RESTRICTED
WORLD TRADE WT/BOP/R/17
16October 1996
ORGANIZATION(96-4279)
Committee onBalance-of-Payments Restrictions
REPORT ONTHE 1996 CONSULTATION WITH HUNGARY
1. TheWTO Committee onBalance-of-Payments Restrictions consulted withtheRepublic of
Hungary on23and25September 1996. Theconsultations wereheldunder theChairmanship ofMr.
Peter Witt(Germany) andinaccordance withtheterms ofreference, pursuant toArticle XII:4(b)
oftheGATT 1994andtheUnderstanding ontheBalance-of-Payments Provisions oftheGATT 1994.
TheInternational Monetary Fund wasinvited toparticipate intheconsultation inaccordance with
Article XV:2 ofGATT 1994.
2. TheCommittee hadthefollowing documents before it:
Basic Document supplied byHungary WT/BOP/13
Background Paper bytheSecretariat WT/BOP/W/16
Notification byHungary under Paragraph 9WT/BOP/N/12
oftheUnderstanding
IMF, Hungary, Selected Issues, 6August 1996
Hungary, Statistical Tables, 6August 1996
Opening statement bytheRepresentative ofHungary
3. Theopening statement bytherepresentative ofHungary isattached asAnnex I.
Statement made bytheRepresentative oftheInternational Monetary Fund
4. Thestatement made bytherepresentative oftheInternational Monetary Fund isattached as
Annex II.
Discussion intheCommittee
(i) Balance-of-payments position andprospects; alternative measures torestore equilibrium
5. Committee Members noted theremarkable improvement sincethelastconsultation, asindicated
bythesignificant increase inforeign exchange reserves, sufficient, asofJune1996, tocover eight
months ofimports, following amassive inflow offoreign direct investment andother capital flows.
Gross domestic savings hadrisen from 15.8to20percentofGDP between 1994 and1995. Thus,WT/BOP/R/17
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thetwindeficits, fiscal andcurrent account, hadbeenreduced considerably ashadtheratioofexternal
debttoGDP, although oneMember remarked thatthelevelofexternal debtremained high. Members
pointed outthere wasnoimminent threat ofaserious decline inthelevelofreserves soconditions
nolonger justified theimposition ofthesurcharge. Other Members concurred thatthere appeared
nojustification forthemaintenance ofthismeasure andurged rapid, ifnotimmediate, elimination,
but,inanyevent, before 1July1997. Some Members drew theattention oftheCommittee tothe
apparent discrepancy intrade datainthedifferent statistics presented, remarking thatincluding the
higher figure forexports, recorded onabalance-of-payments basis, reduced thetrade deficit further.
(ii) System, method andeffects ofrestrictions
6. While Members welcomed therecent reduction intherateoftheimport surcharge, questions
were asked regarding theexact coverage oftheimport surcharge andthepolitical process required
tomake amendments tothesurcharge. Questions wereraised regarding thealleged discriminatory aspect
oftheglobal quotas applied byHungary oncertain imports. Some Members suggested thatthesurcharge
onlyexacerbatedinflationarypressuresanditseliminationwouldhaveapositiveimpactontheHungarian
economy.
(iii) Replies from theRepresentative ofHungary
7. Therepresentative, noting thatmany ofthecauses ofimprovement wereunique occurrences,
requested theCommittee toaccord hisGovernment additional timeinorder toassess theimpact of
thelowering ofthesurcharge. While heinsisted thatthesurcharge wasnotserving anyfiscal purpose,
headded thatHungary 'spercapita level ofindebtedness wasoneofthehighest intheregion. In
providing further details inresponse toquestions raised, heexplained thatthedecree regarding the
surcharge could beamended jointly bytheMinister ofFinance andtheMinister ofTrade. Theimport
surcharge, heexplained, applied tosome 65to70percentofimports; exporters operating induty-free
zones didnotpaythesurcharge ontheirimports asthiswascollected while clearing customs. As
totheglobal quota, hestated thatthesystem atthepresent timewasoperated inconformity with
Hungary 'sWTO obligations andwould beprogressively eliminated onanergaomnes basis.
