Abstract
This 2003 Article IV Consultation for Hungary highlights that developments in growth and inflation were broadly positive in 2002. Buoyed by domestic demand, real GDP growth increased to 3.5 percent (year-over-year) in the second half of 2002 from 3.0 percent in the first half. Headline inflation declined from its recent peak of 10.8 percent in May of 2001 to 4.8 percent at end-2002. The external current account deficit widened in 2002, although foreign direct investment fell off sharply.
1. This statement reviews developments in Hungary since the preparation of the staff report for the 2003 Article IV consultation and highlights the authorities’ recent actions related to the HIPC (Highly Indebted Poor Countries) initiative. The additional information does not change the thrust of the staff appraisal. A referendum on EU accession was held on April 12. With a turnout of about 45½ percent, almost 84 percent of the votes were in favor of accession.
Recent Economic Developments And Data Revisions
2. Recent economic developments include:
Merchandise exports (in euro terms) in January-February 2003 were 5.2 percent lower than a year ago. With import growth not as weak, the 12-month external current account deficit widened to 4.2 percent of GDP in February, compared with 4.0 percent in December 2002. Manufacturing output was affected by the weakness of exports: on a year-on-year basis, it was up only 2 percent in January-February 2003.
Total employment in January-February 2003 was up one-half of a percent on a year ago, on account of a 4 percent rise in public employment; private sector employment decreased 1.1 percent in the same period. With the growth of the labor force outstripping that of total employment, the average unemployment rate rose to 6.4 percent in the first quarter of this year from 5.8 percent in the first quarter of 2002.
Headline CPI inflation rose to 4.7 percent, year-on-year, in March from 4.5 percent in February. However, core inflation (which excludes food and fuel) dropped slightly to 4.8 percent.
Gross monthly wage growth in the private sector was 9.8 percent, year-on-year, in January-February 2003 (compared with year-average growth of 13.3 percent in 2002). Public sector wage growth was 30.9 percent in January-February 2003 (compared with 29.2 percent in 2002).
Notwithstanding sizable foreign borrowing by the government, foreign exchange reserves of the Magyar Nemzeti Bank (MNB) dropped by about 1.6 billion in February and March 2003. This is consistent with the continued sales of foreign exchange to mop up liquidity and help to unwind long forint positions in the wake of the speculative attack.
The MNB has informed staff that it now projects a widening of the external current account deficit (using the new BOP methodology) of about one percentage point of GDP in 2003 compared with the preceding year.
Based on preliminary data, the general government deficit was around Wi percent of GDP in the first quarter, compared to a similar ratio in the first quarter of 2002. Total revenues of the consolidated general government increased by 13.7 percent on a year-on-year basis in the first quarter, while total expenditures increased by 14 percent year-on-year. As noted by the authorities, comparing the data so far for 2003 with data for the same period of2002 requires a note of caution, including in light of the introduction in the second half of that year of several measures raising wages, pensions, and social transfers, and reducing personal income taxes. The Finance Ministry has indicated that the data for the first quarter of 2003 are in line with their monthly projections, consistent with the whole year fiscal target. Staff broadly agrees that the target is still achievable, but sees risks for the remainder of the year, consistent with the staff report.
The authorities have informed staff that the current estimate of the size of privatization receipts this year is equivalent to 1 percent of GDP (compared with 1½ percent of GDP reported in paragraph 25 of the staff report).
In early April, parliament passed an anti-corruption legislative package known as the “glass pocket law,” which aims to make the use of public funds more transparent.
With respect to Appendix II, paragraph 3 of the staff report, the authorities have informed the staff that revisions to imputed owner-occupied rent have been carried out.
3. Data revisions include:
Since the staff report was issued, the Hungarian Central Statistics Office (HCSO) released figures for nominal GDP in 2002 and modified the figures for 2000 and 2001 due to methodological changes. This data would modify several of the ratios used in the tables and text, but only slightly, and not in a way that would modify the analysis and conclusions of the staff report. For example, the ratio of the external current account deficit to GDP in 2002 would be 4 percent rather than 4.1 percent, whereas the ratio of the general government deficit (on ESA-95 basis) to GDP in 2002 would be 9.2 percent rather than 9.5 percent
The HCSO also released figures for the components of real GDP in the fourth quarter of 2002 and revised some of the data on the components of real GDP for recent years. The new figures are shown in the attached Table. While paragraph 5 of the staff report indicates that export volume growth actually may have turned negative in the fourth quarter, the new data indicate that the volume of exports was 1.2 percent higher than a year ago. However, the HCSO made downward revisions to (real) export growth during the first three quarters of 2002. While import growth was revised downward by roughly a similar amount, so that the contribution of net trade to GDP was not affected significantly, the revisions would suggest that, in the face of subdued demand from the EU, the export sector has held up less well than previously thought. For the year as a whole, real export growth was 3.8 percent (compared with a previous estimate, based on the unrevised data, that was around two percentage points higher).
The Ministry of Finance revised the data for general government debt on an ESA-95 basis. While this increased the debt at end-2001 and end-2002 by up to 1.4 percentage point of GDP, the effect on the debt to GDP ratio in 2002 was more than offset by the upward revision to nominal GDP.
