Györgyi Kocsis
Growth vs. Equilibrium: Interim Reports
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In mid-1995 the economy veered away from the deterioration in equilibrium, what with a devaluation in March and the introduction of the supplementary customs duty in that same month; furthermore, the consumption tax measures proved effective," GKI reports. This research and analysis company outlines the process as follows: the government's measures prompted upwardly spiralling inflation, which in turn tempered domestic demand; thus imports declined while exports became more profitable, meaning that the foreign trade deficit is likely to be lower by the end of 1995 than last year. The decline in the deficit is, however, far from being in proportion with the drastic slump in imports; the rate of increase for exports, various forecasts tend to conclude, will have fallen by nearly half since last year. "A supplementary import intensivity has built up in the Hungarian economy since 1992 to the tune of some $3 billion," observes Kopint, offering a possible explanation. An in-depth analysis of the country's imports leads Kopint to conclude that the "structural import surplus" cannot be attributed solely to consumption, nor to investments alone, nor for that matter exclusively to exports, but rather to the aggregate effect of economic activities both newly emerged and hang-overs from the past; consequently, approaching these factors independently of each other will allow neither management of the problem nor any reduction.
In line with the tight relationship between the deficit in the current balance of payments and the foreign trade deficit, the former can be expected to drop more or less in harmony with the latter, although the current BOP deficit—thanks to economic growth—is, when expressed as a proportion of the GDP, considerably lower than last year's. The payments deficit will not be covered, however, by the projected $1.5 billion working capital inflow in the course of 1995; what remains will only add to the nation's stock of debt. (By just how much also depends on changes in cross currency rates.) All the economists have pointed to a new phenomenon, which may be interpreted in various ways: a rapidly growing proportion of the nation's stock of foreign debt—already one fourth of the total—is attributable neither to the government nor to the National Bank of Hungary, but to hard currency loans taken up by the corporate sector and by commercial banks. "The foreign indebtedness of the Hungarian corporate sector financed the 1995 economic growth," assert analysts at Budapest Bank, adding, "This restructuring hinders economic policy-makers when managing debt." They go on to say, "Ever-increasing corporate indebtedness promotes the effective functioning of the economy so long as loans finance production, which in turn assures repayment. Indications are that, having utilized the low cost of hard currency credit compared with forint credit, and further, the high returns on forint investments compared with hard currency investments, a portion of hard currency credit went not toward financing production but to financial investments made in forints." In other words, although a portion of foreign credit was indeed not taken up by the state, the banks and firms which did take up foreign credit did so with an eye toward speculation, using it to purchase government securities; thus the money was, after all, absorbed by the state.
Hungarian economists are generally not in complete agreement as to just how strong the relationship is between the current balance of payments and the position of budget equilibrium; still, along with the former, the latter is also expected to have improved considerably in 1995—more or less as planned in the supplementary budget. This is happening even though the bulk of the social spending cuts originally built into the Bokros package were rejected by the Constitutional Court, to the applause of numerous interest groups; the other scale on the balance was pressed down, and firmly at that, by the extra revenues brought in by the supplementary customs duty—which can in no way be termed a liberal economic measure—and which played a key role in spurring 1995 inflation, even though it drew relatively little public opposition. "As regards the position and financing of state expenditure, the concern over hard currency privatization revenues is entirely unwarranted," Kopint economists note. They explain, "It is not the function of these hard currency revenues to finance state expenditure and possible supplementary imports, but rather to expand the country's hard currency reserves and reduce the net national debt."
From the latter point of view, however, it does indeed matter quite a lot just how close to the projected Ft150 billion in revenue the government closes the year with; alongside the import slump, the other conspicuous macroeconomic development of 1995 has been a structural change in the budget deficit. The deficit arises entirely from internal debt-servicing—from payment of interest and repayment of loans—while the primary balance, once debt-servicing is removed, is in surplus. Kopint analysts are convinced the government has overshot the mark in their projection of the primary surplus for this year and especially for 1996. "If we assume that the issuing of money has not been a factor in budget financing—as was more or less the case in 1993 and 1994—then even a two per cent primary surplus would be sufficient to stem the increase of the national debt/GDP ratio," they assert. They go even further at Kopint, where they conclude, "If economic growth already underway is indeed blocked by the economic policy drive to achieve a sizable primary surplus at any cost, both the primary surplus and GDP as calculated in real terms will be less than projected by economic policy-makers; in this event the debt/GDP ratio would not diminish, but on the contrary, grow."
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Projections on the Performance of the Economy
(as percentage of previous year)
Forecast for 1995
