Hungary Country Brief
Overview
Hungary is an upper middle income country with Gross National Income (GNI) per capita of US$ 5,280. It is among the region’s most successful transition economies and will accede to the European Union (EU) in 2004. 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. Hungary has had a strong record of structural reform even before the change of regime. In its drive to join the EU, it has concentrated on completing the transformation agenda while establishing a sustainable, prudently-managed macroeconomic environment. The gap with the rest of the EU has narrowed and further advances are expected to continue.
Hungary began the transition with some significant advantages over other Central European economies, with higher living standards and a more pragmatic economic policy that was initiated during the communist period. Soon after the change of regime, the country undertook structural reforms and stabilization measures. By the mid-1990s, however, macroeconomic performance deteriorated, with the re-emergence of unsustainable current account and fiscal deficits. The country responded with a second round of deep and far-reaching reforms that included the enterprise, banking, and public sectors. Structural reforms were complemented with a strong fiscal stabilization package (1995-98) and the maintenance of sound macroeconomic policies. Robust economic performance followed, with real GDP growth averaging 4.4 percent over the 1997-2001 period.
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, has resulted in an increase in the general government deficit to over 9 percent of GDP in 2002. The Government is making efforts to decrease the size of the deficit by focusing on the rationalization of employment in the public sector, especially in the administration. In 2003, the deficit is expected to reach 6 percent, falling to 3.8 in 2004 if spending cuts are implemented. Structural problems in the economy are expected to lead to economic growth of some 3 percent in 2003 and 2004, which is well below Hungary's potential. The structural reforms which remain pending are notably in the financing of the health sector, in sub-national finance and capacity building. There is also a need to increase fiscal transparency and to bring overall budget deficits to sustainable levels.
Focus of World Bank Assistance
Hungary joined the World Bank in 1982. At that time, World Bank assistance to Hungary focused on building the foundations for economic liberalization, expanding productive capacity (particularly in industry and agriculture), and modernizing infrastructure (transport, energy, and telecommunications). During the 1990s, the focus of the Bank’s program shifted to support for 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 in collaboration with the EC supported pre-accession institutional development in the energy sector. Work on social cohesion linked together the Government and many partners in civil society. A poverty assessment update pointed to the likelihood that a core group of long term poor might emerge in Hungary in spite of robust economic performance and EU accession, and analyzed policy options to address this issue.
Hungary’s per capita income is still somewhat below the graduation threshold at which discussions to initiate formal graduation would normally commence. However, in light of the progress Hungary has made in completing the transition agenda, and its favorable access to capital market finance, the authorities have informed the World Bank of Hungary’s intention to enter into pre-graduation arrangements with the Bank. They have further indicated that they do not foresee borrowing from the Bank during the pre-graduation period. Bank analytical and advisory assistance to Hungary during this period will continue to be demand-driven and the graduation process will be based on the Bank’s framework for support to EU Accession candidate countries.
The Bank’s assistance program for FY03-05 will focus on a program of analytical and advisory activities (AAA) selected from the following priority areas:
Sub-national development. Hungary’s sub-national system requires further strengthening and reform, prior to EU accession, in order to receive and administer EU structural funds. The assistance program would help support the establishment of regions as effective intermediate layers of governance, with an appropriate alignment of functions and financing competencies between the central and sub-national government levels, as well as improve local financing and management capacity and expand public-private partnerships.
Energy. The Bank is hoping to continue support to help Hungary complete the energy policy requirements of the acquis communautaire, in the context of key reform provisions of the Electricity and the new Natural Gas Acts which are expected to be adopted in 2002.
Social exclusion and poverty. The program will help strengthen the Roma Secretariat established in the Prime Minister’s Office; develop financing mechanisms to ensure the sustainability of successful projects and pilots; and provide policy advice on specific sectors such as education and housing.
Health care financing. In response to the Government’s request, the Bank will provide support for the reform of health care financing to help ensure quality health services.
Environment. The ongoing Municipal Wastewater project is part of a Euro 100 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 the water and wastewater utilities.
Knowledge Economy. Developing the knowledge economy: e-Europe, e-government, e-commerce, enhanced research and development, innovation and education – will be a focus of future Bank activity in selected accession countries, including Hungary.
Center of Excellence. As part of the overall framework for Bank support to EU accession countries, Hungary would be one of the regional centers of excellence with enhanced interaction with other countries in the sub-region, in particular with Southeastern Europe, inter alia to learn from Hungary’s successful transition and convergence experience.
Impact on the Ground
Regional centers for retraining adults established, vocational schools reformed, and a national student loan program developed. Seven regional retraining centers for adults have been established, more than 100 vocational secondary schools have been reformed by developing new curriculum, and by providing equipment and training for teachers, and a national student loan program has been developed.
Energy sector strengthened and liberalized. In the Energy Sector, Bank-financed projects have helped establish a technical basis for interconnections with West European electricity system (UCTE), and in improving the environmental performance of power plants. In close cooperation with the European Commission, Bank technical assistance has helped liberalize the energy sector, establish a regulatory framework consistent with the EU energy acquis communautaire, develop a strategy for the liberalization of the Hungarian natural gas sector, and develop balancing market rules and ancillary services framework for the electricity sector.
The bus and tram system in Budapest reformed and upgraded. Transport infrastructure, most recently the bus and tram system in Budapest, has been upgraded with World Bank support. The Bank has also supported the reform of the Transport Sector.
Sewerage and wastewater treatment systems in two Hungarian cities being upgraded. The World Bank is helping the cities of Budapest and Dunaujvaros upgrade their sewerage and wastewater treatment systems to protect the environment.
Improved understanding of issues affecting the Roma minority. Working with partners, the World Bank is helping to improve the understanding of issues affecting the Roma minority living in Hungary and elsewhere. A Grant supports the Hungary-based Pakiv Foundation, a cross-country fund set up to provide income generating and employment activities for the Roma in Hungary, Romania, Bulgaria and Slovakia.
Two Hungarian cities join a network of reform-minded cities under the “Cities of Change” program. In partnership with the Bertelsmann Foundation, two Hungarian cities were incorporated in a network of reform-minded secondary cities in the ECA region. The partnership enables cities to share best practices in managing the transition to greater self-financing and program effectiveness at the municipal level.
Challenges Ahead
- Reform of health care financing
- Public administration reform
- Address social exclusion and the needs of Hungary’s long-term poor, particularly the Roma
- Transparency of fiscal accounts
World Bank Partners in Hungary
The World Bank’s overall key partner in Hungary is the Ministry of Finance.
The Bank’s support to Hungary complements the activities of the European Commission, European Investment Bank and the European Bank for Reconstruction and Development.
World Bank Lending to Hungary
Total IBRD Commitments from FY91 to FY03: US$ 1,991 million
(by fiscal year *, in nearest US$ millions)
 | up to 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | Total |
| Commitments | 1,330 | 293 | 336 | - | 32 | - | - | - | 1,991 |
| Disbursements | 1550 | 71 | 459 | 50 | 49 | 22 | 6 | - | 2,207 |
Total Commitments by Sector since 1991
(in nearest US$ millions)
* Fiscal year from July 1-June 30.
For more information please contact:
Tunde Buzetzky : phone (Bratislava) + 421 - 2 - 59 337 317
E-mail: tbuzetzky@worldbank.org September 2003
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