Conclusions
8. TheCommitteewelcomedthemarkedimprovementinHungary'sbalance-of-paymentssituation
thathadoccurred between 1995 andthefirsthalfof1996, stemming from export growth andan
improvement intheservices balance. Other contributory factors included alarge increase inFDIand
aconsiderable decline inthesavings-investment imbalance. Theratioofnetinternational debttoGDP
hadalsobeenreduced. TheCommittee noted thatatend-June 1996, gross official reserves stood at
approximately eight months ofimports ofgoods andservices.
9. TheCommittee recognized thatHungary waspursuing astrong adjustment programme, which
hadledtoaconsiderable improvement inthebudgetary position; theauthorities werecommitted to
further fiscal consolidation andstructural reform for1997.
10. Hungary considered itsbalance-of-payments situation stillfragile andpointed tothe
interrelationships among different elements ofmacroeconomic andstructural policies which, initsview,
made itnecessary atthispoint toretain theimport surcharge andavoid anunmanageable situation.
There were during 1995/96 certain positive elements thatmight notberepeatable; inpart, the
improvement wasalsorelated totheeconomic slowdown experienced in1995. Hungary confirmed
itsfirmintention toeliminate thesurcharge anddisinvoke balance-of-payments provisions by1July
1997, atthelatest.WT/BOP/R/17
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11. TheCommittee concluded thatthere wasnolonger animminent threat ofaserious decline
inthelevel ofHungary 'smonetary reserves, assetoutinArticle XII:2(a) ofGATT 1994. While
welcoming thereductions inthesurcharge made inJulyandplanned forOctober 1996, theCommittee
considered thatpresent conditions showed nobalance-of-payments reasons whyHungary should not
continue itsprogressive phase-out andeliminate thesurcharge more rapidly.WT/BOP/R/17
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ANNEX I
Statement bytheRepresentative ofHungary
Introductory Statement byAmbassador Major
Mr.Chairman, attheverybeginning of1995, theHungarian Government faced arather
uncomfortable economic situation. Inthesecond consecutive yearwehave accumulated quite a
considerable current account deficit amounting toalmost 10percentoftheGDPandatthesame time
wewere facing arather uncomfortable budgetary situation. Thedeficit inthisfieldreached more
than8.5percentoftheGDP. Atthesame timethestructural reforms inthecountry came toastop;
inparticular thisrelates totheprivatization. InMarch 1995, theGovernment made ageneral evaluation
ofthesituation andhasdecided infavour ofrather Draconian measures inorder toredress theeconomic
situation ofthecountry, andinparticular toredress theexternal equilibrium andimprove thebudget
situation. TheGovernment accepted aglobal package ofmeasures. Asapartofthispackage inthe
spring ofthisyear, weintroduced amajor upfront devaluation ofourcurrency. Weintroduced the
crawling pegsystem inourexchange-rate policy andan8percentsurcharge which wasalready asubject
matter forexamination inthisCommittee lastyear. Apartofthispackage wasarather ambitious
onebecause westarted toaddress maybe themostimportant issues. Thisrelates tothereform ofthe
bigredistributive systems ofthecountry which operated inarather inefficient way. Thefinancing
ofthese systems needed anover-taxation ofalltheeconomic operators inthecountry. They were
considered as"sacred cows" andthiswasthefirsttimethataHungarian Government everattempted
abasic reform ofthese systems.
After theexperiences ofthefirst18months oftheoperation ofthestabilization package, I
would liketosaythatgenerally, wearequite satisfied withtheresults untilnowofthemeasures.
