This paper discusses key findings of the Second Review under the Stand-By Arrangement for Hungary. All end-March 2009 quantitative performance criteria and the continuous performance criterion on nonaccumulation of external arrears were met, as well as the end-March indicative target on central government debt. The end-March structural performance criteria related to pension reform and government lending to banks were met. The structural performance criterion on amendments to the Financial Stability Act was not fully met but, on the basis of the corrective action taken, IMF staff supports the authorities’ request for a waiver.
The Executive Board of the International Monetary Fund (IMF) today completed the second review of Hungary’s economic performance under a program supported by a 17-month Stand-By Arrangement (SBA). The completion of the review enables the immediate disbursement of SDR 1.26 billion (about €1.4 billion or US$1.9 billion), bringing total disbursements under the program to SDR 7.58 billion (about €8.4 billion or US$11.7 billion).
The SBA was approved on November 6, 2008 (see Press Release No. 08/275) for SDR 10.53 billion (about €11.7 billion or US$16.2 billion). The arrangement entails exceptional access to IMF resources, amounting to 1,015 percent of Hungary’s quota.
Following the Executive Board’s discussion on Hungary, Mr. John Lipsky, First Deputy Managing Director and Acting Chair, stated:
“Weaker than expected external demand and tighter external financing conditions exacerbated the recession in Hungary. In these circumstances, policy settings have been revised to strengthen fiscal sustainability and preserve financial stability. More ambitious structural spending and tax reforms are under way to strengthen fiscal sustainability, allowing the partial accommodation of automatic stabilizers and an increase in the fiscal deficit target in 2009. The authorities’ commitment to the firm and timely implementation of appropriate policies is reassuring.
“Fiscal sustainability is being strengthened through structural spending reforms, while allowing an increase in the fiscal deficit in 2009, owing to the partial operation of automatic fiscal stabilizers. The permanent budgetary savings from expanded reforms to the pension system, social transfers, and subsidies are encouraging. These reforms, together with tax reform that will shift the tax burden from labor to consumption and wealth should boost labor participation and potential growth over the medium-term.
“The prompt implementation of the authorities’ revised program to preserve financial stability, including the careful monitoring of banks that receive government financial support and strengthening bank supervision, are important steps. It is recommended that the authorities explore institutional arrangements that would provide the financial supervisory agency with the necessary regulatory powers, and that remedial action and bank resolution frameworks be quickly strengthened.
“Monetary and exchange rate policy will continue to target inflation over the medium term, while being prepared to act as needed to mitigate risks to financial stability and avoid risks to destabilizing the exchange rate. Looking ahead, a further strengthening of investor confidence and a corresponding easing of financial strains would create room for interest rate cuts,” Mr. Lipsky stated.