IMF Executive Board Completes Fourth Review Under Hungary’s Stand-By Arrangement

This paper discusses key findings of the Fourth Review Under the Stand-By Arrangement for Hungary. All end-September 2009 quantitative performance criteria, the continuous performance criterion on nonaccumulation of external arrears, the indicative target on central government debt, as well as the continuous structural benchmark related to government lending to banks were met. Inflation in September breached the lower inner band of the inflation consultation mechanism. The structural benchmark on submission of legislation on strengthening the institutional framework for bank supervision was met with only a minor delay.

Abstract

This paper discusses key findings of the Fourth Review Under the Stand-By Arrangement for Hungary. All end-September 2009 quantitative performance criteria, the continuous performance criterion on nonaccumulation of external arrears, the indicative target on central government debt, as well as the continuous structural benchmark related to government lending to banks were met. Inflation in September breached the lower inner band of the inflation consultation mechanism. The structural benchmark on submission of legislation on strengthening the institutional framework for bank supervision was met with only a minor delay.

The Executive Board of the International Monetary Fund (IMF) today completed the fourth review of Hungary’s economic performance under a program supported by a Stand-By Arrangement (SBA). The completion of the review makes available SDR 725 million (about €788 million or US$1.15 billion), but the authorities do not intend to draw this amount. The availability of Fund resources will help to provide insurance against the impact of any unforeseen deterioration in external financing conditions. The total amount disbursed under the program remains SDR 7.64 billion (about €8.27 billion or US$12.11 billion).

In completing the review, the Executive Board also modified two performance criteria on the central government primary cash balance and net international reserves.

The SBA was approved on November 6, 2008 (see Press Release No. 08/275) for SDR 10.54 billion (about €11.5 billion or US$16.7 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, said:

“Consistent implementation of economic policies in line with the program over the past year has contributed to an improvement in Hungary’s external financing conditions. Reflecting this improvement, the authorities do not intend to draw the amount that would be made available upon completion of this review. The program continues to focus on improving fiscal sustainability and preserving financial stability, providing the basis for strong, sustainable growth over the medium term.

“Fiscal sustainability has been strengthened through structural spending reforms to the pension system, social transfers, and subsidies. The increase in the fiscal deficit in 2009 helped avoid exacerbating the economic contraction. At the same time, tax reform is shifting the tax burden from labor to consumption and wealth, which should boost labor participation and potential growth over the medium term. To put government debt as a share of GDP firmly on a declining path, strict expenditure control will be needed in 2010, and further measures will be required in 2011 to bring the fiscal deficit below 3 percent of GDP.

“The authorities have made tangible progress in strengthening the institutional framework for bank supervision. The upgrading of the Hungarian Financial Supervisory Authority (HFSA) to an autonomous agency will help preserve financial stability. Looking forward, it will be important for the HFSA to obtain the authority to issue regulations. The authorities remain committed to the reform agenda aimed at strengthening the remedial action framework and bank resolution regime.

“Increased confidence in fiscal sustainability has better anchored market expectations and helped to create room for cautious interest rate cuts. Looking ahead, monetary and exchange rate policy will continue to target inflation over the medium term, while taking into account risks to financial stability,” Mr. Lipsky stated.

Hungary: Fourth Review Under the Stand-By Arrangement, and Request for Modification of Performance Criteria
Author: International Monetary Fund