RESTRICTED
WORLD TRADE WT/BOP/W/16
12September 1996
ORGANIZATION(96-3510)
Committee onBalance ofPayments Restrictions
1996 CONSULTATION WITH HUNGARY
UNDER THE BALANCE-OF-PAYMENTS PROVISIONS OFTHE
GATT 1994 AND THE RELATED UNDERSTANDING
Background paper bytheSecretariat
1. Thispaper hasbeenprepared inaccordance withparagraph 12oftheUnderstanding onthe
Balance-of-Payments Provisions oftheGATT 1994.
Previous consultations withHungary
2. Following theintroduction ofanimport surcharge of8percenton20March, 1995, inJune
1995Hungary consulted jointly withtheWTO andGATT 1947Committees onBalance-of-Payments
Restrictions under Article XII.1Inthecourse ofconsultations, theCommittees recognized thatHungary
hadintroduced theimport surcharge toaddress theimminent threat ofaserious decline initsbalance
ofpayments, noting Hungary 'sintention toreduce theimport surcharge progressively andtoeliminate
itby1July1997. TheCommittees expressed theirhopethat,bythetimeofthenextconsultation,
Hungary would beinaposition toevaluate theeffects ofthesurcharge onitsbalance-of-payments
andtoelaborate onitsintention toreplace thesurcharge bypermanent structural measures. The
Committees requested Hungary alsotopresent forthenextconsultation aconcrete time-table forthe
reduction andelimination oftheimport surcharge.
Trade andexchange ratepolicy developments since thelastconsultation
3. Theimport surcharge applied forbalance-of-payments purposes hasbeenineffect since 20
March 1995. Primary energy products andinputs usedbyexporters areexempt fromthesurcharge.2
Inaddition, thesurcharge isreimbursed onmachinery forinvestment purposes. Thesurcharge,
applicable toimports fromallsources, islevied onthebasis ofthecustoms value andincluded inthe
calculation oftheselling price forVAT purposes. Effective 1July1996, thesurcharge waslowered
to7percentandwillbereduced byafurther percentage point asof1October 1996.3
4. HungaryintroducedanewCustomsLawon1April1996,simplifyingcertaincustomsprocedures
while strengthening control overinfractions. Anewtariff, aligned withtheCommon Customs Tariff
oftheEuropean Union, wentintoeffect on1January 1996, raising thenumber oftarifflinestoroughly
13,000. Thesecond, outoffive,stepreductions onindustrial tariffs wasimplemented in1996. Average
industrial tariffs arescheduled todecline to6.9percentin2000, from 9.6percentin1995. With
1WT/BOP/W/4;WT/BOP/R/3; WT/BOP/N/2;
2TheconditionsforthisexemptionaredefinedaccordingtoArticle3.2ofDecreeNo.9/1995(III.17)IKM-PM.
3WT/BOP/N/12, 31July1996.WT/BOP/W/16
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effect from1January, 1996, thestatistical feeonimports fromtheEuropean Union, EFTA andCEFTA
andthecustoms clearance feehasbeenreduced from 2to1percent; these ratesareapplied onan
m.f.n. basis.
5. Under itsProtocol ofAccession toGATT, Hungary maintains global quotas onimports of
certain consumer goods (household detergents, footwear, textiles, clothing, other clothing material,
haberdashery andnewpassenger cars). Government Decree No.176/1995 (XII.27), published inthe
Official Journal liststheproduct groups andvalues covered bythequota. Most countries which have
afreetradeagreement withHungary havebeenallocated aquota share. Thevalue oftheglobal quota
hasbeenincreased in1996.
6. RegulationsissuedpursuanttotheForeignExchangeActofNovember1995abolishedremaining
controls oncurrent transactions withHungary accepting theobligations ofArticle VIII(Sections 2,3
and4)oftheIMF'sArticles ofAgreement on1January 1996. Capital movements havebeenfurther
liberalized asof1July1996, allowing domestic banks toengage inawider range ofbanking activities
withnon-residents.
7. Thestabilization package introduced early in1995 included thedevaluation oftheforint and
theadoption ofapre-announced "crawling peg"policy fortheexchange rate.4In1995, theforint
depreciated by29percent. Thepolicy continues withmonthly devaluations of1.2percentinthe
firsthalfof1996.
