IMF delegation’s report on the economic health of Hungary in 2012

The IMF delegation was back in Budapest, but the visit was not part of the non-existent official negotiations between the International Monetary Fund and the Hungarian government. It was simply a routine examination of the Hungarian economy. Every six months, according to an agreement signed after Hungary received a substantial loan from the IMF, the officials of the Fund have the right to assess the financial well-being of the country.

The delegation arrived on January 16 to look over the balance sheet of 2012 and to suggest steps to correct perceived mistakes in the economic governance of Hungary. Mihály Varga, the man in charge of the non-existent negotiations, told the press that “all talks with the IMF are after all about the loan guarantee Hungary would like to receive.” The Orbán government wants to have a financial arrangement that would allow them to pursue their uniquely Hungarian economic policies without anyone looking over their shoulder. They sure don’t want to have those pesky IMF officials poking around.

IMF-Hungarian government negotiations, January 16, 2012Photo László Beliczy / MTI

IMF-Hungarian government negotiations, January 16, 2012
Photo László Beliczy / MTI

Mihály Varga simply doesn’t understand why the IMF is reluctant to extend a loan guarantee to Hungary without no strings attached when, according to him, everything is swinging. The deficit is low, the government bonds sell well, the price of their credit default swaps is reasonable, and the Hungarian economy is stable. But, it seems, the IMF sees all this very differently.

The unofficial negotiations continued off and on throughout the two weeks the delegation spent in Hungary. For Varga the question was “whether the IMF is willing to accept Hungary’s current model of economic policy as the basis of negotiations or it insists that we change the structure of our economic governance.” The answer came on January 28. The IMF does not accept György Matolcsy’s unorthodox economic model, and it insists on a different course of action. If Hungary does not comply, there can be no question of a loan. Forget about a guarantee.

It is unnecessary to summarize the contents of the fairly lengthy IMF report here. It can be found on the IMF website. The gist of  the report is that “a new policy course is needed to deliver the required medium-term fiscal adjustment in a sustainable way to support growth and confidence, repair the financial sector, and promote structural reforms to boost the potential of the Hungarian economy.”

The weak performance of the Hungarian economy is due both to structural factors and to specific domestic policies. The IMF doesn’t share the Hungarian government’s claim that Hungary’s problems are due solely to the weak performance of the European Union as a whole. The report argues that the “increased state interference in the economy and frequent and unpredictable tax policy changes, particularly on the corporate sector, undermined private sector activity. This contributed to a negative feedback loop between slow growth, weak investment, bank disintermediation, and high public debt.”

If the current policies are continued, the IMF report predicts, the general government deficit will increase in 2013-15. The IMF, like most Hungarian economists, predicts that there will be revenue shortfalls. As a result, the deficit will be above the maximum 3% necessary to exit the European Union’s Excessive Deficit Procedure.

In addition, the IMF delegation was deeply concerned about Hungary’s potential growth. They predicted that growth, if there is any at all, will be in the 1.0-1.5% range in the next two years. In order to foster growth the IMF would like to see “increased policy predictability, a level playing field for all businesses, and structural reforms.”

The Ministry of National Economy immediately reacted to the IMF, but it was as brief as possible. It simply stated that according to the government the “Hungarian economy in fact is in a much better situation than is portrayed in the IMF’s report.” Moreover, “the steps taken by the government are not ad hoc but will remain permanent features of the system.” Well, if this is true, the Hungarian economy will be unlikely to recover in the medium term.

The government’s take on the country’s economy is optimistic, and the ministry of national economy contradicts the IMF assessment on several points. For example, they do not admit that government policies contributed to the recession. In a report of its own, the ministry blames the problems on outside factors: recession in the euro-zone, the drought that produced a poor harvest, and the economic decline of several foreign businesses (Nokia, Flextronics, for example). Otherwise, they list a number of reforms the ministry considers “structural.” Among them, taxation, changes in education, healthcare, pensions, public transportation, and solving the problem of municipal indebtedness. The document can be read in its entirety on the government’s website.

Mihály Varga tried to shift the blame for the sluggish Hungarian economy to the European Union. After all, Hungary was forced by the EU to lower the deficit and to put into place austerity measures that resulted in economic contraction. He also insists on continuing the exorbitant tax levies on banks that has further stifled economic growth because of the lack of credit from banks that can barely keep their heads above water.

