Brussels, 11 April 2011
Commission's mission to Hungary welcomes commitment to structural reform and calls for further details on deficit cuts
European Commission officials, in close cooperation with International Monetary Fund staff, conducted a mission from 4th to 8th April to prepare the Commission's Spring 2011 forecast and to review recent developments and policy initiatives. Commission and IMF are mandated to continue the surveillance after the expiry of the EU balance of payments assistance to Hungary in November 2010. They welcome the announcement by the Government of structural measures contained in the "Széll Kálmán plan" that should improve the sustainability of public finances. They expect the Government to provide further details in the Convergence programme due to be submitted to the EU in mid April. Based on this, an assessment will be made whether this is sufficient to ensure that the deficit remains below 3% of GDP in the coming years.
"I am pleased that Hungary is embarking on a strategy to consolidate public finances and to boost employment", said Olli Rehn, Commissioner for Economic and Monetary Affairs. "It will be necessary to ensure that the adjustment effort is large, frontloaded enough and backed by specific measures so that the excessive deficit can be sustainably corrected. I trust that the authorities will be ready to take additional measures should this not be the case already. In addition, care needs to be taken to provide a stable and credible environment for both domestic and international investors."
The EC-IMF mission reviewed the economic situation and welcomed that after the stronger-than-expected expansion of 1.2% last year, GDP growth is set to roughly double this year. Indeed domestic demand will contribute positively to growth while net exports grow, and unemployment will start declining. The current account continues to be in surplus although with the pickup of growth it may diminish somewhat. In view of the fragile global financial market situation and the challenging external financing needs that Hungary faces over the coming years, prudent fiscal policy, a stable and credible investment framework, and a cautious financing policy will play an important role.
The mission welcomed the "Széll Kálmán plan" to introduce structural measures on the expenditure side, including social and pension expenditures, but also savings in local government and the transport sector. Based on the specific measures to be announced in the coming weeks, it will assess its impact on the public deficit in 2011 and beyond, in the framework of the spring forecast that will be published on 13 May. It will also evaluate it further in the assessment of the Convergence Programme and under the Excessive Deficit Procedure. Noting that the transport and the local government sectors have been a source of budgetary slippages in the past, the mission welcomed the commitment to tackle these areas and stressed the importance of concrete restructuring plans.
The financial sector, as well as other extraordinary sectoral levies introduced last year, will help in meeting short-term budgetary commitments. However, Commission reiterates that these levies in their current form are not supportive of the country’s investment climate and growth. Credit dynamics are subdued in both household and corporate sector despite the economic recovery. Commission underlines the need to limit the fiscal impact of any support schemes for existing borrowers in foreign exchange and welcomes the announcement of the authorities to consult the Commission on these matters. Such ex-ante consultation should help prevent an infringement of EU law.
After the Council agreed on an EU medium-term financial assistance to Hungary of up to EU €6.5 billion in November 2008, the country received three instalments in the form of balance of payments loan: two instalments of €2 billion each, on 9 December 2008 and 26 March 2009, and a further €1.5 billion on 6 July 2009. In view of the improved access to market financing, Hungary did not draw on EU and IMF assistance upon the completion of the reviews in November 2009 and February 2010, and no review was concluded thereafter. Following the expiry of EU assistance on 3 November 2010, a post-programme surveillance framework has been put in place which foresees continued information flows and monitoring but less frequent review missions.