Hungary's Stabilization and Reform Yield Solid Results

• Pages: 230-232

Page 230

The following article is based on the recent Article IV discussions by the staff of the IMF's European I Department with the Hungarian authorities, and the Executive Board's first and second reviews under Hungary's stand-by arrangement with the IMF.

Macroeconomic conditions in Hungary have improved markedly since the beginning of 1995, when Hungary was faced with large fiscal and external current account deficits. The twin deficits, coupled with high levels of external debt, posed a threat to financial stability and sustainable growth. In addition, the government's commitment to structural reforms had dwindled, undermining the sustainability of competitive private sector activity.

Hungary's strategy is aimed at promoting export-led growth and nondebt capital inflows.

During 1995, in response to adjustment efforts initiated by the government in March 1995-and supported by an IMF "precautionary" stand-by arrangement (an arrangement under which the authorities do not intend to make any drawings) since March 1996-the economy started turning around. The twin deficits began to narrow sharply; structural reform regained momentum; and the stronger external performance-together with large privatization receipts from abroad-facilitated a sizable decline in external debt. Price developments have also been favorable; after showing considerable inertia over the previous few years, consumer price inflation began falling during the second half of 1996.

Inadequate Reforms Led to Major Imbalances

Compared to other formerly centrally planned economies in central and eastern Europe, Hungary entered the postcommunist era in a favorable position. While it retained central planning, its economic system had allowed for significant enterprise autonomy, resulting in few shortages. Aside from a history of progress toward economic liberalization in the structural area, Hungary's economy featured a less distortionary price system; a more stable international macroeconomic position; a smaller, though still dominant, share of external trade conducted within the Council for Mutual Economic Assistance trading bloc; a skilled labor force; and proximity to Western markets. In the early 1990s, however, Hungary's economy faced a number of external shocks that it could not address quickly.

The drop in output and revenues resulted in a sharp deterioration of the fiscal accounts in 1992...