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IPC 
m COMMISSION OF THE EUROPEAN COMMUNITIES 
C0M(91) 83 final 
Brussels, 26 March 1991 
Proposal for a 
COUNCIL DECISION 
providing further medium-term financial assistance 
for Hungary 
(presented by the Commission) 
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EXPLANATORY MEMORANDUM 
The request for additional financial support 
During the past two years Hungary made substantial progress in 
implementing a comprehensive adjustment and reform programme aimed at 
replacing central planning with market based mechanisms. 
In March 1990, in support of this programme the International Monetary 
Fund agreed on a 12-month stand-by arrangement. Following this, the 
European Community decided to grant Hungary a medium-term balance of 
payments loan of ecu 870 million. The first tranche of this loan was 
disbursed in April 1990 and the second in February 1991. During 1990 
some members of the Group of Twenty-Four (G-24) made commitments for 
additional financial support including a US$200 million World Bank 
cofinancing arrangement from Japan and short-term credit and bridge 
loan facilities from Germany and the Bank for International 
Settlements. 
Notwithstanding encouraging progress towards adjustment and reform in 
1990, Hungary's financial situation remains fragile in 1991 when the 
country will be faced with a number of major external shocks including 
the reform of trade prices within the COMECON area, the partial 
breakdown of trade relations with other COMECON partners and the impact 
of Gulf crisis. As a result, the financing requirement is expected to 
increase considerably. 
To meet the increase in its financing requirement, Hungary has 
requested further assistance from the IMF in the form of an Extended 
Fund Arrangement (EFF) as well as access under the oil excess window of 
the Fund's Compensatory and Contingency Financing Facility. The 
agreement on the latter was reached in January 1991 and the EFF was 
approved by the Fund's Executive Board on 20.2.91. 
However, barring any significant increase in net private flows to 
Hungary, the envisaged assistance from the Fund will not be sufficient 
to cover the financing needs. Although direct investment inflows and 
capital market borrowing rose significantly in 1990 and are expected to 
-- •- .-i«4-<«„ UahiHties to commercial 
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banks make it difficult to envisage any substantial increase in bank 
lending. Accordingly, to help cover its overall financing requirement 
and enable it to maintain the policy of remaining current on its 
external obligations, Hungary has submitted a request for complementary 
financial assistance from the Community and the Group of Twenty-Four. 
The need for such assistance has been assessed by the Commission 
Services in close cooperation with the staff of the IMF and is 
estimated at some US$ 500 million. 
The Ecofin Council of January 28 agreed in principle on the Community's 
participation, up to an amount of 50% ($250 million) of a G-24 effort 
to assist Hungary. On this basis the Commission has initiated 
discussions with non-EEC G-24 and other third countries with a view to 
ensuring the mobilisation of the overall amount. Some non-EEC G-24 
members have already made firm pledges; most others have revealed a 
positive attitude towards participation in the support scheme, but are 
not yet in a position to commit themselves. It is expected that they 
will announce their final commitments during the next few weeks. 
The Hungarian reform process 
In September 1990 the government issued its "Economic Programme of 
National Renewal". This programme, which outlines the broad framework 
of the medium-term economic and administrative reform process, is now 
in the process of implementation. 
In particular, greater fiscal discipline and new tax rules are being 
introduced. The tax base and tax rate have been modified in the 
framework of the revised budgetary policy in vigor since mid-1990 to 
help meet requirements under last year's stand-by arrangement with the 
IMF. The budget proposed by the government for 1991 foresees a deficit 
corresponding to 1.5 percent of GDP as compared with an estimated 
outcome of 0.7 percent of GPD in 1990. To achieve this target the 
government is committed to cutting subsidies and reducing government 
transfers for tourism, regional development and social organisations. A 
system of monitoring to better control developments in public 
expenditure an revenues will be set up in 1991. 
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As regards price regime as of January 1991 almost 90 percent of 
consumer goods will be fully liberalised as compared with 80 percent in 
January 1990. A tight monetary and credit policy will continue to be 
pursued to contain the potential inflationary consequences of price 
reform. 
