Hungary and the IMF: indebted future

10 July 2009 | Guest comment

By Zsolt Boda, Védegylet, Budapest, Hungary

In October 2008 Hungary borrowed €12.5 billion ($17.5 million) from the IMF. Together with €6.5 billion from the EU this has increased the GDP to foreign debt ratio to almost 80 per cent, destroying the Hungarian dream of joining the euro-zone in the foreseeable future and putting a huge burden on our future.

Hungary certainly has deep economic problems. In the past seven years, while neighbouring Slovakia grew by five to six per cent per year, Hungary experienced only two per cent economic growth while debt slowly increased. Liberal economists usually blame the relatively high redistribution rate and generous social spending as the main causes. While Hungarian social policy is more generous than others in the region, the economic slowdown can at best only be partially attributed to excessive spending. More importantly, the neoliberal development model was exhausted in the past years before the global crisis.

Like the others in the region, Hungary based its development on the availability of external capital: foreign direct investment and loans. This is largely explained by the lack of available capital in the post-communist countries, but it also reflects a policy choice influenced by neoliberal economic thinking. Unlike other Eastern European countries, Hungary inherited debt from the ‘ancien régime’, which amounted to 100 per cent of GDP. In the early 1990s, half of all foreign investment coming to Central and Eastern Europe landed in Hungary. However, the flow has slowed in the past decade, despite desperate efforts to maintain it. Combined with underdeveloped local enterprises this has inevitably led to economic slowdown.

In October 2008, speculation against the Hungarian forint threatened dramatic depreciation, which would have had tragic consequences for both the public and private sector (many households have either euro or Swiss franc loans). At the same time, a George Soros fund attacked OTP, the largest Hungarian bank, with unlawful methods according to the financial authority. The agreement with the IMF was designed to back the government’s efforts to stabilise the exchange rate. The IMF loan has had an important role in preventing the worst from happening, but approaching the EU could have been an alternate, perhaps less painful, solution.

The willingness of the EU and Western European countries to contribute has been limited. The new EU member states have to acknowledge once more that their wellbeing is not in the focus of the old member states; that European solidarity has strict limits.

Under the IMF loans, the Hungarian government committed itself to cutting public sector wages, pensions, social benefits, and other government spending. Some financial sector reforms were also promised.

Apparently, unlike in previous times, the IMF was not very strict in enforcing its conditions, as some items have already been softened. The most important target the IMF set was keeping the budget deficit relatively low, at 2.6 per cent of GDP. This is an important and quite demanding condition – the EU average now is about 6 per cent. This requires cutbacks in social spending and it limits the possibility of providing assistance to the struggling economy, which will shrink by 6 per cent this year. This is highly problematic: the already accepted social reforms are not well prepared, and the economy needs counter-cyclical measures in a recession period.

The IMF accepted the government’s argument that a strict fiscal policy cannot be maintained during the crisis and the budgetary deficit was allowed to be 4.6 per cent. The details of the new agreement are not yet known, but the minister of finance declared that a new tax on estates and municipal financing reform are included. The tax reform was already voted in parliament and its direction, reducing taxes on labour while increasing on consumption, seems to be acceptable. However all reforms need political consent as well as proper preparation.

The IMF seems to be modestly improving its flexibility and conditionality compared to its dreadful practices in previous decades. It is unclear if this is a temporary moment of self-reflection and self-restraint because of the crisis, or a new self-definition. If the IMF can limit itself to providing immediate help to countries in need, this is a role that can be accepted. The main problems – lack of transparency of the agreements, a still distinctively neoliberal vision of how economies work – are just as much, or rather more, attributable to the Hungarian government, as to the IMF. The deficits of democracy and poor economic governance in Hungary make our indebted future increasingly bleak.