HUNGARY: STRUGGLING WITH ECONOMIC ADJUSTMENT

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00287R001100920001-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 46
• Document Creation Date: December 22, 2016
• Document Release Date: July 12, 2010
• Sequence Number: 1
• Publication Date: November 14, 1984
• Content Type: MEMO

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DIRECTORATE OF INTELLIGENCE
14 November 1984
Hungary: Struggling with Economic Adjustment
Key Judgments
Budapest has addressed its serious hard
currency payments problems with a gradual and
measured adjustment program that relies on prudent
cuts in investment and imports while protecting
the consumer from a decline in living standards.
The Hungarians have been able to avoid more far-
reaching--and painful--austerity measures by
drawing on financial assistance from the West and
a special trade relationship with the USSR.
Because Hungary's new economic reform program will
not take hold for a number of years and financing
requirements will remain high for the rest of the
1980s, Budapest needs good relations with both the
West and the USSR if it is to avoid debt
rescheduling and a deeper austerity program.
The adjustment program has yielded a steady
but undramatic improvement in the current account
position without seriously disrupting the domestic
This memorandum was prepare y East European Division, 25X1
Office of EU70np-an Analysis, Comments an questions are welcome and should be
addressed to Chief, East European Division, Office of European 25X1
Analysis, 25X1
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economy. The investment sector has borne the
brunt of domestic adjustment, with cuts carefully
chosen to protect growth potential. Import cuts
have been modest and have not resulted in serious
shortages for either industry or the consumer.
The program has not, however, cut deeply enough
into domestic demand or led to enough export
growth to permit Hungary to put its financial
problems behind it. Moreover, even though overall
private consumption levels have been maintained,
many workers, especially in heavy industry, have
suffered a decline in living standards.
A major disappointment for the Hungarians has
been their inability since 1980--despite
devaluations and other export incentives--to
increase hard currency. ear-ning-s-.- ---ia_rd---c-urre-nEy----
export receipts have stagnated because of
unfavorable trends in world prices, Western
recession, and continuing problems with the
competitiveness of Hungarian products. A sharp
drop would have occurred without Budapest's
successful efforts to:
-- reexport to the developed West OPEC oil
purchased on barter terms;
-- take advantage of its special trade
relationship with Moscow to expand hard
currency exports to the Soviet Union; and
-- boost sales to LDC markets of machinery
and other products that do not meet
Western standards through better marketing
strategies and easier credit
arrangements.
Budapest has expanded its sources of funds by
joining the IMF and World Bank and by capitalizing
on its reputation for good economic management to
obtain substantial new lending from Western
creditors. While bankers remain reluctant to
increase lending to most East European countries,
Budapest has been able to obtain substantial new
credits that helped meet 1983 and 1984 financing
requirements.
In contrast to the other East Europeans, the
Hungarians realize that the long-run solution to
their problems is economic reform aimed at
improving economic efficiency, product quality,
and export competitiveness. The Hungarians are
committed to additional reform measures during the
next three or four years--in the areas of price
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and wage determination, industrial organization,
enterprise management, and taxation, credit and
banking policies.. They are likely to move
cautiously, however, because of the inevitable
conflict between the short-term need to solve
balance of payments problems and long-term
decentralization. These reforms, therefore, are
unlikely to have a significant impact_"
performance for at least five years.
For the next few years, therefore, Budapest
will have to continue to cut investment and hold
down living standards in order to meet its
demanding debt servicing schedule. During this
period, Hungary:
-- will remain heavily dependent on Western
credits;
-- will be extremely vulnerable to growth
trends in the West, world price and energy
developments, and the level of
international interest rates; and
-- will remain dependent on Soviet generosity
at a time when Moscow is insisting on
tougher trade terms and better quality
exports from all the East European
countries--including Hungary.
