IMF `Needs to Change Position' on Hungarian Budget Deficit, Varga Says

The International Monetary Fund “needs to change its position” on Hungary’s budget gap, which may be twice the target approved by the lender for this year, said Mihaly Varga, an economy official in the new government.

A deficit estimate of between 7 percent and 7.5 percent of gross domestic product is “realistic,” Varga, who leads an economic fact-finding commission, said on M1 television yesterday. Hungary pledged to keep the shortfall within 3.8 percent. The IMF must recognize the situation, Varga said.

Prime Minister Viktor Orban’s government, which took over on May 29 after winning elections last month, seeks to accelerate growth after the worst recession in 18 years over fiscal consolidation. Hungary agreed to spending cuts in 2008, when it obtained a 20 billion-euro ($24.5 billion) bailout from the IMF, the European Union and the World Bank.

“We think this figure is aimed at purely communication purposes,” Janos Samu, economist at Concorde Securities in Budapest said in a note today. “Emphasizing the emergency situation in public finances could be a tool to soothe public expectations for significant tax reductions.” Samu estimates this year’s budget shortfall at 5.7 percent of GDP.

The forint firmed 1.2 percent in the past week versus the euro and was trading at 275.07 per euro at 9:42 a.m. in Budapest from 274.77 late on May 28.

Market Effect

Analysts including at Nomura International, Barclays Capital, and Capital Economics last week said looser fiscal policy may weaken the forint and government bonds at a time when the euro area’s debt crisis prompts countries from Greece to England to cut spending to defend the euro.

Varga’s estimate is more than Economy and Finance Minister Gyorgy Matolcsy’s, who this month said the shortfall may be less than 6 percent for this year. Varga’s commission will publish a preliminary report in a week.

The fact-finding panel was formed during the election campaign, when Orban’s Fidesz party claimed that the 2010 budget was based on false data. The outgoing Socialist-backed Cabinet rejected the allegation. The IMF and the EU, which hold quarterly audits of the budget, have said this year’s target of 3.8 percent is “attainable” with additional measures.

Hungary reduced its budget gap to 4 percent last year from 9.3 percent in 2006, the widest in the EU at the time. The European Commission gave the country until 2011 to meet the 27- nation bloc’s 3 percent limit.

Narrowing the shortfall to within that ceiling is also a requirement for euro adoption, which Hungary failed to meet every year since joining the EU in 2004. Varga said he “hopes” that the new government will be able to set a target date for the switchover this year.

To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net.

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