8. InMay1996, Hungary became amember oftheOECD. Under itsAssociation Agreement
withtheEuropean Union aswellasunder theFreeTrade Agreement withEFTA, industrial exports
from Hungary totheEUandEFTA countries arevirtually freeofcustoms duties. Customs duties
onindustrial imports fromtheEUandEFTA intoHungary havegradually beenlowered andwillbe
abolished by31December 2000, atthelatest.5Under theAgreement withCEFTA (theCzech Republic,
theSlovak Republic, Poland andSlovenia) countries, duties formore than80percentoftrade in
industrial products havebeenabolished asof1January 1996. Alltrade inindustrial goods, witha
fewexceptions,betweenCEFTAmemberswillbefreeby1January2000.Tradeinagriculturalproducts
between CEFTA members willbesubstantially liberalized.
Macroeconomic andTrade Developments
Background
9. Hungary embarked onaradical economic reform in1989/90 which aimed atdeepening the
market-oriented-butincomplete-measuresintroducedduringthe1970sand1980s.Thereformpackage
included several structural measures andafinancial programme withtheobjective ofcontaining strong
inflationary pressures resulting fromtheliberalization measures thatwereadopted asapartofthereform
programme. Theprogramme wasonlypartially successful. Hungary experienced adeepandprolonged
recession which lasted until1994. Thegross value added inthemanufacturing sector asawhole declined
by31.9percentinrealterms between 1985and1993. Agricultural output wasalsosteadily declining
between 1989 and1993. By1993 therealvalue ofagricultural production isestimated tohavebeen
almost 40percentbelow thelevelof1989. While domestic inflation wasreduced from theannual
4Since May161994, theforint hasbeen linked toabasket consisting oftheECU (70percent) andtheUS$
(30percent); from 1January 1997, theDMwillreplace theECU.
5Trade inagricultural products withtheEUandindividual EFTA states issubject tospecial arrangements.WT/BOP/W/16
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rateofabout 34percentin1990toabout 21percentin1994, itwasstillrunning uncomfortably high.
Balance ofpayments wasunder pressure duetoalarge increase inthecurrent account deficit which,
inturn, reflected alarge increase inthetrade deficit, andduealsotoalarge external debt.
10. Thedepth oftherecession andthedifficulties inreducing more effectively therateofinflation
havetheirorigins intheextremely highlevelofexternal debtthatwascontracted prior to1989. In
addition, theauthorities havebeenunable tomaintain astrict fiscal control, andthishasledtoasharp
increaseinthedeficitoftheconsolidatedstatebudget.StartinginMarch1995,theHungariangovernment
hasintroduced twomajor policy packages toimprove theconditions forexport-led growth andto
encourage non-debt capital inflows, thelatter hasbeensupported byanIMFstand-by arrangement.
11. The1995 reform programmes hadfourmaincomponents: (1)atough austerity package aimed
atreducing thefiscal deficit; (2)anupfront devaluation oftheforint against abasket ofcurrencies;
(3)theadoption ofapre-announced crawling-peg system, replacing theearlier periodic devaluation
policy; and(4)anacceleration ofvarious structural measures. Theausterity package included anew
8percentimport surcharge, social welfare cuts,thebroadening ofcategories ofincome submitted
tosocialsecuritycontributions,andtightincomespoliciescomprisingstrictrestrictionsonwageincreases
forpublic-sector workers.
TheRecent Performance: Output, Prices andEmployment
12. Themain short-term purpose ofthepolicy measures adopted in1995, arresting therapid
deterioration offiscal andexternal imbalances, hasbeenfulfilled. Thiswasachieved while maintaining
bothGDP andindustrial output growth, although therespective ratesofgrowth slowed compared to
1994. GDP grew by1.5percent,industrial production by4.8percentandgross agricultural output
waspractically unchanged.
WT/BOP/W/16
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13. Under thestrong impact oftheausterity measures, realdomestic demand declined by3.8per
centin1995. Thiscontrasts withastrong growth of9.9percentin1993 andafurther increase of
2.2percentin1994. While the1993increase inrealdomestic demand wasdriven byastrong growth
ofgovernment consumption, the1994 increase originated ina12.5percentriseinrealgross fixed
investments and13.7percentgrowth ofrealexports. In1995, theGDP growth wasagain driven
bybuoyant exports which increased by15.4percentinrealterms. Mainly asaresult ofdeclining
government investment, gross domestic investment roseonlyby1.2percentinrealterms while real
private consumption declined by5.7percent.
14. Despite atightmonetary policy, theinflation picture worsened in1995 (Chart B).Therate
ofincrease oftheconsumer price index (CPI) accelerated from21.1percentin1994to28.3percent
in1995, fuelled bythedevaluation oftheforint, theimport surcharge, increases inenergy prices and
public service fees,andbyhigher foodprices resulting fromdrought. Inflation continued tobehigh
in1996, running atabout 24-25 percentthrough June1996, although themonthly increase slowed.
