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IMF mission chief calls Budapest talks "constructive"

An International Monetary Fund mission in Hungary had "constructive discussions" with authorities on issues related to financial assistance the country is seeking during a visit on July 17-25, mission chief Thanos Arvanitis said in a statement issued late Thursday.

"The IMF mission, jointly with its European partners, has had constructive discussions with the authorities on these issues. The dialogue will continue in the period ahead," Arvanitis said.

Arvanitis said Hungary faces challenges related to high public and external indebtedness, strained bank balance sheets, weak confidence, and elevated risk perceptions. He added that real GDP is expected to contract in 2012 and recover only modestly in 2013.

"Beyond the current cycle, historically low levels of private investment and labor participation cloud the growth outlook," he said.

He said maintaining macroeconomic and financial stability, while building the foundations for a more robust recovery, is the key challenge in the near term.

"Policies should therefore aim to advance the needed fiscal consolidation in a sustainable manner, restore the soundness of the financial sector, and set in place a more business friendly environment and promote structural reforms, building on the objectives of the original Szell Kalman [structural reform] plan," he said.

"The authorities’ commitment to the fiscal targets under the revised Convergence Plan in 2012-13 is welcome. However, greater focus should be placed on achieving a more balanced fiscal consolidation, shifting away from ad hoc tax measures towards streamlining public expenditures, while ensuring adequate support to vulnerable groups," he added.

He said additional measures will be necessary to achieve the government's deficit target in 2013 and put state debt on a firmly downward path.

Arvanitis said a smaller and more efficient state with strong and predictable policies would create better conditions for private-sector led growth, and reduce the tax burden over time.

He called the National Bank of Hungary's monetary policy stance "appropriate" and said the downturn in lending activity reflects mostly structural changes as well as recent policy actions.

"Reforms to restore banking system soundness in a more business-friendly environment are critically important so that banks can contribute to economic recovery," he said.

"Generating higher and more inclusive growth will require more emphasis on structural reforms. The focus should be on measures to encourage labor participation, advance competition, reform loss making state-owned enterprises, notably in the area of transport, and put in place a regulatory level-playing field for all companies," he added.