Bloomberg News

IMF Urges Hungary to Focus on Growth, Not More Austerity

October 04, 2012

The International Monetary Fund wants Hungary to implement “more balanced” policies that improve the growth outlook and doesn’t recommend austerity measures on top of the government’s planned 2013 budget cuts.

“We are not looking for more fiscal adjustment beyond what the government is already planning, there is no more austerity in our proposals,” Iryna Ivaschenko, the IMF’s representative in Budapest, said in an e-mailed response to questions. “But we think the adjustment can be achieved with more balanced measures, and more generally, we are looking for policies that can boost growth.”

Prime Minister Viktor Orban on Oct. 1 ruled out an IMF loan agreement that entails cuts in pensions, jobs or wages, conditions which last month he said were demands of international lenders. Hungary can finance itself through mid-2013 without bailout, or “with luck” even longer, Mihaly Varga, the government’s chief IMF negotiator, said in interview with the weekly Heti Valasz, published today.

Hungary, the European Union’s most-indebted eastern member, which is suffering its second recession in four years, requested aid in November as its credit rating was cut to junk. Talks for a loan of about 15 billion euros ($19.4 billion) were delayed multiple times because of Orban’s resistance to adhere to legal and economic conditions set by the IMF and the EU.

The IMF hasn’t set a date for resuming aid talks, spokesman Gerry Rice said. “We’re not advocating a tighter fiscal stance for 2013 than the government’s current target,” Rice said at a press conference in Washington today. The IMF wants to see “a balanced and sustainable package of measures.”

Possible Measures

The steps being considered by the government to prevent next year’s deficit from widening by 600 billion forint ($2.7 billion) include raising the value-added tax, imposing a transaction levy on central-bank deals, delaying the full introduction of the flat personal-income tax, and increasing the tax load of commercial banks, news website Origo reported, citing unidentified government officials and documents.

Investor confidence in the government’s commitment to reach an IMF accord has helped the forint recover this year after dropping 15 percent against the euro in the second-half of 2011, the most in the world. It has strengthened 10.3 percent this year, making it the best performing currency in the world.

The forint traded at 285.05 per euro at 5:55 p.m. in Budapest, compared with 285.97 yesterday.

2013 Shortfall

The Cabinet sent its policy proposals to the IMF last month, which include capping social benefits. The Washington- based lender sees Hungary 2013 budget deficit “well over” 3 percent of gross domestic product because of its lower growth projection than the government’s, Varga told Heti Valasz.

Varga said he was “personally” convinced Hungary needs an IMF agreement. Yet, Hungary wouldn’t face “hell” if aid deal failed, he said.

While Hungary is “flooded with offers” from investment banks to manage an international bond sale, the government shouldn’t issue foreign-currency debt yet, Varga told Heti Valasz.

Hungary’s Proposals

Hungary is ready to change some value-added tax rules, clamp down on the underground economy, cut red tape, cap family allowances and employee social-security payments and review EU development fund-disbursement rules, Varga said on Oct. 1.

That will probably fall short of IMF and EU expectations as the measures would do little to boost potential growth, Citigroup Inc. (C:US) said on Oct. 2. The government is trying to avoid an aid deal because structural measures that would be required would be “politically painful,” Budapest-based Citigroup economist Eszter Gargyan said.

Orban has used special taxes on the banking, energy, retail and telecommunication industries to plug budget holes, which along with the nationalization of private-pension funds damaged investor confidence, cut investments and helped push the economy into recession.

The government will probably have to cut its 1.6 percent growth forecast for next year, Varga told legislators this week. The economy shrank 1.3 percent in the second quarter from the year-earlier period.

Hungary needs to move away from “ad hoc” taxes and should create a more “business friendly” environment to boost growth and make budget financing sustainable, the IMF said in a July 26 statement after a week of talks in Budapest.

The government has said it can finance itself and would only need a precautionary loan from international lenders as a safety net to reduce country risk and cut financing costs.

The IMF reiterated that Hungary qualifies for a standby loan facility, which according to the lender’s rules comes with quarterly policy reviews. The government need not draw on the funds, the IMF said.

“Our Stand-by Arrangements could be treated as precautionary by the government,” Ivaschenko said.

To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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