Further steps towards current account convertibility for the forint are 
being considered (in practice the forint is already quasi-convertible 
for most commercial transactions). A restructuring of the international 
currency basket to which the forint is pegged is under discussion in 
order to better reflect the growing role of European currencies in 
Hungary's international transactions. 
Hungary still maintains some degree of restriction on foreign trade. 
Imports of some goods continue to require joint import/foreign exchange 
licenses. The availability of foreign exchange for services and 
transfers is also subject to restrictions; a 87 percent tranche 
liberalisation target for 1991 was recently approved in the framework 
of the three year Economic Programme. 
Reform in banking will proceed in 1991. About thirty new commercial 
banks have been granted permission to be established so far. Some 
foreign banks have also been authorised to start up joint ventures in 
Hungary. A bill on the new role of National Bank of Hungary as an 
autonomous body accountable only to the Parliament is being discussed 
for adoption in 1991. 
At enterprise level privatisation programme involving 20 large state 
companies was completed in 1990. At the end of the year a second phase 
of the programme was initiated concerning another 20 medium-sized state 
companies with plans to process another 100 in five programmes during 
1991 with an estimated book volume of about 100 bn forints. In 
addition, a programme to transfer the ownership of a large number of 
retail and service outlets is under way. The privatisation programme is 
managed by the State Property Agency, which has the goal of cutting the 
public sector's share of the economy to 40 percent by 1995 from around 
85 percent at present. 
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In addition some 5000 new joint ventures have been established so far, 
many of them fully owned by non residents. Their total capitalisation 
is about 1 bn US$. Incentives are offered to non residents include full 
repatriation of profits. 
The need for additional financial support 
Notwithstanding a projected further increase in exports to Western 
markets, the current account is expected to deteriorate sharply in 1991 
due to the exceptional combination of negative shocks mentioned above. 
The IMF's latest estimates point to a (consolidated) current account 
deficit of $1200 million in 1991. This projection incorporates measures 
under the government's current policy programme aimed at offsetting 
roughly half of the balance of payments impact of the new shocks, in 
addition to maintaining the adjustment achieved already in 1990. 
Hungary continues also to face a large debt servicing burden and a 
considerable need for refinancing. Thus, with scheduled amortisation 
payments amounting to $2.4 billion in 1991 and allowing for a minimum 
build up of foreign exchange reserves and a need to increase Hungary's 
export credits, the total gross financing requirements for 1991 amount 
to $4.3 billion. 
It is assumed that Hungary's private borrowing ($1.5 billion) will 
continue to be largely based on borrowing from capital markets, which 
are expected to remain a more important source of new credit than 
commercial banks. Official lending already committed includes the 
second tranche of the Community's medium term loan approved in early 
1990 (and disbursed in February 1991), a World Bank structural 
adjustment loan, Japan's cofinancing of the World Bank and project 
financing from the European Investment Bank. Direct investment inflows 
are also expected to increase somewhat. In addition, it is assumed that 
Hungary will be able to draw on some of its outstanding claims on the 
Soviet Union (may be as much as 200 million US$) stemming from 
accumulated transferable ruble surpluses from recent years, as payment 
for imports of oil and raw materials. 
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With the IMF's assistance to Hungary expected to reach some 
US$ 1.4 billion in 1991 (about 300 million under the Compensatory and 
Contingency Facility and about 1.1 billion under a new 3-year Extended 
Fund Arrangement approved by the Executive Board on 20 February 1991) 
the remaining financing gap to be covered through new official lending 
amounts to some $500 million (see table below). 
Hungary : External financing requirement in 1991 
(estimates in US$ million) 
Current account deficit 
Debt amortisation 
Build up of reserves (- « increase) -1200 
-2400 
- 700 
I. Total gross financing requirement -4300 
Private borrowing +1500 
Borrowing from official sources already committed + 900 
IMF facilities +1400 
II. Total capital inflows +3800 
III. Residual financing gap (I + II) - 500 
Given the significant degree of adjustment already achieved in 1990 and 
the additional adjustment envisaged by Hungary under the new Policy 
Programme the Commission considers any further import compression that 
would be required to close the financing gap in the absence of 
Community and G-24 support could seriously jeopardize the achievements 
of the policy objectives underlying the government's reform effort. 
