Country brief 2006 Updated September 2006
Hungary is an upper middle-income country with a population of 10 million and a gross national income per capita of US$10,050 in 2005 (GNI, Atlas method). The country has successfully attracted substantial inflows of foreign direct investment (FDI), built up a robust private export sector, and achieved solid economic growth with low unemployment. In its drive to join the European Union (EU), Hungary concentrated on completing reforms.The gap with the rest of the EU has narrowed, and additional advances are expected.
Yet in recent years, Hungary's economic performance has been mixed. Growth has strengthened and has become more balanced, and inflation has started to decline, but the fiscal and external positions are a source of concern. The budget deficit is around 8 percent of GDP, caused by public sector spending and tax reductions. The current state of public finances is undermining economic stability and growth prospects.
Hungary joined the World Bank in 1982. Since then, the Bank has financed 40 projects and loans for a total amount of US$4,248 million have been approved by the Board of Directors.
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Economy
Developments since transition
Hungary began its transition with some significant advantages over other Central European economies, such as higher living standards and a pragmatic economic policy initiated during the communist period. Soon after the change of regime, the country carried out structural reforms and stabilization measures.
By the mid-1990s, however, macroeconomic performance deteriorated, leading to unsustainable current account and fiscal deficits. The country responded with a second round of far-reaching reforms that included enterprise, banking, and public sector reforms. Structural reforms were complemented with a strong fiscal-stabilization package (1995-1998) and the maintenance of sound macroeconomic policies. Robust economic performance followed, with real GDP growth averaging 4.4 percent during 1997-2001.
Since 2000, economic policy priorities have shifted from structural reforms to rebalancing living standards and upgrading public infrastructure. Wages, pensions, and public sector investments have increased. This, together with some one-off spending elements, resulted in an increase in the general government deficit to over 8.5 percent of GDP in 2002. Output growth was driven mainly by private consumption. Despite some fiscal tightening in 2003 and a restrictive monetary policy, growth recovered from mid-2003 onward. In 2004 the deficit was reduced to 5.4 percent of GDP.
Recent economic performance
After moderate acceleration in 2004, real GDP slowed down slightly to 4.1 percent in 2005. The main driver of GDP growth was the strong performance in net exports and investment. Consumption increased by 2.3 percent in the last year, substantially below the pace of GDP growth. Due to intensified highway building, the expansion of construction activities surpassed growth in all other segments of the economy. Expanding external and domestic demand kept the GDP growth rate slightly above 4.5 percent in the first quarter of 2006.
Inflation slowed to 3.5 percent in 2005, thanks to smaller increases in indirect taxes and prices of food and regulated items, together with stronger exchange rate. Against the background of falling inflation, the central bank cut its policy rates by 350 basis points during the course of 2005. Current trends in headline inflation have been dominated by the disinflation effects of the cut in the top value added tax (VAT) rate from January. As a result, inflation declined to 2 percent in the first quarter of 2006 year-on-year.
In the first quarter of 2006, Hungary’s unemployment rate hit a seven-year high of 7.2 percent compared to the 6.1 percent registered in 2004.
Fiscal policy has slipped further, and the credibility of a new austerity program is fragile. The general government deficit reached 7.5 percent of GDP in 2005, substantially overshooting the initial 5 percent target. The deficit is expected to widen further to over 10 percent of GDP (including cost of pension reform) in 2006. A fiscal consolidation program proposed by the government in June 2006 contains exclusively short term measures. In the absence of long-term structural reforms, the burden on the budget appears unsustainable. The resulting lack of investor confidence is exerting major downward pressure on the Hungarian currency.
Challenges Ahead
The challenges ahead for Hungary include:
Fiscal consolidation
Healthcare financing reform
Public administration reform
Labor market reform
Social integration and poverty reduction
Back to Top World Bank Program
Program to date
- Landmark Projects
- More projects
When Hungary joined the World Bank in1982, the Bank’s program in the country focused on building the foundations for economic liberalization, expanding productive capacity (particularly in industry and agriculture), and modernizing infrastructure, including transport, energy, and telecommunications. During the 1990s, the Bank shifted the focus of its program to support macroeconomic and structural adjustment, human resource development, and institution building.
Bank support for EU accession was underpinned by the completion of a Bank study, “Hungary on the Road to the European Union” (November 1999). Advisory work, performed in collaboration with the European Commission, supported pre-accession institutional development in the energy sector. Work on social cohesion linked the Government with many partners in civil society. An updated assessment of poverty, which found that a core group of long-term poor might emerge in Hungary in spite of robust economic performance and EU accession, included an analysis of policy options to address this issue.
The Bank supported a wide range of institutions to foster agroindustrial exporting.
Read moreEnvironment. The ongoing Municipal Wastewater project is part of a €100-million (about US$128 million) investment aimed at reducing the pollution load in the Danube River Basin, strengthening compliance with Hungarian and EU environmental standards, and improving wastewater operations in water and wastewater utilities. A Global Environment Facility grant is helping to support a Nutrient Reduction Project as part of the government’s commitments to protect the Danube and the Black Sea.
Roma. The Bank is working with other development partners and the Government on its Roma Housing and Social Integration Program which supports local projects addressing infrastructure and housing, education, health, social protection and employment in Roma settlements. The Bank has also provided a grant to strengthen institutional capacity of the Hungarian Directorate for Roma Integration.
Transport. The Bank and the Government are in the initial stages of discussing assistance for the Ministry of Transport’s initiative to introduce a high speed train link between Ferihegy Airport and central Budapest.
Hungary is also benefiting from a number of cross-country analytical and advisory activities, including a programmatic study of public finance reform issues in the EU8 group of countries, a social inclusion report, EU8 Quarterly Economic Reports , and planned EU8 conferences and seminars on accounting, auditing and public private partnerships.
Impact on the ground
Regional centers for retraining adults established, vocational schools reformed, and a national student loan program developed.
Energy Sector strengthened and liberalized. Bank-financed projects helped establish a technical basis for interconnections with the West Europe electricity system (UCTE) and improved the environment performance of power plants.
Bus and tram system in Budapest reformed and upgraded.
Sewerage and wastewater treatment systems in two Hungarian cities (Budapest and Dunaujvaros) upgraded.
Two Hungarian cities incorporated into a network of reform-minded secondary cities in the Europe and Central Asia region, providing opportunity to share best practices at the municipal level.
The Government is delivering on its commitments under the Danube Conventions and other international agreements for the protection of the Danube River and the Baltic Sea .
NB: Lending is per fiscal year, July 1-June 30
Active Portfolio by Sector as of June 2006
(US$ millions)
The Country Aggregate Report provides more lending data for Hungary
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World Bank Office (in Slovakia):
Ms. Tunde Buzetzky:
tbuzetzky@worldbank.org
Tel: (421-2) 5752 6724
Fax: (421-2) 5752 6701
website: www.worldbank.org/hu
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