Attheendof1995, percapita realwages haddeclined by12.2percentcompared totheprevious year;
thecontraction inrealwages hascontinued butthepaceshows signs ofslowing.
15. Theunemployment situation hasalsodeteriorated. Total employment hasbeenfalling steadily
overthelastfiveyears, andafurther decline isexpected in1996. Although theaverage 1995
unemployment ratedeclined to10.4percent,compared to10.9percentin1994, unemployment edged
upinthesecond halfof1995 andinthefirsthalfof1996.
Balance ofPayments
16. Incontrast tothedomestic indicators ofmacroeconomic performance, thebalance ofpayments,
inconvertible currencies, position markedly improved in1995. Theexternal current account deficitWT/BOP/W/16
Page5
wasreduced toUS$2.5 billion in1995, or5.6percentofGDP, fromUS$4 billion in1994, or9.5per
centofGDP (Chart C).Inaddition, netcapital inflows soared in1995 reflecting asurge inforeign
direct investment andother private capital inflows. Interest payments, traditionally thethird most
important component ofthebalance ofpayments, increased in1995 butputrelatively littlepressure
onHungary 'sbalance ofpayments because ofthegeneral improvement inthecurrent andcapital
accounts. Asaresult ofboththereduction inthecurrent account deficit andthelarge capital inflows,
Hungary 'sgross international reserves sharply increased in1995(byUS$4.5 billion) toUS$12 billion,
reaching thelevelof9.5months ofimports. According totheIMF, thesituation remained virtually
unchanged inthefirstsixmonths of1996. Thefollowing briefsection describes inmore detail the
developments inthecurrent andcapital accounts inthebalance ofpayments.
Current account
17. Theimprovement inthecurrent account wasmainly duetoareduction inthetradedeficit from
US$3.9 billion in1994 toUS$2.4 billion in1995 (Table 1).Following some improvement inthe
performance ofnon-factor services, thedeficit intheservice account remained stable despite theincrease
ininterest payments onforeign debt. Transfers from abroad increased.
18. Theimprovement inthetradebalance in1995reflected thesustained strong growth ofexports
while thegrowth ofimports sharply declined. TheIMFestimates thatthelevelofrealimports actually
declined in1995 by0.7percent,asharp reversal incomparison to1994 when realimports wereup
by8.8percent. Incontrast, realexports accelerated in1995 to15.4percentfrom13.7percentinWT/BOP/W/16
Page6
1994.6Thestrong performance ofexports in1995canbetraced tobothnominal andrealdepreciations
oftheforint andtothereduction ofdomestic demand, which induced manufacturers toturntowards
foreign markets. Thedeceleration inimports came asaconsequence oftheimplementation ofthe
austerity program and,inparticular, oftheintroduction ofan8percentimport surcharge andthesharp
devaluation oftheforint. Asharp fallinrealwages alsocontributed totheadjustment intheexternal
accounts; itstrengthened thecompetitiveness ofproducers andrestrained domestic spending inthe
non-government sector.
Table 1-Hungary -Selected indicators ofbalance ofpayments inconvertible currencies, 1991-95
(Inmillions ofUSdollars, unless otherwise specified)
1991 1992 1993 1994 1995
Trade balance 189 -50 -3,247 -,3633 -2,442
Exports19,258 10,028 8,094 7,615 12,810
Imports1-9,069 -10,077 -11,341 -11,248 -15,252
Non-factor services (net) 535 129 189 100 434
Interest (net) -1,331 -1,215 -1,131 -1,287 -1,599
Receipts 297 419 456 661 758
Payments2-1,628 -1,635 -1,587 -1,948 -2,357
Transfers (net) 860 859 732 908 1,127
Current account balance 252 323 -3,457 -3,912 -2,480
Capital account 1,581 443 6,065 3,422 7,795
Medium- andlong-term
liabilities (net) 781 -886 3,039 1,330 1,856
Direct investment31,459 1,471 2,329 1,097 4,410
Overall balance 1,833 767 2,607 -490 5,315
Changes inreserves (-,increase) -2,720 -758 -2,637 658 -4,531
Fund purchases (net) 887 -8 29 -168 -784
Memorandum items
Current account balance (percent ofGDP) 0.8 0.9 -9.0 -9.5 -5.6
Gross official reserves (months ofimports) 5.2 5.2 7.1 7.2 9.5
Gross external debt(percent ofGDP) 68 58 64 69 71
Netexternal debt(percent ofGDP) 44 35 39 46 38
Debt service ratio436 39 47 61 53
Export value (customs statistics)59,138 9,098 7,599 8,990 11,788
Import value (customs statistics)59,880 8,745 8,940 11,772 13,212
1 Imports andexports for1995 aresignificantly higher thanthecorresponding customs data. Theunderlying export andimport
trends arebetter reflected incustoms data. Seealsofootnote 5below.
