The International Monetary Fund (IMF) said in a report published late on Tuesday that the macroeconomic and financial policies of Hungary are proceeding according to plan, though the country's economic outlook has worsened due to a deterioration in the global environment and the fragility of its political system ahead of parliamentary elections scheduled for next spring.
The IMF report on Hungary derived the following conclusions with regard to the country's economy:
- Macroeconomic and financial policies are on track. The end-March 2009 quantitative performance criteria and indicative target, as well as the structural performance criteria related to pension reform and government lending to banks, were all met. The structural performance criterion on amendments to the Financial Stability Act was not fully met, but corrective action has been taken.
- Hungary's economic outlook has worsened due to a further deterioration of the global environment. With exports amounting to 80% of GDP and the close integration of financial markets, the fall in external demand and tight external financing conditions are leading to a sharper-than-envisaged economic contraction. As a result, tax revenue will be lower and credit quality will be worse.
Against this background, the policy settings under the program have been revised to strengthen fiscal sustainability and preserve financial stability:
- More ambitious structural spending and tax reforms are under way to strengthen fiscal sustainability, allowing the partial accommodation of automatic stabilizers and an increase in the fiscal deficit target in 2009.
- The revised program puts additional emphasis on measures to help preserve financial stability, including careful monitoring of support for banks, strengthening bank supervision, and improving the remedial action and bank resolution frameworks.
- Monetary and exchange rate policy will continue to target inflation over the medium-term while being prepared to act as needed to mitigate risks to financial stability.
- The fragility of the political situation presents implementation risks. In April, following the prime minister's replacement through a constructive motion of no confidence, a new government was formed. Parliamentary elections are scheduled for April 2010, but early elections are possible. To help foster broad-based ownership of the program, Fund staff have undertaken extensive outreach to the media and the political opposition, the IMF said.
The IMF, the European Union and the World Bank approved a combined €20 billion standby loan to Hungary last autumn as the global financial crisis hit the country.
In the light of a worse than foreseen recession, the IMF and the European Commission agreed during May consultations on the loan, that Hungary's ESA general government deficit target be updated to 3.9% of GDP for 2009, to 3.8% for 2010 and 2.8% of GDP in 2011. The deficit targets were upped from a 2.6% of GDP target this year, 2.5% next year and 2.2% in 2011 in the December 2008 convergence plan. (MTI-ECONEWS)