European Commission officials welcomed Hungary's commitment to structural reforms but called for further details on deficit cuts in a statement on Monday, after conducting a mission in the country on April 4-8.
The mission, conducted in close cooperation with International Monetary Fund staff, was made to prepare the Commission's Spring 2011 forecast and to review recent developments and policy initiatives, the Commission said.
The Commission and IMF are mandated to continue the surveillance after the expiry of the EU balance of payments assistance to Hungary in November 2010.
The mission welcomed the announcement by the government in March of measures contained in a structural reform program dubbed the Szell Kalman Plan. But they expect the government to provide further details of the measures in Hungary's updated convergence program to be submitted to Brussels in mid-April, the Commission said.
"Based on this, an assessment will be made whether this is sufficient to ensure that the deficit remains below 3% of GDP in the coming years," the Commission said.
"I am pleased that Hungary is embarking on a strategy to consolidate public finances and to boost employment", said Olli Rehn, Commissioner for Economic and Monetary Affairs. "It will be necessary to ensure that the adjustment effort is large, frontloaded enough and backed by specific measures so that the excessive deficit can be sustainably corrected. I trust that the authorities will be ready to take additional measures should this not be the case already. In addition, care needs to be taken to provide a stable and credible environment for both domestic and international investors."
The EC-IMF mission welcomed Hungary's stronger-than-expected 1.2% GDP growth in 2010 and said the rate is set to double in 2011.
"In view of the fragile global financial market situation and the challenging external financing needs that Hungary faces over the coming years, prudent fiscal policy, a stable and credible investment framework, and a cautious financing policy will play an important role," the Commission said.
"The financial sector, as well as other extraordinary sectoral levies introduced last year, will help in meeting short-term budgetary commitments. However, Commission reiterates that these levies in their current form are not supportive of the country’s investment climate and growth," the Commission said.
A bank levy introduced in Hungary in 2010 took a big bite out of financial sector profits. Retail, energy and telecommunications companies were hit by crisis taxes levied on their sectors.
The Commission underlined "the need to limit the fiscal impact of any support schemes for existing borrowers in foreign exchange and welcomes the announcement of the authorities to consult the Commission on these matters." "Such ex-ante consultation should help prevent an infringement of EU law," it added.
The government is expected to take a decision on an assistance package for troubled borrowers with foreign currency-denominated loans within days, Hungarian Banking Association General Secretary Rezso Nyers said last Thursday.
Retail borrowers with Swiss franc-based mortgages, which had been more popular than forint mortgages before they were banned, saw their repayments rise as the forint weakened during the crisis, prompting Hungary's previous government to introduce a moratorium on evictions by lenders. The moratorium, which has been extended several times before, is set to end on April 15, 2011.