In contrast, most of the media described the IMF report as “devastating.” HVG emphasized the real possibility that because the IMF-EU delegation predicts a higher than 3% deficit  Hungary might remain under Excessive Deficit Procedure. That would be very bad news for Hungary. I assume that one of the topics José Manuel Barroso and Viktor Orbán will discuss in Brussels tomorrow will be the delegation’s critical remarks about Hungary’s economic policies.

On the right, the economist György Barcza, who used to work for ING Bank (2001-2012) but moved over to the pro-Fidesz Századvég last November, was the first one to raise his voice against the IMF’s critical report. He claimed that “the IMF didn’t dare tell the truth.” The members of the delegation criticized but did not say what remedies the Hungarian government should implement.  Barcza claimed that if the tax levies on banks and on international companies were lifted the budget would lose about 800 billion forints. In order to make up this sum the government would have to take drastic measures. It would have to introduce a 0.5% property tax. The tax rate for those who earn more than 4 million forints per year would be 50%. In addition, the government would have to stop the generous tax rebate to which families with three or more children are entitled.

Well, I’m no economist but I have other ideas that might solve the problem of the missing 800 billion. For example, the government could sell its MOL stock for which they spent billions, not in forints but in euros. I would suggest getting rid of the recently purchased shares in Rába. They shouldn’t have spent billions on a Hungarian-language university in Romania.  They shouldn’t have spent 13-14 billion forints on TEK (Terror Elhárítási Központ). It was really not necessary to spend 2-3 billion on a 400-member guard for the parliament. They shouldn’t be spending billions on recruiting voters abroad. Hungary doesn’t need several new football stadiums, each costing 10-20 billion forints.  And what about taking over the loans of municipalities that under Fidesz leadership piled up debts they can’t pay? I’ll bet that one could easily make up those missing 800 billion forints.

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Paul
Guest

You only need to look at that picture and the acres of space between the tables, to see how relations between Hungary and the IMF are!

As for the existing IMF loan – a year or two ago, there was much talk on here about the need for the government to raise money because that loan (or part of it?) was due to be repayed soon. Has that happened yet?

Member

Paul :
You only need to look at that picture and the acres of space between the tables, to see how relations between Hungary and the IMF are!

Exactly! This was my first thought too! I’m no expert on protocol but is this normal to seat the delegations 20 yards apart? Seriously. Can they hear each other? It must be like “50 billion?” “Yes, 60 billion … whatever …”.

Chris Fekete
Guest

I enjoyed reading the final comment in the IMF report, “The mission team is grateful to the authorities and other counterparts met during our stay in Budapest for their hospitality and frank discussions. The mission collaborated closely with a parallel mission from the European Commission.” Sounds like diplomatic code for “you can’t fool us despite copious amounts of free pálinka”!

petofi
Guest

Is there a Goebbels University hidden somewhere in the suburbs of Debrecen?

I ask because Hungarian, Fidesz politicians obviously believe that the bigger the lie the more likely it is to be
believed (at least, by the ‘sheep’ they call citizens).

Minusio
Guest

This government can’t be helped, and you can’t get rid of it.

Their main financial problem is the so-called flat tax of 16%. Actually it isn’t that flat. But it resulted in huge losses in income for the government. No flat tax survived in any country for more than a few years. The reason is that the basic assumptions are flawed. The result is simply that better than average earners pay less (but, shame on them, they don’t eat more than one steak a day although they should and they don’t invest because they wouldn’t know in what) and the rest of the population has to put up with “fees” getting higher everywhere and paying the highest VAT in Europe. But figures still don’t add up.

petofi
Guest

Listening to Fidesz ‘interpretations’ of the IMF report is eye-popping–the nerve of such blatant lies and accusations of foreign mis-interpretation. Thus the creation of villainous outsiders attacking the valiant Hungarians.
Hungarians down the rabbit hole.

In fact, in totaling up the ‘successes’ of Fidesz in the last two years, one can arrive only at this–the creation of Sycophant’s Heaven on planet Earth.

Turkmenbasi
Guest

The 2013 central budget allocates HUF 35bn less for the higher education than last year, while boosting the state support for soccer from HUF 7.8bn in 2012 to 15.8bn this year.