HIPC
4. In the context of the HIPC initiative, the Hungarian authorities have agreed to provide debt relief on all of its claims on Ethiopia, Mozambique, Nicaragua and Tanzania. The authorities started negotiations with Ethiopia in November 2002. They are currently formulating their approach concerning the claim on Mozambique, and are waiting for a response from Nicaragua on an offer made in April of this year. Finally, the Hungarian authorities initiated a meeting between the Tanzanian authorities and General Electric (the holder of the relevant claim after the original holder Tungsram—which was a state-owned manufacturer of electrical equipment—was privatized).
Table. Hungary: Revised National Accounts Figures and Selected Ratio
The current account is not consistent with the concept of the use of foreign saving on a national accounts basis, which results in a statistical discrepancy in the data on the overall saving-investment balance. The reasons include the exclusion of reinvested earnings from the official statistics (an item which may vary over time, but for which official data are unavailable).
The 2002 general government balance includes various one-off financial operations (amounting to 3.1 percent of GDP) that are not part of the saving-investment balance on a national accounts basis.
ESA-95 basis.
Table. Hungary: Revised National Accounts Figures and Selected Ratio
| 2000 | 2001 | 2002 | |
|---|---|---|---|
| Actual | Actual | Est. | |
| (In percent, unless otherwise indicated) | |||
| Real GDP growth | 5.2 | 3.8 | 3.3 |
| Nominal GDP, Forint billions | 13,172 | 14,850 | 16,980 |
| (Annual percentage change, constant prices) | |||
| Domestic Demand | 4.5 | 1.7 | 5.3 |
| Consumption | 4.4 | 5.3 | 7.8 |
| Gross fixed capital formation | 7.6 | 3.5 | 5.8 |
| Exports of GNFS | 21.0 | 8.8 | 3.8 |
| Imports of GNFS | 19.4 | 6.0 | 6.1 |
| (In percent of GDP) | |||
| External Current Account Deficit 1/ | 6.2 | 3.4 | 4.0 |
| Gross Private Savings | 21.9 | 23.1 | 23.3 |
| Gross Private Investment | 27.4 | 23.5 | 22.7 |
| General Government | |||
| Revenue, primary | 41.3 | 44.9 | 42.6 |
| Expenditure, primary | 39.8 | 43.9 | 48.5 |
| Primary balance | 1.5 | 1.0 | -5.9 |
| General Government Balance (ESA-95) | -3.0 | -4.7 | -9.2 2/ |
| Net interest | 5.1 | 4.0 | 3.6 |
| General Government Debt 3/ | 55.5 | 53.4 | 56.3 |
The current account is not consistent with the concept of the use of foreign saving on a national accounts basis, which results in a statistical discrepancy in the data on the overall saving-investment balance. The reasons include the exclusion of reinvested earnings from the official statistics (an item which may vary over time, but for which official data are unavailable).
The 2002 general government balance includes various one-off financial operations (amounting to 3.1 percent of GDP) that are not part of the saving-investment balance on a national accounts basis.
ESA-95 basis.
Table. Hungary: Revised National Accounts Figures and Selected Ratio
| 2000 | 2001 | 2002 | |
|---|---|---|---|
| Actual | Actual | Est. | |
| (In percent, unless otherwise indicated) | |||
| Real GDP growth | 5.2 | 3.8 | 3.3 |
| Nominal GDP, Forint billions | 13,172 | 14,850 | 16,980 |
| (Annual percentage change, constant prices) | |||
| Domestic Demand | 4.5 | 1.7 | 5.3 |
| Consumption | 4.4 | 5.3 | 7.8 |
| Gross fixed capital formation | 7.6 | 3.5 | 5.8 |
| Exports of GNFS | 21.0 | 8.8 | 3.8 |
| Imports of GNFS | 19.4 | 6.0 | 6.1 |
| (In percent of GDP) | |||
| External Current Account Deficit 1/ | 6.2 | 3.4 | 4.0 |
| Gross Private Savings | 21.9 | 23.1 | 23.3 |
| Gross Private Investment | 27.4 | 23.5 | 22.7 |
| General Government | |||
| Revenue, primary | 41.3 | 44.9 | 42.6 |
| Expenditure, primary | 39.8 | 43.9 | 48.5 |
| Primary balance | 1.5 | 1.0 | -5.9 |
| General Government Balance (ESA-95) | -3.0 | -4.7 | -9.2 2/ |
| Net interest | 5.1 | 4.0 | 3.6 |
| General Government Debt 3/ | 55.5 | 53.4 | 56.3 |
The current account is not consistent with the concept of the use of foreign saving on a national accounts basis, which results in a statistical discrepancy in the data on the overall saving-investment balance. The reasons include the exclusion of reinvested earnings from the official statistics (an item which may vary over time, but for which official data are unavailable).
The 2002 general government balance includes various one-off financial operations (amounting to 3.1 percent of GDP) that are not part of the saving-investment balance on a national accounts basis.
ESA-95 basis.