András
Schweitzer
The Forint Story
Trading in the Hungarian forint, which
has conformed to the IMF's convertibility criteria for the last four and a
half years, became subject to even fewer restrictions in the middle of June
2001. The forint, when introduced as a currency in 1946, replacing the pengoy
after an unprecedented hyperinflation, could be converted at most as an arithmetical
exercise. What follows is a short history of the currency in its relation
to others, not to mention some episodes dealing with the appropriation of
gold and foreign currencies, IKKA gift packages, BC foreign currency accounts,
which were the legal way whereby a very few could purchase Western goods and
to keep convertible (hard) currency; illegal "pocket" trade within
Comecon and "Operation Gorenje", and the 1988–89 westbound rush
of Hungarians to buy what was missing from Hungarian shops or was cheaper
in the "free world".
Though the exchange rate of the forint was fixed at its introduction on
1 August 1946, it had nothing to back it. One forint was declared to have
the value of 0.07575 grammes of gold, and hence it followed (via the gold standard
of other currencies) that a US dollar was valued at HUF 11.7, a Deutschmark
at HUF 0.12, a Schilling at HUF 0.17, and a pound at HUF 29.3. (One rouble
cost, on a similarly theoretical footing, HUF 13.) The main function of these
quasi- exchange rates had to be sought in terms of the 1946 decree, which compelled
Hungarian citizens to "deposit" their gold and foreign currencies
with the Hungarian National Bank (MNB), which at these rates credited them
with a total of HUF 332.1 million.
The foreign currency regulations of 1950 produced a completely centralized
system, insisting that "the Hungarian National Bank manage[d] the gold
and foreign currency reserves of the country, participate[d] in the development
of the exchange rate policy, quote[d] currency exchange rates, and regulate[d]
foreign currency transfer connected to export and import transactions."
Sportsmen, artists and the diplomatic corps could apply to purchase currency
when travelling to Western countries, and then-if the request was granted-apply
for a passport to the Ministry of the Interior. Foreign trade firms, initially,
had to sell the foreign currency received for exports, or buy foreign currency
for authorized imports, at exchange rates designated for each article and
contract. The situation became somewhat simpler in 1957, when the same rate
started to apply for a whole group of commodities. From 1962 on, law-abiding
citizens (who conformed to the regime) could lay their hands (anew) on a pitiful
sum of hard currency, after a tourist allowance was introduced, allowing them
a limited amount every three years.
The world passport permitted a month's stay in the West. Most tried to make
the best of this brief visit, since the regulation prescribed a three year's
wait till you were given another chance. You could purchase $70 worth of foreign
currency to go with this passport and that was precious little in the sixties,
even given that West European railway tickets could be bought for forints
at home. There was nothing to correspond to the American Europe on $5 a Day,
but had there been a travel guide titled Abroad on Less than a Daily Two and
a Half Dollars, it would no doubt have mentioned unforgettable liverpaste
tins, sausages and Vietnam cans of duck, Italian hostels that really could
not be described as "all mod. cons.", and the many visits to distant
kin and scant acquaintances designed to reduce costs.
With Kádár's 1968 economic reform, currency rates in trade were unified, on
the basis of the average amount of forints spent on acquiring a unit of foreign
currency. The quasi-rate for the US dollar was declared to be HUF 60, that
of the rouble HUF 40, and companies "producing" more expensive dollars
were "compensated" from the profits of the more efficient ones.
Meanwhile, Budapest had become the West for other Communist countries. Polish
tourists with bundles of zlotys, looking for the only bank where they could
be converted, were not an uncommon sight in the seventies. There was good
reason why this exchange bureau was not located within easy reach of the railway
stations: the Hungarian state purposely restricted the acquisition of forints
by tourists from the other Communist countries. Comecon countries had a common
exchange rate policy and Hungary was often compelled to devaluate the forint,
as the commodities in the basket used to calculate the exchange rates were
found to be too expensive. Yet Poles, Romanians or East Germans were happy
to buy Hungarian goods even at such prices, so Hungarians could well have
reacted to criticism of their prices with the bon mot of the merchant in the
joke: "when we've run out of it too, we will also be ready to lower our
prices".
What's more, a wider range of goods were available in Hungary in certain shops
than first met the eye. Currency sent from abroad by relatives could be spent
on luxury items such as coffee, chocolate or nylon stockings in specialized
state-owned IKKA stores. Those few who were privileged to regularly travel
to western countries (diplomats, foreign traders, academics) kept their hard
currency in "BC accounts," or bought whisky, tape recorders, Swiss
chocolate, etc. in the "diplomats' store" in the centre of Budapest.