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This further and additional financial assistance in 1991 from the 
Commission and the Group of Twenty Four is specifically aimed at 
helping Hungary to overcome in 1991 the negative impact on its Balance 
of Payments of some exceptional external shocks largely unforeseen only 
few months ago. In this respect this loan, which has the nature and 
takes the form of a Balance of Payment support, has a different nature 
from the previous one approved by the Commission in early 1990 with the 
aim to overcome the difficulties of structural adjustment of the 
Hungarian economy. Therefore these two forms of financial support 
should be seen as complementary and not as substitutes. 
Main features of the loan 
The Commission is proposing that the Community should grant Hungary a 
new medium-term loan for 1991 at a maximum amount of ecu 180 million to 
help the country face a number of adverse external shocks that were not 
taken into account when the Community's ecu 870 million medium-term 
loan was approved in early 1990. 
The loan the Commission is envisaging would be closely linked to the 
IMF Extended Financing Facility Arrangement and would be disbursed in 
two tranches, the first tranche being subject to approval of the IMF 
Arrangement, the second one — which is to be disbursed in the third or 
fourth quarter of the year - subject to compliance with a number of 
performance criteria which are to be discussed with the Hungarian 
government in consultation with the Monetary Committee. 
The Community would provide the funds through market borrowing with a 
guarantee by the Community budget; Hungary would subsequently borrow 
from the Community. The borrowing and lending operations will be 
perfectly matched and without any commercial risk for the Community. 
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Proposal for a 
COUNCIL DECISION 
providing further medium-tern financial assistance 
for Hungary 
THE COUNCIL OF THE EUROPEAN COMMUNITIES, 
Having regard to the Treaty establishing the European Economic 
Community, and in particular Article 235 thereof, 
Having regard to the proposal from the Commission1 submitted following 
consultation with the Monetary Committee, 
Having regard to the opinion of the European Parliament2, 
Whereas Hungary is undertaking fundamental political and economic 
reforms and has decided to adopt a market economy model; 
Whereas the said reforms are already under implementation with the 
financial support from the Community and will strengthen mutual 
confidence and bring Hungary closer to the Community; 
Whereas Hungary and the Community have entered into negotiations for 
the conclusion of Europe Agreements establishing a relationship of 
association; 
Whereas by Decision 90/83/EEC3 the Council decided to grant to Hungary 
a medium-term loan facility of a maximum amount of 870 million ecu in 
order to permit that country to overcome the difficulties of structural 
adjustment of its economy; 
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Whereas, however, following the changes in the international 
environment, Hungary, like other Central and Eastern European 
countries, is now facing additional external shocks which might 
Jeopardise its financial stability and cause its balance of payments to 
deteriorate sharply; 
Whereas the Hungarian authorities have requested financial assistance 
from the International Monetary Fund (IMF), the G-24 and the European 
Community, and whereas, over and above the estimated financing which 
could be provided by the IMF, the World Bank and official bilateral 
creditors, a financial gap of some 360 million ecu remains to be 
covered in 1991, in order to prevent a further erosion of Hungary's 
reserve position and avoid an additional degree of import compression 
which could seriously Jeopardise the achievement of the policy 
objectives underlying the government's reform effort; 
Whereas the Commission as coordinator of assistance from the Group of 
24 industrial countries has invited them and other third countries to 
provide medium-term financial assistance to Hungary as an appropriate 
mesure to support the balance of payments and to strengthen the 
country's reserve position; 
Whereas the Community loan should be managed by the Commission; 
Whereas the Treaty does not provide, for the adoption of this Decision, 
powers other than those of Article 235, 
HAS DECIDED AS FOLLOWS : 
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Article 1 
1. The Community shall grant to Hungary a medium-term loan facility of 
a maximum amount of 180 million ecus in principal, with a maximum 
average duration of seven years, with a view to ensuring a 
sustainable balance-of-payments situation and strengthening the 
reserve position. 