Inconsequence ofthesteps wehavetaken, thefurther deterioration oftheexternal imbalances and
thebudget deficit werebotharrested in1995 andconsiderable improvement wasachieved. Bothan
improved foreign trade balance andaconsiderable reduction ofthebudget deficit in1995 aswellas
outstanding foreign direct investment performance relieved theimmediate pressure onthebalance of
payments. Theforeign direct investment inflow, including privatization revenues amounted lastyear
uptoUS$4.5 billion. Thecapital account in1995hadamedium- andlow-term capital inflow ofabout
us$7billion, which isUS$1.7 billion more thanin1994. Ithink thatthereserve situation ofHungary
alsoimproved inasignificant way. International reserves increased bymore thanUS$5 billion in
1995 andtotalled US$12 billion. Ournetforeign debtsituation alsoimproved considerably byabout
US$2½ billion lastyear. Thecurrent account deficit wasreduced toUS$2.5 billion lastyearfrom
alevelofalmost US$4 billion in1994. Priortotheintroduction ofthesemeasures, including theimport
surcharge, lowexport performance andadynamic import growth wasexperienced. Aflattening rate
ofimport growth andaccelerated export characterized theeconomy inthe18months afterthemeasures
taken.
The trade balance ofthecountry improved lastyearbymore thanUS$1.2 billion andit
contributed inamajor waytotheimprovement ofourforeign account situation. Forthetimebeing,
Mr.Chairman, wearenotinaposition toevaluate theimpact oftheindividual measures wehave
taken intheframework ofthepackage. Undoubtedly thereisastrong correlation between thesurcharge
andtheslowing down oftheimport growth. Atthesametime, thedynamism oftheexport performance
andthedecelerating imports waslikely alsoduetotherather considerably reduced purchasing power
ofthepopulation andalsoduetothereduction ofthespending oftheGovernment sector.WT/BOP/R/17
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Justtomention onefigure inthisrespect, thataccording toourfiles, realwages decreased
lastyearinHungary byabout 12percentsoitwasarather bitter pilladministered totheHungarian
population intheframework ofthispackage.
Afewwords about 1996andabout theperspectives. Inthefirsthalfofthisyear,weexperienced
acertain slowing down ofourexport growth. Intheprevious twoyears theexport growth ofHungary
wasintherange ofabout 20percent. Unfortunately forthisyear, thisdynamism almost halved.
Thisismainly due,according toouropinion, tothestagnation inourmajor export markets inwestern
Europe. Atthesame time, therewasalsoastagnation ofimports, orbetter tosayaverymodest drop
inthevolume ofimports which isinaclosecorrelation withthereduced purchasing power byallplayers
onthedomestic market. Allinall,wedoconsider thatwiththese tendencies weshallbeabletokeep
under US$2 billion thecurrent account deficit forthisyear. Weareexpecting theeconomy avery
modest 1.5percentrealgrowth andthefiscal situation alsocontinues toimprove. Wehaveexpectations
thatthegeneral government deficit would bekeptunder 4percentoftheGDP. Atthesame time,
itwould notbefairfrom oursidenottonottocallyourattention thatinthisrespect thatthere are
verymany question marks, inparticular thehealth insurance system isproducing hugedeficits and
itneeds amajor effort bytheGovernment tocurtail thespending bythisbody.
Ifyouwould permit me,Iwould liketosayafewwords about thestructural reforms going
onintheHungarian economy. Ithink thatlastyearwewere abletowitness another considerable
acceleration oftheprivatization process. Thenetincome fromtheprivatization wasabout US$3 billion
thatyear, andwecarried outanalmost fullprivatization oftheenergy sector andbydoing soIthink
wewere pioneers intheregion.
TheGovernment isverymuch determined tocontinue thereform ofthebigredistributive
systems. Early nextyear,wearehoping thatParliament willconsider adraftlawonthepension system,
andonthedisability pension systems. Those arepolitically hotpotatoes, butIamconvinced thatthe
Hungarian Parliament willbebrave enough totakethese further severe measures inorder toredress
thebudgetary situation ofthecountry foralonger termandareform oftheeducation/health system
isalsoontheagenda.
Atthesame time, weareexperiencing afurther rather massive inflow offoreign direct
investment. Hopefully thetotalamount ofFDIthisyearwillbeintheneighbourhood ofUS$2 billion
andweareexpecting from theprivatization another US$½ billion additional income. Itisourvery
determined aimthatinone-and-a-half years, weshallaccomplish theprivatization inHungary and
theshare oftheprivate sector would increase toabout 80percentincontribution totheGDP which
is,inmyopinion, ismore orlesscomparable withtheWest-European level. Asaresult ofthemassive
inflow offoreign direct investment, there aresome rather positive changes intheinternational
competitiveness oftheHungarian economy. Justtomention onefactor, lastyearamajor partofour
export growth came from themanufacturing andinparticular engineering sectors andthisisquite
evidently alltheresult ofthelarge-scale privatization andthemassive rôleoftheforeign capital in
theHungarian industy.