Clear priorities, indeed.

Go Videoton!!!! Go FC Felcsút!!!!!!!

Guest

London Calling!

Oh come on! Eva!

“……..the Hungarian economy will be unlikely to recover in the medium term.”

Only recently, Orban said that the economy will “soar” in the second half of 2013 – echoing Matocsy’s fairy tales.

We just have to trust and wait!

And Orban’s ‘bond’ sprees have only cost 2½ times more than if they had the IMF backstop.

And of course Matolcsy and Orban have insulated Hungary from the collapse of the EU.

And all of Europe are copying Hungary’s methods to save their own skins.

Oh ye of little faith!

Regards

Charlie

Member

Turkmenbasi :
The 2013 central budget allocates HUF 35bn less for the higher education than last year, while boosting the state support for soccer from HUF 7.8bn in 2012 to 15.8bn this year.
Clear priorities, indeed.
Go Videoton!!!! Go FC Felcsút!!!!!!!

Do not forget the 20+ billion spent to “restore” the square in front of the Parliament building as it looked in “1944”.

The support for Orban’s favorite sport is much higher if you add the missing tax revenue
oligarchs are allowed transfer to soccer.

Since the Fidesz takeover 2010, the support for higher education has been slashed by 40%. If you combine that with the media law, their aim is clear: people should become ignorant, uneducated and obedient.

Mr Jagland’s statement yesterday lent support to this policy.

LwiiH
Guest

petofi :
Listening to Fidesz ‘interpretations’ of the IMF report is eye-popping–the nerve of such blatant lies and accusations of foreign mis-interpretation. Thus the creation of villainous outsiders attacking the valiant Hungarians.
Hungarians down the rabbit hole.
In fact, in totaling up the ‘successes’ of Fidesz in the last two years, one can arrive only at this–the creation of Sycophant’s Heaven on planet Earth.

You have to expect Fidesz to spin this in their favor. It’s the job of the media and the opposition to not let them do that. But oh, we have an incompetent opposition distracted by infighting and problem with this thing called the media council which Thorbjørn Jagland no longer seems to have a problem with… hummm.

Ron
Guest

CharlieH :
London Calling!
Oh come on! Eva!
“……..the Hungarian economy will be unlikely to recover in the medium term.”
Only recently, Orban said that the economy will “soar” in the second half of 2013 – echoing Matocsy’s fairy tales.
We just have to trust and wait!
And Orban’s ‘bond’ sprees have only cost 2½ times more than if they had the IMF backstop.
And of course Matolcsy and Orban have insulated Hungary from the collapse of the EU.
And all of Europe are copying Hungary’s methods to save their own skins.
Oh ye of little faith!
Regards
Charlie

Okay first we had Lazar claiming by the middle of 2011 it was all done and we would live in paradise.Than it was 2012, now it is the end of 2013. I do not believe they talk about the Hungary people and/or nation, but about themselves.

Flaghirsch
Guest
You should be here in Hungary. I rarely listen to radio or tv, but when I drive or sit in a tax I listen to radio, various music channels. Whatever channel is on, the news sections however don’t deal with anything else than the “10% utility decrease”. “The government is fighting for the customers, against the utility companies.” Day after day these are the news. The unemployment ratio is “great and is imporving”. It does not matter which channel you listen to. The way the system operates is that if you get a radio license and you don’t want to end up like Klubradio, well, then you have to informally accept that the news editors have to be hired from a pool consisting of former trusted Fidesz newspapermen (formerly of Hirtv, Lánchíd Radio etc.). You get friendly suggestions for these positions from Fidesz-people operating around the media authority. Again, everything is only recommended. (Although they don’t even have to recommend that much, as most radio owners are really Fidesz-linked enterprises, that is how they got their license in the first place – the media strategy for Fidesz is paramount, in addition to control over the intelligence services and prosecution). So… Read more »
petofi
Guest

LwiiH :

petofi :
Listening to Fidesz ‘interpretations’ of the IMF report is eye-popping–the nerve of such blatant lies and accusations of foreign mis-interpretation. Thus the creation of villainous outsiders attacking the valiant Hungarians.
Hungarians down the rabbit hole.
In fact, in totaling up the ‘successes’ of Fidesz in the last two years, one can arrive only at this–the creation of Sycophant’s Heaven on planet Earth.

