Press Release: IMF Approves Stand-By Credit for Hungary

IMF News, March 15, 1996

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The IMF 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 will treat the stand-by as precautionary.
Hungary joined the IMF on May 6, 1982; its quota is SDR 754.8 million (about $1,105 million).
Its outstanding use of IMF credit currently totals SDR 259 million (about $379 million).

Early 1990s: Hungary faced a number of external shocks and was constrained by high levels of taxation and social expenditure and by the size and inefficiency of the public sector.
External current account deficit deteriorated markedly to 9-10 percent of GDP in 1993-94.
Structural reform slowed to a halt amid relatively subdued economic activity and already high external debt and debt-service ratios.
1995 corrective policy package measures included:
- Devaluation of the forint and introduction of a crawling exchange rate peg.
- Tightening of public sector wage policy.
- Budgetary measures.
Reported 1995 outcomes:
- Positive results on the balance of payments.
- Declines in high levels (in relation to GDP) of both public expenditures and revenues.
- Progress on privatization.
- Output growth remained positive in 1995.

Program retains features of 1995: exchange rate crawl and limits on public sector wages; the program is more ambitious in scope.
Output growth targets:
- 2 percent in 1996
- 3.2 percent in 1997
- From 1.7 percent in 1995
Inflation targets (decay from 1995):
- 16.6 percent in 1996
- 12.7 percent in 1997
- From 28.3 percent in 1995
External current account deficit targets:
- 4 percent of GDP in 1996
- 3 percent of GDP in 1997
- From 5.6 percent of GDP in 1995
Fiscal objectives:
- 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.
- 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.
Monetary and exchange rate policy:
- Guided by the preannounced nominal rate of depreciation of the forint.
- Authorities reduced the monthly rate of crawl from 1.3 percent in the second half of 1995 to 1.2 percent in the first half of 1996.
Wage policy:
- Wage policy will be restrained as it is critical to the success of fiscal adjustment, the preservation of competitiveness, and the realization of the inflation target.

Focus areas under the program:
- Improving budget planning, monitoring and execution, and placing different levels of government on sounder financial footing.
- Strengthening the social security system.
- Restructuring and privatizing state-owned enterprises, including banks.
- Continuing the liberalization of international transactions.

Objective of social security reform:
- Generate enough savings to allow for a significant reduction in contribution rates, while ensuring the viability of the system.
Health sector reform:
- Reform of provision of medical services will be undertaken while ensuring adequate support to the truly needy.

Program success faces risks from:
- Adverse external developments, such as weak growth in Western Europe.
- Fiscal and monetary slippage.
Authorities need to be ready to prepare for these risks.

*Estimated **Program

International Monetary Fund. Press Release No. 96/10, March 15, 1996.