Press Release No. 10/295

Press Release No. 10/295
July 17, 2010

An International Monetary Fund (IMF) mission, led by Christoph Rosenberg, held discussions with the Hungarian authorities during July 6-17, 2010 as part of the sixth and seventh reviews of the country’s Stand-By Arrangement (SBA) approved by the IMF Executive Board on November 6, 2008 (see Press Release No. 08/275). 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. Rosenberg made the following statement:

“The Hungarian economy has begun to recover from the deep crisis of 2008-09, driven mostly by strong exports. Domestic demand remains weak, however, owing to difficult lending conditions and a soft labor market. Overall, real GDP is projected to grow by 0.6 percent in 2010. Inflation has been declining and the large current account deficits from 2008 and earlier have been eliminated. The 2011 outlook envisages a continued pickup in real GDP growth—to the 2½-2¾ range depending on the external environment and the strength of policies—and a further decline in inflation to the central bank’s target.

“Supported by the SBA, the Hungarian authorities have made good progress in helping their economy recover through prudent macroeconomic policies and strengthened financial sector policies, including improved banking supervision. Adherence to SBA targets—both quantitative and structural—has been broadly satisfactory through June.

“At the same time, more remains to be done to cement these gains and put Hungary on a strong and sustainable growth path. In an environment of heightened market scrutiny of government deficits and debt levels, the fiscal deficit targets previously announced—3.8 percent of GDP in 2010 and below 3 percent of GDP in 2011—remain an appropriate anchor for the necessary consolidation process and debt sustainability, and should be adhered to, but additional measures will need to be taken to achieve these objectives.  Sustainable consolidation will require durable, non-distortive measures, which the authorities need more time to develop. Difficult decisions will be needed not only on the revenue side--where the high financial sector levy, which is likely to adversely affect lending and growth, is planned to be temporary--but also on the spending side. In addition, the large loss-making state-owned enterprises need to be restructured to reduce their burden on the budget. In this context of fiscal adjustment, it is important that the vulnerable continue to be protected from the impact of the weak economy, although any further support should be provided in a targeted and transparent manner.

“Over the past two weeks, the IMF mission has conducted intensive discussions with the authorities covering these issues. While there is much common ground, a range of issues remain open. The mission will therefore return to Washington, D.C. The IMF will continue to actively engage with the authorities with a view to bridging remaining differences.”