Abstract
This 2002 Article IV Consultation highlights that although economic growth of Hungary slowed in 2001, the economy showed considerable resilience to the weaker external environment. GDP growth was a still respectable 3.8 percent, down from 5.2 percent in 2000 but higher than most other countries in the region. Although export growth decelerated as the year progressed, it nevertheless outpaced growth in Hungary’s export markets. Domestic demand was partly supported by buoyant private consumption on the back of strong real wage gains. Meanwhile, the unemployment rate edged down to 5.6 percent by the start of 2002.
Statement by the IMF Staff Representative May 22, 2002
1. This statement reviews developments in Hungary since the preparation of the staff report for the 2002 Article IV consultation (SM/02/128, 4/30/02). This additional information does not change the broad thrust of the staff appraisal, although prospects for fiscal consolidation in the near term now appear less likely.
2. The parliamentary election in April 2002 resulted in a narrow majority (of 198 seats out of 386) for the center-left opposition (the Socialist party together with the Alliance of Free-Democrats). On May 15, President Mádl appointed Peter Medgyessy to form a new government. Indications are that a new cabinet will be in place by May 27.
3. Economic policy developments:
The National Bank of Hungary (NBH) has maintained its policy interest rate at 8.5 percent since the last official rate reduction on February 19. Meanwhile, the forint has continued to trade at around 12 percent above its central rate against the euro. In a statement on May 6, 2002, the Monetary Council noted that additional unfavorable developments for inflation might require a tightening of monetary conditions. On that date, the Monetary Council also discussed a draft of the NBH’s Quarterly Inflation Report for May. That report, according to the Council’s statement, revised upward the end-2002 central inflation forecast from 4.8 percent in the February report to 5.3 percent, close to the upper limit of the inflation target range. The latest report kept the central forecast for end-2003 close to the middle of the inflation target range, at 3.4 percent, but noted that existing risk factors could push the end-2003 inflation to 4 percent. These factors included wage pressures, a more expansionary fiscal policy, and potential hikes in regulated prices.
The candidate for Minister of Finance, Mr. Csaba Laszlo, indicated that the government intends to amend the 2002 budget to include plans for a spending package. Based on press reports, staff estimates that the additional spending could be in the range of Ft 220-270 billion (equivalent to about 1.4-1.7 percent of GDP). The additional spending would largely raise pensions, and public sector wages in education and health. The extent to which the additional spending might be accompanied by expenditure cuts in other areas is unclear. Mr. Laszlo has also suggested that the new government plans to reduce the deficit of the general government to 2.5 percent of GDP (on an ESA-95 basis) by 2006, with a view to adopting the euro in 2007. These plans are somewhat less ambitious than those indicated during the Article IV consultation discussions.
4. Other economic developments:
The external current account was in surplus in March, bringing the rolling 12-month current account deficit down slightly to 2.7 percent of GDP, from 2.8 percent in February. Net FDI inflows over the latter period were 3.6 percent of GDP.
Year-on-year industrial output growth was 3.1 percent in March, the strongest growth rate recorded since October 2001. The unemployment rate, meanwhile, stood at 5.8 percent in the first quarter of 2002, up slightly from 5.6 percent in the previous quarter.
In the first two months of 2002, the average volume of retail sales was 12.1 percent higher than a year earlier, as consumer spending was boosted by a pick-up in year-on-year real wage growth to 12 percent.
The official general government deficit reached 63 percent of the annual deficit target in the first four months of 2002, sharply up from 20 percent of the annual target in the same period last year. This reflected larger-than-targeted expenditures by both the central budget and social security administrations, mostly due to higher spending on health care, pensions, and public sector wages. The NBH has raised its estimate of the fiscal stimulus in 2002 from 0.8 percent of GDP to 1.3 percent of GDP.
Year-on-year consumer price inflation was 6.1 percent in April, up from 5.9 percent in March, reflecting a rise in food and fuel price inflation. By comparison, year-on-year core inflation, which excludes certain fuel and food prices, declined by 0.2 percentage point to 6 percent in April.