Because Budapest requires accommodation with
both East and West for its economic well being, it
will continue to walk a tightrope in its conduct
of foreign policy. The Hungarians, anxious to
protect their ties with the West from the chillier
East-West climate, will try to encourage dialogue
and ease tensions between the superpowers, and
will attempt to maintain an active schedule of
high-level visits with Western leaders and to
improve relations with Western bankers and
international financial institutions. They also
will try to oblige the West on many foreign
affairs issues when they believe they can do so
without incurring Soviet wrath.
But the West cannot expect too much from
Hungary in the way of direct defiance of strongly
stated Soviet wishes. The Hungarian leadership
not only sees Hungary as a loyal member of the
Warsaw Pact, with concomitant responsibilities,
but also fears losing Moscow's economic subsidies
and tolerance of their reform program.
Consequently, the Hungarians will respond to
Soviet concern about their policies by toning down
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their rhetoric and by sharply limiting any new
initiatives vis-a-vis the West. And, when the
Soviets insist op a particular Hungarian action--
such as joining the Soviet-led Olympic boycott--
Budapest will comply.
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Introduction
The Hungarians, ik our opinion, deserve their reputation as
the most skillful economic and financial managers in Eastern
Europe. Having anticipated the potential for trouble in the late
1970s, they began then to implement policies to try to stem the
deterioration in their external trade and financial accounts.
Hungary's balance of payments problems nonetheless intensified in
1981 as a result of a liquidity crisis precipitated by a pullback
in bank lending to Eastern Europe, recession in the West, and
Soviet oil cutbacks.
Hungary succeeded in staying afloat by tapping support and
credits from Western central and commercial banks and by joining
the International Monetary Fund. But the liquidity crunch
necessitated prolonging domestic austerity and foreign trade
adjustmegts while it also motivated Budapest to push ahead with
reforms. A l t h o u g h H u n g a ry ' s f i-n ant i -a-l- p-r-o b-+-emm s- a-r e- l es-s--s a r--i o u-s
than those of many LDC and East European debtors, Budapest's
strategy in resolving them has far-reaching implications for the
country's future political and economic stability, as well as its
relations with the Soviet Union and the West.
This paper examines shifts in Hungarian policies and
assesses where the burden of adjustment has fallen so far, the
role of economic reform in the adjustment process, and the
outlook for Budapest's policies and performance over the medium
term.
Background
Hungary has lived with the problem of payments deficits for
more than a decade. Expansionary domestic policies and
unfavorable developments in world markets in the 1970s resulted
in widening trade deficits, which Budapest financed by turning to
readily available hard currency credits. Periodic backtracking
on the economic reform program only made matters worse. The
government attempted to shield both consumers and producers from
inflation by increasing subsidies, while it failed to provide
sufficient incentives for exports. Consumption and investment
grew excessively in their sheltered environment, drawing imports
into the economy at a faster rate than exports could be
generated. The result was a widening of the trade deficit from
$197 million in 1971 to $506 million in 1974 and $1.2 billion in
1978. Over the same period, hard currency debt rose from $1.1
billion to $7.3 billion (see Table 1 and Figure 1).
By 1978, Hungarian policymakers realized that major policy
changes were needed to avert financial disaster. The regime
consequently shifted priorities from rapid growth to improving
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HUNGARY: HARD CURRENCY DEBT
1071 1972 1173 1174 1175 1076 1977 1978 1979 1180 flat 1982 1183 1984
March
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its balance of payments position, largely by boosting exports.
The Hungarians also decided to place the burden of domestic
adjustment on investment through more restrictive domestic credit
policies, thus permitting living standards simply to level off
rather than erode. At the same time, they revived the reform
program in an effort to enhance economic efficiency and export
competitiveness by reducing price distortions, misallocation of
resources, and poor enterprise management.
Domestic Adjustment Policies
Investment Curbs
Budapest in the last five years has concentrated most of its
domestic stabilization efforts on the investment sector.