Although wearefairly optimistic astothefuture, butIwould liketomention thatstillthe
Hungarian economic situation remains fragile asitcomes outquiteevidently fromthereport prepared
byourcolleagues fromtheSecretariat. There areverymany conflicts ofinterest, veryserious dilemmas
fortheGovernment, inparticular astothefragility ofthebalance-of-payments situation. The
Government would likeverymuch todynamize theinvestments anditisour,maybe quitewell-based,
fearthatthemassive increased investments might bring about another massive inflow ofimports, thus
weakening ourbalance-of-payments situation. Astothemeasure examined bythisCommittee asto
theimport surcharge, Iwould liketoinform thedistinguished Members oftheCommittee that,onWT/BOP/R/17
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thebasisoftheimproving balance-of-payments situation ofHungary, theGovernment tooktherather
brave steptoadvance somewhat thestarting oftheelimination ofthemeasure andon1Julythisyear,
wereduced byonepercentofthesurcharge andanother onepercentdecrease hasbeendecided to
takeplace on1October thisyear. Wearemaking these reductions onanexperimental basis, justto
seehowtheeconomy, andinparticular, thebalance-of-payments reacts tothese measures andinthe
lightoftheexperiences, theGovernment willmake upitsmind concerning apossible scenario for
thefinaleliminationofthemeasure.Hungaryremainscommittedtoitsintentiontoeliminatethemeasure
bytheendofthefirsthalf-year nextyear.
Thank youverymuch andwithyourpermission Iwould liketoaskMrs. Baartobealittle
bitmore specific onthebalance-of-payments situation. Thank you.
Recent developments inthebalance ofpayments ofHungary
Thecurrent account ofHungary deteriorated sharply fromthesecond halfof1992. Thisprocess
culminated in1993 and1994 bringing about record deficits ofalmost US$3.5 andUS$4 billion
respectively. Correspondingly, thestock ofbothgross andnetforeign debtrosealarmingly. These
negative trends continued atanevenfaster paceinthefirstmonths of1995, which persuaded the
Government about theimmediate necessity ofastabilization package. Thiswasputineffect in
March 1995, containing serious measures torestrict consumption bycutting realwages, reducing budget
expenditures, curtailing social spending andtriggering massive lay-off inthepublic sector. Toregain
competitiveness,aone-step9percentforintdevaluationwasputintoeffecttogetherwiththeintroduction
ofapreannounced crawling pegged exchange raterégime tostimulate export, andreduce import. An
8percentimport surcharge wasimplemented on20March 1995. Allthiswasmeant toincrease the
potential forgrowth byencouraging investment andtosustain theGDP growth thatappeared in1994
following fouryears ofpermanent shrinking.
Inthewake ofthese steps animmediate improvement could havebeenobserved bothinthe
current account andintheforeign debtposition. Thiscould have been attributed mainly tothe
foreseeability oftheconduct ofeconomic policy. It'sverydifficult tojudge what wastheseparate
effect oftheimplemented import surcharge onthebalance-of-payment improvement. Thewhole
stabilization package -which wasaconsistent one-hasresulted insubstantial changes ontheexternal
equilibrium process. Undoubtedly onestepdevaluation, theimplementation ofthenewpreannounced
crawling pegged exchange raterégime andtheimport surcharge hadanimmediate effect inrestoring
thecredibility andintightening import demand. Especially exchange ratedetermination helped to
rebuild credibility, which wasclearly shown bythefactthatfollowing amarginal initial period, the
exchange rateoftheforint stayed permanently atthebottom ofitsintervention band. Thecostofthese
advantages came intheform aslight slowdown ofGDP growth andaccelerating inflation which,
nevertheless, stillremained tractable.