2 Excludes reinvested profit remittances.
3 Includes neterrors andomissions.
4 Inpercent ofexports ofgoods andnonfactor services.
5 Excludes transactions withnopayment counterparts butincludes transactions byenterprises inthetrade freezonethatarenot
reported inthecustoms statistics.
Source: IMF.
19. Thecommodity composition ofexports changed during 1995asexports ofrawmaterials and
semi-finished products aswellasoffoodproducts soared andthegrowth ofexports ofcapital and
consumer goods slowed down (Table 2).Thestrong growth ofexports ofrawmaterials andsemi-
finished products in1995(30.4 percentincurrent USdollar terms) waslargely duetoasharp increase
6Thetrade datadiffer from source tosource. Thestatistical difficulties seem tobepartly duetodifferences
between balance ofpayments andcustoms dataandpartly toproblems related toindex numbers. Theissues
areunder discussion between theIMFandtheauthorities. Note alsothatthefigures prepared inTable 1ofthis
report summarize exports andimport dataincurrent prices.WT/BOP/W/16
Page7
inprices which theIMFestimates tohaveincreased byalmost 22percent. Incontrast, thefastgrowth
ofexports offoodproducts (28percent)mainly reflected astrong growth ofrealexports -theexports
increased by20percentinvolume terms. Thedecline inthevalue ofexported energy products in
1995 mainly reflected adecline ofa10.7percentinthevolume ofexported products.
20. Theslowdowninimportgrowthin1995wasalsoassociatedwithlargechangesinthecommodity
composition ofimports. These changes reflected large swings inworld market prices inaddition to
changes inthestructure ofimport demand. Imports ofrawmaterials andsemi-finished products
continued togrow atarelatively fastpace(21.8 percentincurrent USdollar terms) eventhough
somewhat slower thanin1994 when thecorresponding growth ratereached apeakat28.3percent.
Virtually allofthe1995 increase wasduetorising prices ofrawmaterials andsemi-finished product
which increased byalmost 20percent. Imports ofenergy products increased atamore modest rate
(4percent) anddeclined ifmeasured involume terms (-4.2 percent). Thecurrent dollar value of
imports offoodproducts andcapital goods declined by7.6percentand8.2percentrespectively,
reflecting thecontraction ofconsumer demand andinvestment. Imports ofindustrial consumer goods
remained flat. Therealdecline inthese imports in1995 wasobviously much sharper ifoneallows
forprice changes inthatyear.
Table 2-Hungary -Commodity composition ofnon-rouble trade, 1991-951
(Inmillions ofUSdollars)
1991 1992 199321994 1995
Exports
Energy products 180.6 290.0 298.3 351.6 309.0
Rawmaterials andsemi-finished products 3,829.8 3,752.3 3,220.4 3,900.2 5,084.7
Capital goods andtransportation equipment 1,194.1 1,282.9 1,240.7 1,399.3 1,458.6
Industrial consumer goods 2,244.5 2,812.1 2,245.6 2,859.4 3,211.9
Food products 2,522.6 2,567.5 1,901.8 2,190.3 2,802.8
Total 9,871.6 10,704.8 8,906.9 10,700.8 12,867.0
Ofwhich: Non-energy 9,791.0 10,414.8 8,608.6 10,349.2 12,558.0
Imports
Energy products 2,630.2 1,606.8 1,581.6 1,599.7 1,663.0
Rawmaterials andsemi-finished products 4,175.6 4,067.5 4,185.5 5,370.3 6,541.6
Capital goods andtransportation equipment 2,247.2 2,288.1 3,372.2 3,387.8 3,109.5
Industrial consumer goods 2,402.5 2,454.5 2,652.1 3,204.2 3,235.7
Food products 626.7 649.3 739.0 9,91.8 916.5
Total 11,082.2 11,066.2 12,530.3 14,553.8 15,466.3
Ofwhich: Non-energy 9,452.0 9,459.4 10,948.7 12,954.1 13,803.3
Balance oftrade
Energy products -2,449.6 -1,316.8 -1,283.3 -1,248.1 -1,354.0
Rawmaterials andsemi-finished products -3,45.8 -315.2 -965.1 -1,470.1 -1,456.9
Capital goods andtransportation equipment -1,053.1 -1,005.2 -2,131.5 -1,988.5 -1,650.9