You have to expect Fidesz to spin this in their favor. It’s the job of the media and the opposition to not let them do that. But oh, we have an incompetent opposition distracted by infighting and problem with this thing called the media council which Thorbjørn Jagland no longer seems to have a problem with… hummm.

One suspects that the Viktator is putting the Azeri millions to ‘good’ use….

Kingfisher
Guest

When I was at Ferihegy early this month, I couldn’t help notice that there are Azerbaijan posters everywhere in the departure lounges, praising it as a destination!

Bowen
Guest
Flaghirsch : You should be here in Hungary. I rarely listen to radio or tv, but when I drive or sit in a tax I listen to radio, various music channels. Whatever channel is on, the news sections however don’t deal with anything else than the “10% utility decrease”. “The government is fighting for the customers, against the utility companies.” Day after day these are the news. The unemployment ratio is “great and is imporving”. It does not matter which channel you listen to. The way the system operates is that if you get a radio license and you don’t want to end up like Klubradio, well, then you have to informally accept that the news editors have to be hired from a pool consisting of former trusted Fidesz newspapermen (formerly of Hirtv, Lánchíd Radio etc.). You get friendly suggestions for these positions from Fidesz-people operating around the media authority. Again, everything is only recommended. (Although they don’t even have to recommend that much, as most radio owners are really Fidesz-linked enterprises, that is how they got their license in the first place – the media strategy for Fidesz is paramount, in addition to control over the intelligence services and… Read more »
Bowen
Guest

Kingfisher :
When I was at Ferihegy early this month, I couldn’t help notice that there are Azerbaijan posters everywhere in the departure lounges, praising it as a destination!

They have been there since at least the summer of last year.

Member

Expense summary of propaganda projects to be finished before the 2014 elections.

1. Debrecen soccer stadium = 12.5 billion HUF (town of Orban’s party deputy chairman)
2. Ferencvaros soccer stadium = 12 billion (to satisfy antisemitic football hooligans)
3. Felcsut soccer stadium = 3 billion (Orban’s villlage of birth)

4. Budapest Sports Hall (Tüskecsarnok) = 5.9 billion

5. Renovation of Vásárhely soccer stadium = 1 billion (town of Orban’s chief of staff)
6. Downtown building in the same town = 1.2 billion

7. Kossuth square at Parliament = 21 billion (resurrected Horthy & Hitler must feel at home)

8. Ferenciek square = 4.1 billion (renovation to prevent anti-government protests there)

9. Sausage park in Békéscsaba = 1.35 billion (to commemorate Orban’s participation in sausage stuffing there)

For a more complete list, whose projects add up to 200 billion, see
http://index.hu/belfold/2013/01/30/stadion_es_kolbaszpark_a_valasztasra/

Guest

@Flaghirsch: Exactly!

And TV news are not better, maybe even worse. My (Hungarian) wife just refuses to watch them, maybe once a week is the maximum that she tolerates.

At least we have the internet, so I’m better informed by reading here and bbj, portfolio etc …

Member

I went trough the list in the index and it seems that the 30% at least will be financed from EU monies, at least so they claim. Something is really fishy here. We are talking about several hundred millions of Euros.

But even with EU support the burden on the budget is horrible.

Somebody really should look at the companies that do the constructions. I’m guessing Simicska and Co. The “election gift basket” is one reason for this spending flurry. The other is the very likely the lost 2014 elections. They have to squeeze out the most before the next government steps on breaks.

Minusio
Guest

@ Mutt. “Next government”. What next government?

Kirsten
Guest

Flaghirsch, very interesting comment. But do people actually believe that everything is fine? I mean is the reduction in the price of utilities so important that they are willing to overlook other things? Or would you say that it is simply not talked about? I remember that I heard people say that they speak about politics only to people of which they know that they have rather similar opinions…

I know that it is a futile statement but reading this article of Eva, it is a pity that such obvious mismanagement of OV and Fidesz does not suffice to unite the opposition.