Despite penalties and searches, Hungarians travelling to the West in the eighties
always took more foreign currency with them than their allowance: some in
their underpants or socks, some in rolled-up shirt sleeves, the more inventive
taped banknotes onto the sliding door of the train compartment, so customs
officers in the doorway-or rummaging in luggage or under the seats- would
not find them. Incidentally, the forint, which could only be taken out of
the country in limited amounts, was not worthless paper everywhere: on Vienna's
Mexikoplatz, one could buy quartz watches, calculators or headphones for forints,
(not to mention that reputable banks in the centre of Vienna would buy "smuggled"
forints at somewhat lower than half the rate set by the Hungarian National
Bank). In Poland, Hungarian currency bought fine pullovers (ten for the price
of one back home), and this was a time when a few dollars exchanged on the
black market for zlotys bought a Warsaw-Beijing air ticket.
In 1988 restrictions on how often one could go abroad were lifted, and passports
"valid for all countries" were issued, though the tourist allowance
was retained. "The Hungarians are Coming!" rang the alarm on the
front page of the Austrian weekly, Wochenpresse, on 11 November 1988. A regiment,
outnumbering even King Matthias's Black Army, was not long to besiege Vienna:
on the record-breaking day of 3 April 1989 alone, 114,000 Hungarian citizens
set out for the West, to return with 3,500 fridges, 4,000 televisions, 5,000
computer parts, 5,700 videos and 166 cars (HVG, 15 April 1989). Since the
amount of foreign currency per capita legally transferable from the country
was limited, this was probably the year when most grannies got to see Vienna-or
at least Shopping City Süd, Vienna's first huge shopping mall. Foreign currency
taken out of the country in 1988, estimated variously by Hungarian customs
and foreign observers, totalled between USD 2 and 5 billion, so in order to
defend the Hungarian monetary system, the tourist allowances were stopped
for months, which gave a new impetus to the black market. Laundering foreign
currency acquired from other than official sources caused no great difficulty:
currency could be legally received as a gift from foreign donors who were
not difficult to recruit for a fee of 100-150 schillings, and whose deposits
into the foreign currency
accounts were already "white". The foreign currency then could be
taken out of the country with a certificate from the bank.
The pace leading to convertibility quickened: "Thanks to the considerable
liberalization of domestic retail prices and of foreign trade, the forint
has become largely convertible with respect to most current business,"
said the June 1992 report of the Hungarian-International Blue Ribbon Committee,
a body of American, Australian, European and Japanese economists.
According to paragraph VIII of the founding document of IMF, countries joining
the organization undertake to guarantee that "in payments and transfers
concerning current business no restrictions shall be applied, or that such
restrictions shall not be applied without prior consent from the IMF."
This in effect means that the residents of a country have the right to buy
foreign currencies for payments connected with their current business-that
is, not necessarily to hold them-and that non-residents can acquire the local
currency for the same purposes. Hungary, which joined the IMF in 1982 because
of a deficit in the balance of trade, only offered to approach this criterion
continuously. Introducing IMF-standard convertibility for the forint was,
alongside stabilization, one of the key issues of the 1990-1994 government
programme. The absence of stabilization, however, would have made the introduction
of convertibility premature, which thus was effected only in January 1996.
What was left to be done? "The cabinet today decided to lift all restrictions
on currencies, and to provide for the complete convertibility of the forint.
Thanks to liberalization, residents as well as non-residents-including individuals,
organizations and businesses, including the monetary transfer system-are free
to convert their forints into other currencies, and vice versa, not only in
relation to current business but also capital flow," claims the 5 June
2001 gazette of the National Bank.
What challenge this step represents to the country is yet to be seen. At the
beginning of the eighties, when partial convertibility was introduced, the
economist Mária Brüll made an observation that is probably still valid: "convertibility
is a great step forward, as well as a big challenge, for the home and foreign
economy of a country. We need to produce goods and husband our resources in
a way that we can always be sure to offer goods and services of good value
for the forints held by non-residents. And this includes-directly or indirectly-the
performance of each and every one of us, as we need to deliver our own performance
for our own money-our own guarantee, if you like."
The
step to normalcy
1 January 1988: A passport valid for travel to all countries is introduced;
the issuing of passports and the provision of foreign currency are separated.