Industrial consumer goods -158.0 357.6 -406.5 -3,44.8 -23.8
Food products 1,895.9 1,918.2 1,162.8 1,198.5 1,886.3
Total -1,110.6 -361.4 -3,623.4 -3,853.0 -2,599.3
Ofwhich: Non-energy 339.0 955.4 -2,340.1 -2,604.9 -1,245.3
1 F.o.b./c.i.f. basis.
2 In1993 including military technology itemasreimbursement forstatedebtoftheformer Soviet Union.
Source: IMF.WT/BOP/W/16
Page8
21. AfterthedomesticreorientationoftradefromtheformerCMEAcountriestowardsthedeveloped
market economies intheearly 1990s, Hungary 'sgeographical composition oftrade hasbeenbroadly
stabilized (Table 3).Thenewdevelopment hasbeentherising share oftheformerly socialist countries
which increased from 24.1percentin1994 intotalexports to26.2percentin1995. However, the
import share ofthese countries remained unchanged. Thedeveloped market economies continue to
bethemajor trade partner (about 70percentin1995), while theshare ofdeveloping countries was
continuously declining ontheexport side(from 8.4percentin1991 to3.8percentin1995), with
onlyamarginal improvement intheshare ofdeveloping countries inHungary 'simports (from 4.5
percentin1994 to5.9percentin1995).
22. Thedeficit inthenon-factor services account remained stable ataround slightly lessthan
US$1.2 billion. Inaddition, higher debtservice payments wereoffset byanincrease intheinterest
receipts fromabroad resulting inonlyamoderate increase innetinterest payments. Payments ofinterest,
financial feesanddividends onHungary 'srising foreign debtincreased fromUS$1,948 million in1994
toUS$2,357 million in1995reflecting bothanincrease inthegross debtlevelandintheaverage interest
ratepaidonthedebt.
Table 3-Hungary -Direction oftrade, 1990-95
(Percentage shares)
1990 1991 1992 1993 1994 1995
Exports 100.0 100.0 100.0 100.0 100.0 100.0
Non-rouble exports174.4 97.9 100.0 100.0 100.0 100.0
Ofwhich:
Present andformer socialist countries 8.4 21.7 23.3 26.3 24.1 26.2
Developing countries 7.9 8.4 5.3 5.4 3.9 3.8
Developed market economies 58.1 67.9 71.3 67.4 72.0 69.9
Ofwhich:
Germany 16.9 26.9 27.7 26.6 28.2 28.7
Italy 5.9 7.6 9.5 8.0 8.5 8.5
Austria 7.5 10.8 10.7 10.1 10.0 10.1
Switzerland 1.9 1.8 1.9 1.8 1.5 1.4
United Kingdom 2.0 2.0 2.0 2.3 4.3 3.0
France 2.7 2.9 3.2 3.5 3.6 4.0
United States 3.5 3.2 3.2 4.2 4.0 3.2
Japan 1.2 1.7 0.9 1.0 0.9 0.6
Imports 100.0 100.0 100.0 100.0 100.0 100.0
Non-rouble imports171.5 97.4 99.9 100.0 100.0 100.0
Ofwhich:
Present andformer socialist
countries2.0 22.3 25.2 25.9224.0 24.1
Developing countries 9.7 7.9 4.2 4.4 4.5 5.9
Developed market economies 59.8 66.6 70.5 69.7 71.6 70.5
Ofwhich:
Germany 24.0 21.4 23.5 21.6 23.4 23.5
Italy 4.1 7.2 6.3 6.0 7.0 7.9
Austria 10.0 13.3 14.4 11.6 12.0 10.8
Switzerland 3.1 3.2 2.9 2.7 2.6 2.5
United Kingdom 2.1 2.5 2.9 2.5 3.9 3.1
France 2.1 2.7 3.1 3.3 3.4 3.9
United States 2.6 2.6 2.9 3.9 3.1 3.1
Japan 2.1 2.8 2.4 2.7 2.7 2.2
1 Trade flows settled inroubles areconverted fromtheirforint value, given inofficial statistics, attheperiod average U.S.dollar/forint
exchange rate. These practices were discontinued in1993, andtheirrolewasmarginal in1991 and1992.
