Press Release: IMF Approves Stand-By Credit for Hungary

March 15, 1996

The International Monetary Fund (IMF) today approved a stand-by credit for Hungary authorizing drawings up to the equivalent of SDR 264.18 million (about $387 million) over the next 23 months to support the Government's economic program through end-1997. The Hungarian authorities do not intend to make any drawings and to treat the stand-by as precautionary.


In the early 1990s, Hungary's economy faced a number of external shocks to which it was unable to react quickly. Constrained by high levels of taxation and social expenditure and by the size and inefficiency of the public sector, the external current account deficit deteriorated markedly to 9-10 percent of GDP in 1993-94, against a background of relatively subdued economic activity and already high external debt and debt-service ratios. Structural reform slowed to a halt.

In 1995, the Government began corrective action through a policy package that sought to reverse the negative trends of the previous years, while addressing the economy's structural problems. The package-which included the devaluation of the forint and the introduction of a crawling exchange rate peg, the tightening of public sector wage policy, and budgetary measures-has had positive results on the balance of payments, the decline in high levels (in relation to GDP) of both public expenditures and revenues, and on privatization, while output growth remained positive in 1995. The Government intends to continue the adjustment effort with IMF support, and to tackle the remaining imbalances in the economy-notably fiscal and structural-to help stabilize it and to achieve secure and sustainable growth.

The 1996-97 Program

Hungary's 1996-97 economic program retains features key to the 1995 program, such as the exchange rate crawl and limits on public sector wages, but is more ambitious in scope. The program targets output growth strengthening to 2 percent in 1996 and 3.2 percent in 1997, from 1.7 percent in 1995; a significant deceleration of inflation to 16.6 percent in 1996 and 12.7 percent in 1997, from 28.3 percent in 1995; and further consolidation of the external current account deficit to 4 percent of GDP in 1996 and 3 percent of GDP in 1997, from 5.6 percent of GDP in 1995. To these ends, the authorities will seek to reduce the fiscal deficit to a level consistent with the current account and inflation targets and to continue the gradual decline in the comparatively high levels, in relation to GDP, of both expenditure and revenue. The consolidated government deficit, net of privatization receipts, is programmed to fall to 3.9 percent of GDP in 1996 and 3 percent of GDP in 1997, from 6.8 percent of GDP in 1995, primarily through lowering real expenditures. Monetary and exchange rate polices will be guided by the preannounced nominal rate of depreciation of the forint, which the authorities have reduced from a monthly rate of crawl of 1.3 percent in the second half of 1995 to 1.2 percent in the first half of 1996. Wage policy under the program will be restrained as it is critical to the success of fiscal adjustment, the preservation of competitiveness, and the realization of the inflation target.

Structural Reforms

Under the program, structural reforms will focus on four areas: a) improving budget planning, monitoring and execution, and placing different levels of government on sounder financial footing; b) strengthening the social security system; c) restructuring and privatizing state-owned enterprises, including banks; and d) continuing the liberalization of international transactions.

Addressing Social Needs

The objective of reform of the social security system is to generate enough savings to allow for a significant reduction in contribution rates, while ensuring the viability of the system. Reform of provision of medical services will be undertaken while ensuring adequate support to the truly needy.

The Challenge Ahead

The program's success faces risks from adverse developments outside Hungary, such as weak growth in Western Europe, but also from fiscal and monetary slippage, and the authorities will need to be ready to prepare for them.

Hungary joined the IMF on May 6, 1982; its quota1 is SDR 754.8 million (about $1,105 million). Its outstanding use of IMF credit currently totals SDR 259 million (about $379 million).

Hungary: Selected Economic Indicators

  1993 1994 1995* 1996** 1997** 1998**

(percent change)
Real GDP -3.0 -0.8 2.9 1.7 2.0 3.2
Consumer prices
    (end of period)
24.7 21.1 21.2 28.3 16.6 12.7
(Percent of GDP)
Primary fiscal balance,
    excluding grants (deficit –)
–1.7 –3.3 –0.8 2.0 4.5 4.4
External current account balance,
    excluding official transfers
    (deficit –)
0.9 –9.0 –9.5 –5.6 –4.0 –3.0
Gross investment 15.2 19.4 21.5 21.8 23.6 24.6
Gross national savings 14.4 10.0 13.4 17.7 21.0 22.8
Net external debt 35.1 38.8 45.8 38.7 37.9 35.6

Sources: Hungarian authorities; and IMF staff estimates.


1.A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access the IMF financing, and its allocation of SDRs.


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