The IMF’s Executive Board concluded its post-program monitoring of Hungary for the year 2010, and the report is less diplomatic than the usual IMF assessments. The IMF considers the government’s strategy “very risky” as Christoph Rosenberg, who is in charge of monitoring Hungary, told MTI yesterday. Rosenberg considered the plan to create new jobs important, but “on the data currently available this plan does not seem to stand on firm footing.” That’s why it is so important that the Hungarian government make clear what its reform plans are that would ensure sustainable economic growth. Rosenberg also wanted the Hungarian government to know that the IMF’s Executive Board is very concerned about the narrowing of the Constitutional Court’s competence in fiscal matters and the changes effected with the status of the Budgetary Council.
What did the Directors’ report say? According to them the Hungarian government’s “main challenge will be to establish a sustainable fiscal stance over the medium term.” However, in their opinion that cannot be achieved by the Hungarian answers to the problem. Because “while the recent tax reduction could improve competitiveness, it also entails a substantial fiscal cost. ” The Directors stressed that “measures taken thus far to offset this revenue loss, including levies on select industries, are in large part temporary and distortionary.” They also noted that “the unwinding of the defined-benefit private pension pillar, in particular, is a source of concern as it increases medium-term fiscal risks while reducing transparency.”
The IMF report also underscored the fact that there is still substantial slack in the economy, as evidenced by high unemployment. They predicted an economic growth of 1.1% this year and 2.8% next year. Compare that to the Hungarian government’s estimates of 2.8% for 2011 and 4.1% for 2012. While the IMF predicts only a 3.0% growth between 2012 and 2015, the Hungarian government is much more sanguine. According to Matolcsy’s ministry the GDP growth by 2014 will reach 5% and in 2015 it will be 5.5%.
The two estimates concerning inflation also differ greatly. This year the IMF predicts a 4.1% inflation while the Hungarian government is expecting only 3.0%. The IMF pointed out that with the boost from the expropriation of the private pension funds the deficit will indeed be 2.8% in 2011, but by 2012 the effect of the nationalized funds will dissipate and the deficit will be 5.2% of the GDP. By 2015 it will be 7.1% unless of course some drastic structural change is introduced.
Right after the IMF report was released MTI asked for a comment from the Ministry of Economics, but not surprisingly they had no comment. However, Matolcsy had a night to stew over it and he came out hitting. The ministry this afternoon put up its reply to the Directors of the IMF on its website. The announcement bears the title: “We are expecting self-criticism from the IMF.”
First of all, the Hungarian government points out that the IMF was among those financial institutions that didn’t signal the impending global financial crisis. This is an especially serious mistake when the IMF “has a special responsibility for the stability of the international system.”
Also “some modesty on the part of the IMF would be appropriate when in the second half of 2009 at the time of the preparation of the 2010 Hungarian budget the IMF didn’t notice or it didn’t dare to make public those facts that indicated that the Hungarian authorities overestimated the income side and underestimated the expense side. The IMF refused to acknowledge these mistakes until the very end of 2010.”
According to Matolcsy by the end of 2010 it was clear to everybody that “the figures were falsified” and instead of a budget deficit of 3.8% the real figure was “above 7.0%.” The IMF didn’t talk about this earlier and “it doesn’t mention it in this report either.” It is true that the IMF played a positive role in the fiscal rescue of the country, but “when it came to its part in the supervision of the budget it wasn’t up to the task.” Because of all this “we expect the IMF to exercise self-criticism.”
Matolcsy has some harsh words about the IMF’s concern over “the de facto nationalization” of the “compulsory private pension funds.” According to the Hungarian minister in charge of economics those who made the decision to move over to the state fund “did so on their own volition and therefore it cannot be called nationalization.” Of course, Matolcsy didn’t mention that the people’s move to the state fund was made under the threat of losing their accumulated and future contributions to the state pension fund.
The other complaints about abolishing the Budgetary Council and replacing it with a totally inadequate three-man board without a staff and enlarging the Budgetary Council of the National Bank in order to achieve pro-government decisions were brushed aside.
In brief, it was an impertinent letter that might make a great impression in certain parts of Hungarian society but will most likely further endanger Hungary’s standing in world opinion. It is one thing to make political hay at home with responses like this and quite another thing to bear the responsibility for the financial well-being of the country. But for both Matolcsy and Viktor Orbán political aggressiveness trumps diplomacy. I was watching the video of Orbán’s answer to criticism during the session of the European Parliament and paid some attention to Matolcsy’s reactions. Every time Orbán said something that I considered diplomatically inappropriate, Matolcsy smiled broadly and nodded in agreement. These two men found each other, but together they may lead the country to the precipice.