2 In1993 including military technology itemworth US$713 million inlieuofstatedebttheformer Soviet Union.
Source: IMF.WT/BOP/W/16
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Table 4-Hungary -Foreign debt, 1990-951
1990 1991 1992 1993 1994Estimate
1995
Official 2,715 3,862 3,852 3,906 3,627 3,329
Private 15,286 15,068 13,993 1,6451 19,026 19,613
Total 18,000 18,931 17,845 2,0357 22,653 22,942
External debt/GDP
Hungary (gross)
(net)58.2
43.668.0
43.757.7
35.163.8
38.868.9
45.870.8
37.6
Countries withrecent debtservicing
difficulties53.7 55.2 51.6 49.1 44.9 40.5
Countries without recent debtservicing
difficulties28.8 29.2 29.0 30.4 30.3 30.2
Debt service/exports
Hungary (gross)2
(net)353.7
49.136.1
33.538.6
35.247.4
43.060.8
54.352.5
47.8
Central andEastern Europe ... 14.8 10.6 9.5 12.7 12.1
Countries withrecent debtservicing
difficulties27.8 33.3 33.7 37.3 31.9 33.2
Countries without recent debtservicing
difficulties15.3 15.1 16.3 15.6 15.5 15.4
Current account/exports ofgoods andservices
Hungary 1.5 2.3 2.4 -31.7 -36.6 -14.6
Countries withrecent debtservicing
difficulties-4.1 -10.8 -12.6 -16.7 -10.8 -15.1
Countries without recent debtservicing
difficulties-3.7 -4.9 -6.3 -8.5 -7.1 -6.5
Heavily indebted poorcountries -14.9 -25.1 -27.7 -32.4 -23.2 -19.4
Foreign exchange reserves/imports ofgoods and
services
Hungary 15.3 37.1 34.7 48.3 48.2 63.9
Countries withrecent debtservicing
difficulties28.3 35.8 43.1 49.0 52.6 48.9
Countries without recent debtservicing
difficulties26.2 29.3 25.3 27.2 28.6 28.9
Fifteen heavily indebted poorcountries 16.8 20.2 14.2 13.8 16.9 17.8
Interest payments/exports ofgoods services
Hungary 19.4 14.0 12.3 14.6 18.2 13.8
Countries withrecent debtservicing
difficulties9.6 13.1 13.3 13.2 11.7 13.8
Countries without recent debtservicing
difficulties7.8 7.3 6.7 6.3 5.9 5.8
Amortization/exports
Hungary 29.6 18.2 19.0 24.1 30.5 29.9
Countries withrecent debtservicing
difficulties17.7 19.4 21.4 24.3 20.2 19.2
Countries without recent debtservicing
difficulties6.9 7.4 9.2 9.1 9.3 8.9
1 Convertible currencies unless otherwise indicated. Country classifications arebased onIMF, World Economic Outlook, October
1996.
2 Inpercent ofexports ofgoods andnonfactor services; including early repayment ofdebtin1994-95.
3 Interest receipts deducted from interest payments.
Source: IMF.
Capital account
23. Thesurge inforeign capital inflows in1995reflected twoimportant developments inthecountry.
Hungary attracted large inflows offoreign direct investment (FDI) lured bythenewly stimulatedWT/BOP/W/16
Page10
privatization. Inthepast,Hungary hadbeentheleader among thetransition economies inattracting FDI,
butin1995, itevensurpassed itsprevious records. TheFDIinflows more thantripled inthatyearin
comparison totheprevious yearreaching thelevelofUS$4.4 billion. Thelargest increase wasaccounted
forbyoverUS$3 billion privatization receipts. Inaddition, Hungary benefited from astrong growth
ofportfolio capital inflows withasignificant riseofnon-sovereign borrowing. Thishaspartly reflected
theincreased confidence offoreign investors, andpartly alargeinterest ratedifferential between theforint
andforeign exchange denominated assets. Netcapital inflows reached US$7.8 billion in1995following
adropfrom US$6.1 billion in1993 to3.4billion in1994. Asaresult ofincreasing disbursements of
portfolio andothermedium- andlong-term capital, netmedium andlongterms liabilities remained positive
in1995despitesteadilyrisingamortizationcharges.AccordingtotheIMF,privatecapitalinflowsremained
highinthefirstsixmonths of1996.
External Debt
24. Followingthegrowthofexternalborrowing,Hungary'sgrossexternaldebtincreasedfromUS$28.5
billion, or69percentofGDP in1994, toUS$31.7 billion in1995, or71percentofGDP (Table 4).