Turning tofigures ofbalance ofpayments, themostremarkable improvement could havebeen
seeninthecurrent account, thatended upwithonlylessthanUS$2.5 billion deficit in1995, analmost
US$1.5 billion improvement compared totheendof1994 value ofUS$3.9 billion deficit. The
development ofthecurrent account isalsoworth mentioning; 57percentofthetotaldeficit wasrealised
inthefirstquarter of1995, 27percentoriginated inthesecond quarter, while thelasttwoquarters
added only16percenttotheyearly deficit. Behind thisspectacular improvement themain driving
force wasthedynamic expansion ofexport faroutpacing therateofgrowth ofimport, thatwaseven
stagnating forsome periods. Thegapbetween export andimport developments widened further in
favour ofexports in1995. Thatis12percentage points instead of2percentage points in1994. It
should bementioned thatthestructural effect oftheimport surcharge ontheproduction andonexport
ability isindirect anditisimpossible toprove separately. Attention should bepaidtotheimprovementWT/BOP/R/17
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inthebalance ofservices, thatcould beattributed toconsiderable increase intravel receipts anddecrease
intravel expenditures.
Thefavourable change inthecredibility oftheeconomic policy hasstrengthened Hungary 's
positions ontheinternational capital markets andinduced amassive capital inflow, mainly inform
ofdirect investment. Portfolio investment hasalsogained momentum, butmonetary policy could handle
these issues without encountering problems. Concomitantly withcapital inflows foreign exchange
reserves increased steadily leading toaconsiderable decline inthestock ofnetforeign debt. Finally,
inDecember1995,aprivatizationrevenueamountingtomorethanUS$3billionarrivedincash,causing
aninstant equivalent increase inforeign exchange reserves andafurther decline inthestock ofnet
foreign debt.
Thetrends remained thesameinthefirsthalfof1996. Apart fromstronger thanusual seasonal
effects thatcaused thetrade balance tohitaslarge adeficit inthefirstquarter asitdidinthesame
period in1995, services andevenincomes (netinterest payments) continued toimprove rapidly. The
latter wasmade possible bymassive prepayments offoreign debtofthepublic sector, financed from
theincreased stock offoreign exchange reserves, thatledtoadecrease inthevolume ofinterest
expenditures, while theincreased reserves stock itself resulted inhigher interest receipts.
Thestock ofbothgross andnetforeign debtdecreased markedly, theformer byUS$3.3 billion,
thelatter byUS$1.2 billion since December 1995. Ofcourse aparallel decrease could havebeen
seeninthestock offoreign exchange reserves thatstood atUS$9.8 billion attheendofJune1996,
US$2.2 billion short ofitsend-1995 value.
These favourable developments extending toalmost allcomponents ofHungary 'sbalance of
payments made itpossible togradually annul thesurcharge onimport introduced withthestabilization
package. Thesurcharge wasdiminished by1percenton1July1996 andthere isadecision about
onemore percent decrease from 1October 1996.WT/BOP/R/17
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ANNEX II
Statement bytheIMFRepresentative
Atthebeginning of1995 Hungary faced adifficult economic situation. Thecurrent account
deficit hadbeensome 9-10percentofGDPfortwosuccessive years andthefiscal deficit hadremained
atabout 6-7percentofGDP since 1992. These twindeficits, inthecontext ofanalready highlevel
ofexternal debt, wereseenasathreat tofinancial stability andsustainable growth. Eighteen months
later, thefiscal andexternal current account deficits havedeclined sharply; structural reform hasgained
momentum; andthestronger external performance hasfacilitated asizable decline innetexternal debt
from 46percentofGDP in1994 tosome 35percentofGDP in1996. Furthermore, therebound
inexports hasmeant thatmacroeconomic adjustment hasnotbeenaccompanied byamajor output loss,
despite asharp contraction indomestic demand.
Theimprovementinthebalanceofpaymentsisparticularlynotable.Theexternalcurrentaccount
deficit dropped toUS$2.5 billion (5.6percentofGDP) in1995, fromUS$4 billion (9.5percentof
GDP) in1994, reflecting gains inexport market shares andthecontainment ofimports. The
strengthening ofthecurrent account in1995 wasaccompanied byasurge indirect investment
(particularly fromprivatization) andother private capital inflows. These inflows boosted gross official
reserves --toalevel equivalent to9½months ofimports atend-1995 --andledtoalarge dropin
thenetexternal debt-to-GDP ratio.
