the economy is on the road to recovery, supported by external demand. After falling by 6.3 percent in 2009, economic activity is expected to contract by 0.2 percent in 2010 and then increase by more than 3 percent in 2011. CPI inflation, which is being temporarily boosted by the increases in the VAT rate and excise taxes, is projected to fall to below the 3 percent target in the first half of 2011. The current account balance, which improved sharply to a surplus of about 0.4 percent of GDP in 2009, is projected to deteriorate modestly to a deficit of 0.4 percent of GDP in 2010.
“Regarding policies, much has been accomplished, but more remains to be done. The general government deficit target for 2010 of 3.8 percent of GDP is achievable, but will require strict expenditure control and—to insure against risks—a cautious use of budgetary reserves and readiness to take additional action if necessary. In 2011, additional measures will be needed to reduce the general government deficit to below 3 percent of GDP and put government debt firmly on a declining path.
“Further improving banking supervision and the resolution framework for banks will contribute to the preservation of financial stability. To the extent allowed by financial market conditions, further gradual and cautious cuts in the policy interest rate would be appropriate.”