Nevertheless, theoverall debtburden wassomewhat reduced. Netexternal debtdeclined fromUS$18.9
billion, or46percentofGDP in1994 toUS$16.8 billion, or38percentofGDP in1995. Thedebt
service ratioalsodeclined -from 61percentin1996 to53percentin1995 -mainly asaresult ofthe
rapid growth ofexports. Moreover, international reserves increased dramatically from US$6.7 billion
in1994, ormore than7months ofimports tomore thanUS$12 billion in1995, almost 10months of
imports (Chart E).Insum, theimprovement inHungary 'sdebtsituation, hasbeenthemain reason for
therecent upgrading oftheirassessment ofHungary 'sdebtbyinternational rating agencies. This, inturn,
hasincreased theattractiveness ofHungarian assets forforeign investors.WT/BOP/W/16
Page11
Macroeconomic Adjustments
25. Thechangesinbalanceofpaymentshavedirectcounterpartsinthedomesticeconomicfundamentals
-inthesavings andinvestment balances. Thefollowing section describes thechanges inthose balances
in1995andthedevelopments inthose important policy areaswhich affect them-public finance, monetary
policy andexchange ratepolicy.
Savings -Investments Balances
26. Correspondingtothereductionintheexternalcurrentaccountdeficit,theinternalsaving-investment
balance wassignificantly improved in1995. In1993and1994, Hungary hadalargeexcess ofinvestment
overdomestic savings, which hadtobefinanced byforeign savings, andtheimbalance represented about
8-9percentofGDP. In1995, theimbalance isestimated bytheIMFtohavebeenmore thanhalved
(Table 5).The1995 decrease inthecurrent account deficit (andinthesavings-investment imbalance)
resulted fromasignificant increase ingross domestic saving, estimated at14.4percentofGDP in1994
andat18.8percentin1995. Gross investment remained stable atslightly more than22percentofGDP.
Theincrease ingross domestic saving reflected, inturn, astrong riseinsaving outside thegovernment
sector from15.8percentofGDP in1994 to20percentin1995. Thisincrease came asaconsequence
ofthestrong fallinrealwages andstrong growth ofexports which allowed enterprises 'profit margins
andsavings torecover. However, thestability ofaggregate gross investment masked offsetting movements
ingovernment andnon-government investment, withtheformer decreasing andthelatter increasing. As
aresult, therewasaslight decrease intheexcess ofgovernment investment overgovernment saving while,
forthefirsttimesince 1993, non-government saving exceeded non-government investment.WT/BOP/W/16
Page12
Table 5-Hungary -Savings-investment balance, 1991-95
(Percentage ofGDP)
1991 1992 1993 1994 1995
Gross domestic saving 18.1 15.3 10.6 14.4 18.8
Government 1.8 0.5 1.1 -1.3 -1.2
Nongovernment 16.4 14.8 9.6 15.8 20.0
Gross investment 20.5 16.1 20.0 22.2 22.4
Government 3.0 5.2 4.7 5.0 3.3
Nongovernment 17.5 10.9 15.2 17.2 19.1
Saving-investment balance -2.4 -0.8 -9.3 -7.8 -3.6
Government -1.2 -4.7 -3.6 -6.3 -4.5
Nongovernment -1.1 3.9 -5.6 -1.4 0.9
Memorandum item:
Current account balance10.8 0.9 -9.0 -9.5 -5.6
1 Thecurrent account deficit isonasettlements basis anddiffers fromthesaving-investment balance which isonanational accounts
basis.
Source: IMF.
