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IMF warns Hungary about relaxing deficit target

Raising the country’s budget deficit target for 2009 could hurt the economy, Iryna Ivaschenko, the representative of the International Monetary Fund (IMF) in Hungary, said in an interview with Bloomberg in Budapest on Tuesday.

An IMF delegation started a review of Hungary's compliance with the stipulations attached to a stand-by loan granted to the country last November on Wednesday, Bloomberg reported.

The IMF will be ready to discuss at the end of the year whether Hungary needs a new loan after the current one expires next March, Ivaschenko said, adding that Hungary, as an EU member, would first have to talk to the European Commission and then contact the IMF.

The IMF, the EU and the World Bank approved a combined €20 billion credit line to Hungary last November after the domestic bond market dried out last autumn as a result of the global financial crisis.

“Relaxing beyond reason the fiscal stance (from a general government deficit target of 3.9% of GDP) right now could do more harm to confidence, and as a result to the economy,” Ivaschenko warned, noting that confidence has grown in recent months.

In its fresh Inflation report released on Wednesday, the National Bank of Hungary said the 2009 deficit target may be overshot, at 4.1% of GDP, unless part of budget reserves are frozen.

In the spring IMF and European Union officials approved a government plan to raise the deficit ceiling from 2.9% of GDP this year to limit the need for further spending cuts, which Prime Minister Gordon Bajnai said would hurt the economy even more.

The IMF mission, which is expected to last about two weeks, will also assess what the government needs to do to keep its fiscal policy on track next year as it prepares the 2010 budget.

Bajnai, who is cutting spending by 1,300 billion in two years, is “committed” to meeting budget targets for this year and next, Ivaschenko said. The 2010 deficit goal is 3.8% of GDP.

“The 2010 budget is a crucial step,” Ivaschenko said. “There isn’t a lot of wiggle room in the budget if Hungary wants to preserve investor confidence.”

The country may opt to borrow from the IMF and the EU even after an international bond sale last month because it may be a “much cheaper” option, Ivaschenko said. Hungary raised €1 billion last month in its first international bond issue since the crisis. The IMF will be ready to discuss a new loan at the end of this year, she said.

Hungary has drawn €14 billion of the international loan as of the end of June, Finance Minister Peter Oszko has said. The IMF is providing $15.7 billion of the loan, with €6.5 billion from the EU and $1.3 billion from the World Bank.

The government has drawn 70% of the funds the IMF is providing and a “chunk of this money is sitting in the reserves” of the Hungarian central bank, Ivaschenko said. (Bloomberg-MTI Econews)