Paul
Guest

wolfi :
@Flaghirsch: Exactly!
And TV news are not better, maybe even worse. My (Hungarian) wife just refuses to watch them, maybe once a week is the maximum that she tolerates.
At least we have the internet, so I’m better informed by reading here and bbj, portfolio etc …

Wolfi, you are lucky. My wife (and all her relatives and most of her friends) take these ‘news’ services as gospel. (And then tell me I don’t understand or know nothing because I don’t live there.)

Unfortunately, I fear that my wife is more typical than yours.

Paul
Guest

Minusio :
@ Mutt. “Next government”. What next government?

It will be interesting to see, when the proverbial hits the fan and harsh measures are unavoidable, if the next government blames the previous one!

Minusio
Guest

@ Paul. As long as the FDI part of the Hungarian dual economy works, Orbánistan can limp along for quite a while, basically as Kirsten describes it.

Paul
Guest

https://www.facebook.com/we.friendsofhungary?ref=ts&fref=ts

Thanks for the link, Bowen. It’s quite chilling to read this in English. To know this sort of thing goes on is one thing, but to actually be able to read it engenders a whole new level of depression.

I suggest we all have a duty to get on this page and ask as many questions as possible.

Kirsten
Guest

Paul, it will depend on what type of government you get. With OV, I would not exclude even very “unorthodox” measures. He will maintain a minimum of social benefits such as “ulilities prices”, continue with his big projects, seize the central bank and finance the government with its credits, inflate the internal debt away, if he is “clever” repay beforehand some of the foreign debt from the currency reserves and then depreciate the forint. More serious governments could stop all these big projects and abolish the flat tax, and then see whether it is really necessary to adopt harsh additional austerity measures.

Bowen
Guest

Paul :
https://www.facebook.com/we.friendsofhungary?ref=ts&fref=ts
Thanks for the link, Bowen. It’s quite chilling to read this in English. To know this sort of thing goes on is one thing, but to actually be able to read it engenders a whole new level of depression.
I suggest we all have a duty to get on this page and ask as many questions as possible.

Be warned – if you try to comment on this Facebook page with anything other than praise, you’ll get a tirade of accusations that you are anti-Hungarian in return for your efforts.

Paul
Guest

Sorry, Kirsten, I was being facetious, I was assuming the next government will be Fidesz. In the UK (and I assume everywhere else) the incoming government always blames everything on the previous administration (because of “the mess we inherited”). I was just imagining who Orbán will blame in 2014 for the mess he inherits?

Paul
Guest

Minusio :
@ Paul. As long as the FDI part of the Hungarian dual economy works, Orbánistan can limp along for quite a while, basically as Kirsten describes it.

I’ve said much the same thing on here many times. Those who are hoping for Orbán to be removed via a collapse of the economy are going to have much longer to wait than they think.

But, of course, the result of this will be that the mess that the real ‘next government’ has to cope with in 5 or 10 (?) years time will be even worse. We could end up with a sort of double collapse – the economy collapses, resulting in a change of regime, but the mess left behind is so severe than any incoming government will not be able to deal with it, or the people won’t give them the time to, and this will lead to a second, more severe collapse. And not just economic this time.

Minusio
Guest

@ Paul. But we are in a minority. Most people don’t want to accept how clever and long-lasting this regime has set itself up.

As I also said before, I imagine some kind of “Arab Spring” in Hungary – rather later than earlier. But as the constitutionality of Hungary has been destroyed and a civic political culture never had a change to develop, Hungary’s further development might also follow the “Arab Spring” countries’: ideologues taking over, fighting in the streets, you name it, they’ll do it.

I thought the Meciar government in Slovakia was bad. It set the country back at least four years. Orbán is “bombing” the country back to the stone age. In Czechia they missed the chance to do something honourable – at least once. They mucked it up. Still, they are in another league when compared to Hungary.

Kirsten
Guest

He does not inherit a mess :-). If you consider this a mess, you are just not patriotic enough. And if there might be a small bit of a mess, this is because of the European crisis, the IMF, the capitalists or internal saboteurs. Paul, I am afraid, you have to get back to lesson 1. He apparently has even enough economists around who are willing to find his policies promising. I think he will (somehow) win in 2014, and sell this as proof of his successful policies – perhaps not in terms of income of the broad population but in taking over control by the nation of its economic fate. I better stop :-). (I am still under the impression of the Czech presidential elections and I can assure you that it was also quite a lesson in odd reasoning.)

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