Public Finance
27. Oneofthemajor adjustment problems hasbeenforsome timethepresence oflargefiscal deficits.
In1995, theGovernment tookmeasures toreduce thedeficit, butitssuccess wasrelatively modest. Even
though theconsolidated budget deficit asapercentage ofGDPdeclined from6.4percentin1994to3.8per
centin1995, most ofthisreduction came from one-time revenues from privatization. Without these
revenues, thedeficit wasonlyreduced by¾ofapercentage point ofGDP (Chart FandTable 6).While
theGovernment made considerable strides inreducing theshare ofgovernment expenditures inGDP-from
56percentin1994 to51percentin1995 -itsfiscal reform wasadversely affected byasharp fallin
therevenue-to-GDP ratio. Thelatter mainly reflected anerosion ofthetaxbase, declines inthetaxrates,
andanincome redistribution from wages toprofits.WT/BOP/W/16
Page13
Table 6-Hungary -Consolidated government balance, 1991-951
(Inbillions offorint andpercentage ofGDP)
1991 1992 1993 1994Estimate
1995
(Inbillions offorint)
Revenues
ofwhich:1,272.3 1,471.2 1,797.6 2,166.8 2,564.6
Taxes onprofit andincome 265.2 226.0 296.0 327.0 394.1
Social security contribution 408.0 514.5 646.4 756.7 806.3
VAT 149.5 175.7 286.7 336.4 424.0
Excises 137.3 166.7 148.2 164.3 200.9
Customs duties 61.6 94.2 124.9 148.8 247.9
Privatization receipts -- 22.0 7.2 31.0 150.0
Other revenue 250.6 272.1 287.3 402.7 341.4
Expenditures 1,353.8 1,662.2 2,067.4 2,447.0 2,775.6
Primary expenditure21,207.4 1,499.5 1,908.8 2,157.7 2,294.7
Subsidies 142.1 116.3 136.2 197.8 210.5
Transfers tolocal governments 190.7 224.0 266.9 298.6 320.2
Social transfers 459.6 557.4 665.0 796.6 879.9
Other 415.0 601.8 840.6 864.7 865.0
Interest payments2146.4 162.7 158.6 209.3 500.0
Consolidated balance -81.5 -191.0 -269.8 -280.1 -211.0
Excluding privatization revenue -81.5 -213.0 -277.0 -311.1 -361.0
Primary balance364.9 -28.3 -111.2 9.1 289.0
Excluding privatization revenue 64.9 -50.3 -118.4 -21.9 139.0
(Inpercent ofGDP)
Consolidated balance -3.3 -6.5 -7.6 -6.4 -3.8
Excluding privatization revenue -3.3 -7.2 -7.8 -7.1 -6.6
Primary balance32.6 -1.0 -3.3 0.2 5.3
Excluding privatization revenue 2.6 -1.7 -3.3 -0.5 2.5
Revenues 50.9 50.0 50.7 49.6 46.6
Excluding privatization 50.9 49.2 50.5 48.9 43.9
Expenditure 54.2 56.5 58.3 56.1 50.5
Primary expenditure248.3 51.0 53.8 49.4 41.4
Interest payments25.9 5.5 4.5 6.6 9.1
1 Central budget, consolidated withsocial security funds, central-budgetary institutions, andextra budgetary funds. Excludes in1993
national revenues corresponding totheresolution ofoutstanding claims byHungary related tothepurchase ofmilitary aircraft from
Russia.Also,thedatafor1990-93maynotbedirectlycomparabletothosefortheperiod1994-96becauseofchangesinthemethodology
forcompiling thefigures.
2 Primary expenditure aredefined astotalexpenditure excluding interest payments; thelatter alsoinclude other debtservice charges.
3 Overall balance minus interest payments andother debtservice charges.
Source: IMF.
28. Achieving fiscal consolidation inthecontext ofdeclining revenue-to-GDP ratioledtotheneed
forevenmore drastic cutsinexpenditures. Thegovernment wage billaswellassubsidies andfiscal
transfers were cutin1995 by22and24percentrespectively, inrealterms. Expenditures excluding
interest payments decreased from 49.4percentofGDP in1994 to41.4percentin1995 while interest
payments expressed asapercentage ofGDP increased from6.6percentin1994to9.1percentin1995.
Amajor, stillunresolved issueisthesocial security budget. Thenominal expenditures forsocial transfers
rosein1995 by10.5percentcompared toonly6.6percentforsocial security contributions. Reducing
thesocial security budget deficit has,therefore, become akeyobjective forHungary 'sgovernment.WT/BOP/W/16
Page14
Monetary andCredit Policy
29. Financial markets andmonetary policy havebeenunder aconsiderable pressure emanating from
increased inflows offoreign capital. Large interest ratedifferentials provided throughout 1995 strong
incentives forforeign arbitrage. Fearing anacceleration ininflation, Hungary 'smonetary authorities
sought toholdupinterest ratesthrough sterilization ofexcessive liquidity despite pressures arising from
theconversion intoforint offoreign exchange assets heldbynon-residents andresidents. Nevertheless,
despite sterilization, broad money (M2) increased by18.5percentascompared to13percentin1994,
which putadownward pressure oninterest ratesin1996anditreduced theinterest ratedifferential. The
IMFconsiders thecurrent differential ofabout 5percentadequate afterallowing forexchange raterisks.
Thereduction intheinterest ratedifferential should slowdown theinflow offoreign capital andthuslower
theupward pressure onthegrowth ofmoney and,consequently, oninflation.
Exchange RatePolicy
30. Theadoption ofapre-announced "crawling peg" exchange raterepresents anattempt bythe
government toinject greater predictability intoexchange ratemovements, avoid speculation byforeign
exchange traders andreduce inflationary pressures. Theforint hasslightly depreciated inrealterms in
1995. Thecompetitiveness ofthesector producing tradeable goods hasimproved which isreflected in
thestrong export performance, slowdown inthegrowth ofimports andintheimproved trade balance.