Recent Economic Developments and Data Revisions

2. Recent economic developments include:

• Merchandise exports in euro terms were 13.1 higher in January-February 2004 than a year earlier (about 20 percent in volume terms). With imports in euros higher by 8.4 percent during that period (about 15 percent in volume terms), the trade deficit was substantially lower (totaling 270 million in January-February of this year, compared with 467 million in January-February 2003). However, the overall external current account did not improve much: the 12-month rolling current account deficit (including reinvested earnings) was 9 percent of GDP in February, down from its peak of 9.2 percent in August-October 2003. Industrial output benefited from the strength of exports: it was up 10.8 percent in the first quarter of 2004 from a year earlier.

• Year-on-year headline CPI inflation was lower than expected in March, declining to 6.7 percent from 7.1 percent in February, as food prices developed favorably. Core inflation (which excludes food and fuel) remained constant at 6.1 percent.

• Gross monthly wage growth in the private sector was 10.1 percent, year-on-year, in January-February 2004 (3.3 percent in real—CPI deflated—terms), compared with year-average growth of 9.0 percent in 2003 (4.3 percent in real terms). In the public sector, wage growth fell to 5.5 percent in January-February 2004 (-1.4 percent in real terms), compared with 17.8 percent in 2003 (13.2 percent in real terms).

• Since the preparation of the staff report, the forint has continued to stabilize in the Ft 250–255 per euro range. The Magyar Nemzeti Bank (MNB) reduced its key policy rate by 25 basis points on April 5, and on May 3 by another 50 basis points (to 11½ percent), citing with the latest cut improvements in foreign investors’ assessment of the risks facing the Hungarian economy.

• Based on preliminary data, the general government deficit was about 2.1 percent of estimated annual GDP in the first quarter of 2004, compared with 1.6 percent in the first quarter of 2003 (excluding local governments, who typically run a small deficit). Tax revenues increased by 8.3 percent in the year to the first quarter of 2004; total expenditures increased by 17.3 percent, though the increase was 7.8 percent excluding “chapter administered professional appropriations.” The latter is a bulky item which includes transfers to central budgetary institutions, a large share of which occurred earlier than usual this year. The Ministry of Finance expects that the general government deficit will continue to increase through the second quarter, but will then be very low in the second half of 2004.

3. Fiscal data have been revised:

• On April 5, after the staff report was prepared, the Ministry of Finance provided staff with revised estimates of the allocation within the 2004 budget, partly reflecting revised estimates of the 2003 fiscal outcome (see attached table). The latter revision incorporated information on local governments and the consolidation among different parts of the general government, which had previously been unavailable. While some numbers and ratios used in the tables and text of the staff report would be modified (see below), the analysis and conclusions of the staff report would not change in a substantive way. The revisions largely reflect adjustments to the consolidation of the fiscal data for 2003 across different parts of the general government, increasing both consolidated revenues and expenditures by about 1.2 percent of GDP, while changing the balance by only a very small amount (to 5.9 percent of GDP from the preliminary estimate of 6.0 percent mentioned in the staff report). The revised projections for 2004 show roughly unchanged total revenues and expenditures—and therefore an unchanged deficit—although the composition of these components differs from the budget projections in the staff report.

• Nevertheless, staff still sees risks to achieving the 2004 fiscal deficit target, consistent with those elaborated in the staff report.

Anti Money Laundering and Combating the Financing of Terrorism (AML/CFT)

4. The authorities updated staff on the status of AML/CFT legislation and its enforcement. In June 2003, the new AML Act came into force. Its key features include: (i) bringing rules for lawyers and public notaries fully in line with the second AML Directive of the European Union; and (ii) introducing re-identification and verification of identification documents of existing customers of financial sector institutions. Other developments include an increase in the number of suspicion reports, and an increase in the number of staff of the Financial Intelligence Unit. Hungary was removed from the FATF monitoring list in June 2003.

Table.

Hungary: Consolidated General Government, 2003-04

(ESA-95 Basis)

Source: Hungarian authorites.

^1/Including social security contributions.

Table.

Hungary: Consolidated General Government, 2003-04

(ESA-95 Basis)

					2003 Revised	2004 Revised budget
(In percent of GDP)
Total revenues					44.9	43.7
	Current revenues and current grants				43.2	42.3
		Tax revenues total			39.3	39.0
			Taxes on income		9.3	9.0
				Personal income tax	7.1	6.9
				Corporate income tax	2.2	2.1
			Social security contributions		12.6	12.4
			Taxes on goods and services		15.9	15.6
				of which: VAT	9.2	9.7
			Other taxes		1.5	2.0
		Current non tax revenues total			3.7	2.8
			Of which: interest		0.2	0.3
		Current grants			0.2	0.5
	Capital revenues and capital grants				1.1	1.4
		Capital revenues			0.9	0.8
		Capital grants			0.2	0.5
	Non-allocable revenues				0.6	0.0
Total expenditures					50.8	48.3
	Current expenditures and current transfers				44.9	42.2
		Goods and services			19.6	17.3
			Of which: wages and salaries 1/		12.4	11.9
		Transfers			21.2	20.5
			Of which: to households		16.5	15.9
		Interest payments			4.1	4.4
	Capital expenditures and capital transfers				5.6	6.0
		Capital expenditures			3.8	3.7
		Capital transfers			1.8	2.3
	Unallocable expenditures				0.3	0.2
		Of which: General government reserves			0.0	0.2
General government balance					-5.9	-4.6
Net interest					-3.9	-4.1
Primary balance					-2.1	-0.5
Memorandum items:
	GDP, in current prices (forint billions)				18,574	20,380
	Gross debt (in percent of GDP)				59.0	59.5

Source: Hungarian authorites.

^1/Including social security contributions.

View Table

Table.

Hungary: Consolidated General Government, 2003-04

(ESA-95 Basis)

					2003 Revised	2004 Revised budget
(In percent of GDP)
Total revenues					44.9	43.7
	Current revenues and current grants				43.2	42.3
		Tax revenues total			39.3	39.0
			Taxes on income		9.3	9.0
				Personal income tax	7.1	6.9
				Corporate income tax	2.2	2.1
			Social security contributions		12.6	12.4
			Taxes on goods and services		15.9	15.6
				of which: VAT	9.2	9.7
			Other taxes		1.5	2.0
		Current non tax revenues total			3.7	2.8
			Of which: interest		0.2	0.3
		Current grants			0.2	0.5
	Capital revenues and capital grants				1.1	1.4
		Capital revenues			0.9	0.8
		Capital grants			0.2	0.5
	Non-allocable revenues				0.6	0.0
Total expenditures					50.8	48.3
	Current expenditures and current transfers				44.9	42.2
		Goods and services			19.6	17.3
			Of which: wages and salaries 1/		12.4	11.9
		Transfers			21.2	20.5
			Of which: to households		16.5	15.9
		Interest payments			4.1	4.4
	Capital expenditures and capital transfers				5.6	6.0
		Capital expenditures			3.8	3.7
		Capital transfers			1.8	2.3
	Unallocable expenditures				0.3	0.2
		Of which: General government reserves			0.0	0.2
General government balance					-5.9	-4.6
Net interest					-3.9	-4.1
Primary balance					-2.1	-0.5
Memorandum items:
	GDP, in current prices (forint billions)				18,574	20,380
	Gross debt (in percent of GDP)				59.0	59.5

Source: Hungarian authorites.

^1/Including social security contributions.