Theimprovement inthebalance ofpayments hascontinued in1996. Thecurrent account deficit
inthefirsthalfof1996wasUS$0.9 billion, wellbelow theUS$2.1 billion inthesameperiod of1995.
Private capital inflows alsoremained highinthefirsthalfof1996(including those hidden intheerrors
andomissions ofthebalance ofpayments). Nevertheless, official reserves havedeclined because of
early repayments ofofficial debtandtherelocation abroad ofsome oftheforeign exchange deposits
heldbycommercial banks attheNational Bank ofHungary. Thelatter reflects theelimination ofa
distortion inreserve requirement regulations thatmade itadvantageous forcommercial banks tokeep
theirforeign exchange balances atthecentral bank. However, thisdevelopment hasnoimplications
fortheunderlying external position, andatend-June reserves stood atthestillcomfortable levelof
about eightmonths ofimports. Against thisbackground offavourable external developments, several
internationalratingagencieshaverecentlyupgradedtheirassessmentofHungary'sdebt,andthepremium
paidoverU.S.Treasury bonds hasdeclined tosome 100basis points from300basis points inearly
1995.
Theseachievementsreflecttheimplementationoftheauthorities'March1995austeritypackage,
aswellastheIMF-supported adjustment program in1996. These initiatives hadfourmaincomponents:
anupfront devaluation oftheforint; theintroduction ofapre-announced exchange ratecrawling peg
toreduce inflationary expectations; fiscal retrenchment; andacceleration ofstructural reform, including
anewwave ofprivatization. OnAugust 28,1996, theIMFExecutive Board concluded thefirstreview
ofthestand-by arrangement withHungary andthe1996 Article IVconsultation. IMFDirectors
welcomedtheauthorities'continuedcommitmenttothepoliciesneededtoconsolidatetheirrecentsuccess.
Despite therecent achievements, inflation hasproved more persistent thanexpected. This
reflects higher thanexpected increases inbothadministrative prices andwages. Thecrawling peg
exchange régime hasbeeneffective inlimiting wages inthesectors exposed toforeign competition;
however, wage growth hasbeenabove target inthenontraded goods sector. Therefore, inflation is
likely tobesignificantly above theoriginal 1996 target of20percent. The1997 inflation target
(13percent) isalsolikely tobeexceeded byasizable margin. Inthecontext ofthecrawling peg
exchange régime, higher inflation would leadtoanerosion ofcompetitiveness thatcould jeopardizeWT/BOP/R/17
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thesuccessful reduction oftheexternal current account deficit. Thisriskcould havebeenallayed by
tightening policy, particularly thefiscal stance. However, theauthorities areunwilling atthisstage
totighten policies because theyareconcerned about thepossible adverse impact oneconomic activity.
Instead, theyhaveincreased theirannual average inflation rates to23-24 percentin1996 and17-
18percentin1997. Nonetheless, themain external target ofthe1996 program --acurrent account
deficit below US$2 billion (4.3percentofGDP) --appears within reach given thestrong performance
oftheexternal accounts inthefirsthalfof1996, provided thatthere arenoslippages inpolicy
implementation. Withthesameproviso, the1997current account target ofUS$1.5 billion (3.5percent
ofGDP) alsoremains achievable, assuming no,oronlyalimited, reduction intherateofthecrawl.
Inthelightofthehigher thanexpected inflation, itisessential toachieve, asaminimum, the
1996general government deficit target of4percentofGDP. Themostalarming development inthis
respect isthewidening social security deficit, mainly duetodelays inhealth carereform. Byend-July,
thisdeficit stood atsome Ft.50billion (0.7percentofGDP), nearly three times theoriginal annual
target ofFt.18billion andalready above therevised 1996 target ofFt.41billion. Theoverrun in
thesocial security deficit hassofarbeenmore thanoffset bythebetter thanexpected performance
ofthecentral government budget. Nevertheless, there remains ariskthattheoverall deficit ofthe
consolidated government mayexceed theannual target. Theauthorities willneedtotakeprompt
corrective action iftherevenues from consumption taxes andsocial security arrears donotpickup
astheyexpect.
