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Central Bank supervisory board chairman calls for new economic policy

Interview

Hungary needs a turnaround in economic policy to recover from the current difficult economic situation, it must fully comply with the European Union regulations, the tax system must be amended and the central bank act must be brought in line with expectations, business daily Vilaggazdasag said on Friday, quoting chairman of the National Bank of Hungary supervisory board Zsigmond Jarai.

Mr Jarai, who has recently stepped down as head of the Fiscal Council, told the paper that "the most important task is to carry out a comprehensive turn in economic policy, which I believe has already started". The facts that Hungary has contacted the IMF for financial assistance and the budget includes a fiscal tightening corresponding to 4-5 percent of the GDP are signs of this turnaround, Mr Jarai added.

A stabilisation move would probably immediately strengthen the forint, he said.

"It has become clear that markets do not tolerate unorthodox economic policy any longer," Mr Jarai added.

 The central bank act must be amended in line with the expectations, otherwise the central bank should be left to work even if one cannot agree with some of its steps", Mr Jarai said.

The tax system must also be changed because it has become too complicated. This new type of economic policy also requires changes in institutions and personnel and increased emphasis must be placed on financial control in the economy. "Politics should be pushed into the background in this area," he added.

The special taxes must be phased out as soon as possible, Mr Jarai said, administration burdens on Hungarian businesses must be reduced, and banks and the stock exchange must be re-activated.

When asked about reinstating a finance ministry, Mr Jarai said that was the authority of the Prime Minister and answered in the negative to the question whether he would accept an appointment as minister.

Commenting on the IMF agreement under preparation, Mr Jarai said "there will be an agreement. I consider the European Union a tougher case in a political sense because it will be necessary to comply with certain EU regulations. . . . in such a tight situation we cannot afford not to take fully into consideration the expectations. The new economic policy must hit a more conciliatory and open tone," he said.

Asked how it’s possible that the deficit changed so drastically in two weeks, Mr Jarai said "I have no idea what happened in concrete terms, but it also shows that the entire state apparatus must be placed on sounder professional foundations."

"A change in economic policy can potentially result in a rapid decrease in yield premiums on the government securities market", he said, calling the current high yield spreads unsustainable. "An agreement with the IMF and the EU would give impetus to this, but it would be even better if we were not waiting for instructions but instead voluntarily set out on the right path," Mr Jarai said, adding that "with the help of good economic policy, even a 80%-of-GDP state debt can be managed".

"It is clearly a lack of confidence that is behind our current high risk ratings," Mr Jarai said.

The current central bank reserves represent a secure level, he added. It is the National Bank of Hungary’s task to decide the necessary level of international reserves and called a discussion about the utilisation of these reserves by some politicians as highly unfortunate.

Commenting on the possibility of merging the central bank and the financial supervisory authority PSZAF, Mr Jarai said several arguments support a merger because the financial means to prevent a bank crisis are in the hands of the central bank but the supervisory authority has the information. However, "such laws should not be submitted in haste, without preliminary coordination, but they should be discussed with the central bank, the supervisory authority and the EU," Mr Jarai added.

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