2. To this end the Commission is empowered to borrow, on behalf of the 
European Economic Community, the necessary resources that will be 
placed at the disposal of Hungary in the form of a loan. 
3. This loan will be managed by the Commission in full consultation 
with the Monetary Committee and in a manner consistent with any 
Agreement reached between the IMF and Hungary. 
Article 2 
1. The Commission is empowered to negotiate with the Hungarian 
authorities, after consultation with the Monetary Committee, the 
economic policy conditions attached to the loan. These conditions 
shall be consistent with the agreements referred to in the third 
paragraph of Article 1 and with arrangements made by the G-24. 
2. The Commission shall verify at regular intervals, in collaboration 
with the Monetary Committee and in close coordination with G-24 and 
the IMF, that the economic policy in Hungary is in accordance with 
the objectives of this loan and that its conditions are being 
fulfilled. 
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Article 3 
1. The loan shall be made available to Hungary in two instalments. The 
first instalment shall be released as soon as an Extended 
Arrangement has been concluded between Hungary and the IMF and the 
second instalment after a period of at least two quarters subject 
to the provisions of Article 2(2). 
2. The funds shall be paid to the National Bank of Hungary. 
Article 4 
1. The borrowing and lending operations referred to in Article 1 shall 
be carried out using the same value date and must not involve the 
Community in the transformation of maturities, in any exchange or 
interest-rate risk, or in any other commercial risk. 
2. The Commission shall take the necessary steps, if Hungary so 
decides, to include in the loan conditions, and also to exercise, 
an early repayment clause. 
3. At the request of Hungary, and where circumstances permit an 
improvement in the interest rate on the loans, the Commission may 
refinance all or part of its initial borrowings or restructure the 
corresponding financial conditions. Refinancing or restructuring 
operations shall be carried out in accordance with the conditions 
set out in paragraph 1 and shall not have the effect of extending 
the average duration of the borrowing concerned or increasing the 
amount, expressed at the current exchange rate, of capital 
outstanding at the date of the refinancing or restructuring. 
4. All related costs incurred by the Community in concluding and 
carrying out the operation under this Decision shall be borne by 
Hungary. 
5. The Monetary Committee shall be kept informed of developments in 
the operations referred to in paragraphs 2 and 3 at least once a 
year. 
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Article 5 
At least once a year the Commission shall address to the European 
Parliament and to the Council a report, which will include an 
evaluation, on the implementation of this Decision. 
Done at Brussels, For the Council 
The President 
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FINANCIAL RECORD 
1. Budget line concerned 
Article (BO-2102) loan guarantee for aid to Hungary (to be created 
through an amending and/or supplementary Budget). 
2. References (legal base) 
Article 235 of the Treaty 
3. Classification of the Expenditure 
Obligatory 
4. Description and Justification for the action 
a) Description of the action 
Provision of a guarantee from the Community for a loan to 
Hungary in view of supporting its balance of payments and 
strengthening the country's reserve position. 
b) Justification for the action 
The G24 and the Council of the EEC have endorsed the 
principle of providing assistance in response to a request 
from Hungary. 
- The budget entry is intended to provide a budgetary support 
for guarantee offered by the European Community to cover a 
loan extended to Hungary. 
5. Nature of the expenditure and method of calculation 
a) Nature of the expenditure 
A guarantee to a loan to Hungary. 
b) Method of calculation 
A token entry is proposed given that the amount and timing of 
any call on this budget line cannot be calculated in advance 
and because it is expected that this budget guarantee will not 
be called. 
6. Effect of the action on intervention credits 
Only in the case of an effective call on the guarantee. 
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7. Financing of intervention expenditure 
Endowment of the line by transfer, by reutilisation of 
reimbursed amounts (Article 27(3) of the Financial Regulation 
of 1977), or by amended and/or supplementary budget. 
In order to fulfill its obligations, the Commission can 
provisionally ensure the debt service with funds from its 
treasury. In that case, Article 12 of the Council Regulation 
(EEC, Euratom) no. 1522/89 of 29.5.1989 will apply. 
ISSN 0254-1475 
COM(91) 83 final 
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