Thepreliminary budget guidelines for1997callformoreambitious cutsinprimary expenditures
andtaxratesthanoriginally envisaged, while maintaining the1997deficit target fortheconsolidated
government at3percentofGDP(excluding privatization receipts andthecostofeliminating thequasi-
fiscal deficit ofthecentral bank). Theplans include thecommitment toeliminate the8percentimport
surcharge byJuly1997. Infact,thesurcharge hasalready beenreduced: itwaslowered byone
percentage point onJuly1,1996, andafurther onepercentage point decline isscheduled for
October 1,1996. Inaddition, social security andpersonal income taxratesaretobereduced in1977.
Tooffset therevenue loss,theguidelines envisage sizable cutsinrealtransfers tolocalgovernments
andcentral budgetary institutions, awidening ofthesocial security contribution base,andimprovements
intaxadministration.
Theplans tolower taxandsocial security contribution ratesarewelcome given thehighburden
oftaxation inHungary anditsadverse effects ongrowth andemployment. However, expenditure
reductions overthelasttwoyears havefocused heavily ontransfers tolocal authorities andcentral
budgetary institutions, andthereisadanger thatfurther cutsintheseareascould leadtotheaccumulation
ofpayments arrears bythese organizations. Therefore, itwould bepreferable tobroaden thescope
oftheexpenditure cuts. Excessive reliance onimproving collection efficiency isalsorisky, aspast
experience inthisareaisnotencouraging. The1997 budget willbeakeyfocus ofthediscussions
withIMFstaff, inSeptember andDecember thisyear, aimed atcompleting thesecond review under
thestand-by arrangement.
Onmonetary policy, theauthorities havesucceeded inmaintaining positive realinterest rates,
despite thepressures arising from theconversion offoreign exchange assets intoforint during the
firsthalfofthisyear. Given thedecline intheinterest ratedifferential between foreign anddomestic
assets, theneedforsterilized intervention islikely todiminish inthesecond halfoftheyear. However,
tomaintain theanti-inflationary stance ofmonetary policy, theauthorities intend toresist declines in
official interest ratesuntilthere areclear signs thatinflation isonadeclining trend.
Structural reform isaprerequisite forstrong macroeconomic performance inthemedium term.
Important stepshavealready beentaken, mostnotably amarked acceleration oftheprivatization processWT/BOP/R/17
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andthepassage oflegislation toincrease theretirement age. However, delays inhealth andpension
reforms areworrisome, given theirimplications forthefiscal consolidation process. Inthisrespect
theauthorities 'intention toobtain Parliamentary approval ofthekeypension anddisability pension
reforms byend-February 1997 iswelcome.
Effective January 1,1996, Hungary accepted theobligations ofArticle VIII, Sections 2,3,
and4oftheIMF'sArticles ofAgreement anditsexternal trade andexchange system isfreeof
restrictions onpayments andtransfers forcurrent international transactions. Themove toArticle VIII
status wasfacilitated byanewforeign exchange law.Further tradeliberalization measures havebeen
adopted inthecontext ofHungary 'sagreements withtheEU,EFTA, CEFTA, andtheOECD
membership asoutlined intheSecretariat 'sbackground note. Capital transactions havealsobeenfurther
liberalized asofJuly1,1996; notably, domestic banks cannowengage inawider range ofbanking
activities withnonresidents.
Insummary, theadjustment program undertaken sinceearly1995hasyielded important results
interms ofmacroeconomic stabilization. Most notably, theexternal position hasstrengthened
substantially overthelasteighteen months andtheobjective ofcontaining thecurrent account deficit
tolessthanUS$2 billion in1996appears feasible. Therecent reduction intheimport surcharge ahead
oftheoriginal schedule iswelcome. Furthermore, theauthorities 'continued commitment tofiscal
consolidation andstructural reform bodes wellfor1997, andshould facilitate theelimination ofthe
import surcharge byJuly1997.