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Gov’t measures “brave but risky”, says IMF delegation chief

Government measures announced till now are “brave but risky”, the head of the IMF's delegation to Hungary Christoph Rosenberg said at the close of consultations.

The purpose of the IMF delegation's visit to Hungary was to review the country's economic position and outlook together with the government and the National Bank of Hungary, Rosenberg said.

Hungary's government said earlier it would not renew its agreement with the IMF on a €20 billion financial support package reached at the height of the financial crisis in the autumn of 2008. The agreement on the IMF-led credit expired at the beginning of October.

Hungary is able to get its financing on the market, government officials have said.

The IMF delegation as well as the country's other partners believe the government's 3.8%-of-GDP general government deficit targets is achievable, said National Economy Ministry state secretary András Kármán. Information on government measures to reach the 2011 deficit target will be sent to the IMF in the coming weeks, he added.

The delegation said in a statement published on the IMF website that the government's economic program “includes several encouraging elements”, notably a determination to stick to deficit targets and reduce taxes on labor, but they were critical of some short-term measures. The program “relies to a substantial extent on temporary and distortive measures that may jeopardize medium-term fiscal sustainability, increase uncertainty, and ultimately harm growth,” the delegation said.

The delegation encourage the government to spell out “incomplete elements”, notably measures to permanently reduce state spending and improve the efficiency of public services.

The delegation also noted the importance of a cautious monetary stance, preservation of current financial stability arrangements, and progress on financial sector reform to support stability.

Government plans to make membership in private pension funds no longer mandatory for career-starters and to offer the funds' members the chance to return to the state's pay-as-you-go system “raises a number of concerns”, the delegation said. The measure would improve the budget balance without taking the necessary structural fiscal adjustment, and it would be a “significant step back” in the pension reform started in the late 1990s. The measure would reduce financial transparency, increase fiscal risk and could erode liquidity on the domestic capital market, hindering long-term growth by reducing savings, the delegation said.

Rosenberg said the IMF expects Hungary's GDP growth to reach 1% in 2010 and 2.5% in 2011.

The projections are an improvement over those in the IMF's fresh World Economic Outlook - 0.6% GDP growth for 2010 and 2.0% growth for 2011 - published on October 6.

Consumer price inflation is set to slow to around 3.75% by the end of 2010, but tax increases and other supply-side shocks will keep average annual CPI over 3.5% in 2011, the delegation said.

The government expects GDP growth to reach 3.0% in 2011, Kármán said.

Iryna Ivaschenko, who heads the IMF office in Hungary, said the IMF is waiting for a clear signal from the government that the recently introduced extraordinary bank levy is only temporary and is in line with European Union regulations.

The delegation said the bank levy - at 0.7% of GDP, three times more than the largest such tax elsewhere - was “harmful to the economy”. They warned that the tax has been fixed for 2010 and 2011 but “remains undetermined for 2012 and beyond”. The resulting uncertainty could lead banks to reduce the size of their balance sheets, squeezing credit and causing growth to slow, the delegation said.

“To minimize the prospect for adverse reactions from banks, we suggest that the government send a clear and credible signal that the levy will be substantially reduced and/or aligned with emerging EU standards after 2011,” the delegation said. (MTI – Econews)