Only those can take out their tourist allowance in 1988 who have not done
so in the previous two years. From 1988 the allowance can be used in instalments,
the unspent amount can be paid back into the account, of which transactions
a "currency record" is kept. Banks can create their own rules for managing
foreign currency accounts. To legalize foreign currency illegally kept at
home, travelling accounts can be opened, into which 75 per cent of such moneys
can be deposited until 31 March 1988 (the rest is bought by the banks for
forints). 15 June 1988: Private exporters can buy back 10 per cent of their export
income from the state, using forints. 1 January 1989: The BC account can be used to buy a car. The ratio of those
goods that can be imported without a special import permit increases to 40
per cent. The act regulating investments by foreigners in Hungary comes into
force, ruling that the permission of the Minister of the Economy and Trade
is needed only for the foundation of those companies whose owners are solely
or dominantly foreigners. 11 March 1989: The National Bank ceases its direct relations with firms,
including forwarding currency transactions. July 1989: The government authorizes the National Bank to alter exchange
rates within a +/-5 per cent band. 18 September 1989: Due to the great demand for convertible currency, the
tourist allowance is issued in cheques. 10 October 1989: Since Austrian banks charge 10-15 per cent for the handling
of cheques, tourists travelling to Austria can buy 500 Schillings in cash. 3 November 1989: The regulation stating that the three-year tourist allowance
can be claimed on the first day of the three year period and deposited in
a foreign currency account, is abolished. 19 November 1989: The introduction of the four-year premium allowance system:
whoever claims their yearly $50 only in the third or fourth year is entitled
to a premium of $50 or $100, respectively. Foreign currency can be deposited
in foreign currency accounts without the need to certify its origin. 9 December 1989: Transactions on foreign currency accounts are no longer
restricted. 31 January 1990: The MNB allows six commercial banks to deal with foreign-trade-related
currency transactions. 1 January 1990: Firms are allowed to deal in any form of foreign trade,
and can buy an unrestricted amount of foreign currency necessary for import
and other expenses, but they still have to sell the foreign currency income
of their exports. August 1990: The National Bank stops quoting and dealing in currencies at
non-commercial rates. January 1991: Even companies with a completely or dominantly foreign ownership
can be established without a permit from the monetary authorities. "Rouble
accounting" disappears during the year. 9 December 1991: Travel agencies can buy and sell foreign currencies. The
currency basket now contains only two currencies, the dollar and the ECU. 16 December 1991: Hungary promises the EU that in the coming five years
it won’t introduce restrictions in its regulations of currency flow. 1 January 1992: According to the new act on the central bank, the organization
responsible for foreign exchange administration is the Hungarian National
Bank, though rules are still drafted in the Ministry of Finance, as the chief
monetary authority. 1 July 1992: Foreign trade contracts can now quote prices in forints. The
inter-bank foreign currency market is established, banks authorized to deal
in currencies do not need to sell their currencies to the state. Banks authorized
to do so can offer their services in any currency, and trade in currencies,
at any rate. 1 August 1992: HUF 10,000 can be taken out of the country without any special
permit. 2 August 1993: The ECU in the currency basket of the National Bank is exchanged
for the German mark. 22 December 1993: Hungary submits its accession request to OECD, its condition
being that no special permit be needed for current transactions of the balance
of international payments, and for capital movements for terms longer than
a year. 6 April 1994: Hungarian citizens can transfer foreign currency to a value
of a maximum HUF 20,000 to each other. 22 December 1994: Foreigners can exchange forints obtained through foreign
trade contracts for any currency. 12 March 1995: The Bokros Package [monetary restrictions, dubbed after then
Minister of Finance Lajos Bokros], is introduced, as a part of which the forint
is devalued the next day by 9 per cent. Four days later crawling-peg devaluation
is introduced, the value of which is 1.9 per cent per month for the first
half a year, after which it is reduced half-yearly. 1 April 1995: Entrepreneurs can open foreign currency accounts for foreign
trade transactions and to host loans in foreign currencies. 1 January 1996: A new, liberal act on foreign currency transactions comes
into force, after which everything is allowed that is not prohibited by particular
rules. Foreigners can still buy foreign currencies only with forints of "certified
origin." Hungarian individuals cannot keep accounts abroad, and many capital
movements still require special permits or need to be registered. Currency
worth HUF 100,000, and HUF 50,000 can be taken out of the country in cash.
Entrepreneurs can take out loans with terms shorter than one year only in
possession of special permits. 3 January 1996: The IMF declares the forint to be convertible. 1 July 1996: The private placement and purchase of OECD government bonds
and securities of companies of the highest credit rating, registered in OECD
member states, is no longer restricted. 1 January 1997: The tourist allowance ceases. Hungarian citizens can receive
in their foreign currency accounts incomes from businesses registered abroad,
from foreign securities and the selling or use of property abroad. Regulations
concerning the purchase of foreign securities are relaxed. 1 January 1998: Foreign companies can open branches in Hungary which count
as resident companies. Hungarians can buy all the securities of any company
resident in any OECD country. Companies and organizations can buy foreign
currency without limit, and not necessarily in connection with their business
deals. HUF 100,000 can be taken out of the country in cash. 1 January 2000. The euro is the only currency in the currency basket. 1 April 2001. The monthly crawling-peg rate is only at 0.2 per cent. 3 May 2001. A widening of the band within which the exchange rate of the
forint can move: now it can differ from the mid-point rate by +/- 15 per cent. 21 August 2001. The Monetary Council of the National Bank announces an end
to crawling-peg devalulation from 1 October 2001.
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