Official data show that gross fixed investment in real terms
tapered off in 1978-79 and declined each year from 1980 to 1983
at an average annual rate of 4 percent, compared with an average
annual growth rate of 7 percent from 1971 to 1977. By year-end
1983, the volume of investment was 15 percent lower than in 1978
and this year's plan calls for a further cut of almost 8 percent
(see Table 2). The share of investment (including stockbuilding)
in gross domestic product, meanwhile, fell from 41 percent in
1978 to roughly 26 percent in 1983, while the percentage of state
budgetary expenditures pow investment plunged from 20
percent to 11 percent.
Government efforts to depress investment activity have been
complicated by an inability to curb the drive to invest at the
enterprise level (see Box I). In Hungary's quasi-decentralized
system, the central government controls and manages only about
half of total investment--mainly large projects and
infrastructure--and relies on a complicated set of credit,
monetary, and tax policies to influence indirectly the volume and
direction of enterprise investment. From 1979 to 1981,
enterprises exceeded the government's investment guidelines by
finding loopholes in the tighter credit controls, drawing on
unexpectedly high profits, and, in some cases, misusing
depreciation and reserve funds as sources of investment. The
aggressiveness of enterprises forced the government to shelve
some of its own projects and to cut back drastically on housing
and hospital construction in order to keep overall investment
near the planned level. In 1982-83, the authorities imposed
additional stiff controls on enterprise investment, including a
partial freeze on the drawing down of profit funds and sharply
higher requirements for loan downpayments. As a result,
enterprise investment declined 3 percent in the first seven
months of this year, compared with the same period last year.
The problem this year has shifted to above-plan investment by the
central government, which is trying to catch up on earlier
delayed projects.
Hungarian planners have sought to limit the long-term damage
from lower investment levels by using both credit and
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Investment Hungarian Style
Investment decisionmaking and financing are more complex and
decentralized in Hungary than in the other East European
economies, making it more difficult for Budapest to accomplish
its stabilization goals. The socialist sector is responsible for
the bulk of investment (86 percent in 1983), divided roughly
equally between central and local governments, on the one hand,
and enterprises and cooperatives on the other. State investment
concentrates on major industrial projects such as steel and
aluminum plants, infrastructure, and raw material and energy
sources, and also provides funding to local authorities for
highway and hospital construction. As part of the economic
reform, Hungarian firms-Iave been g-iven authority to invest on
their own for such purposes as expanding or modernizing plants
and importing machinery. Enterprise investment is funded by a
combination of the firms' own resources (retained profits), state
investment grants, and National Bank credits.
The central authorities wield a variety of economic
instruments to help ensure that the volume and direction of
investment decisions of individual enterprises are consistent
with the country's macroeconomic objectives. The most important
control mechanism is credit policy because enterprises rely on
bank loans to finance over 20 percent of their total
investment. The government also finetunes an array of "economic
regulators" (mainly taxes and subsidies) to influence enterprise
policies on wages, prices, depreciation, use of reserve and
development funds, and other variables that affect enterprise
liquidity and the level of investment. In 1984, for example, the
regulators have called for a 10-percent increase in the social
security contribution employers must pay for each worker,
continuation of a partial freeze on use of development funds, and
more flexible amortization laws.
Under the Hungarian reform, enterprises divide their after-
tax profits among three funds:
The Reserve Fund. Enterprises must place a specified
proportion (20 percent in recent years) of profits in
this compulsory fund until a certain minimum is
reached. In theory, the fund provides a protective
shield against market shocks and cycles and can also be
used under stringent guidelines to cover shortfalls in
the other funds.
The Development Fund. The remaining profits are divided
between the development fund and the sharing fund. The
development fund also receives a portion of the
enterprise's depreciation allowances on fixed capital,
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I I
state investment support, and transfers of funds from
other enterprises. It is intended to be the main source
of enterprise investment funding.
The Sharing Fund. This money has no bearing on
investment, but is used to supplement wage payments to
employees.
The government has been unable in recent years to cut
investment as much as it would like in large part because it has
been lax in enforcing constraints on the
enterprises'
i
us funds, particularly the reserve
fund.
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7
enterprises view the reserve fund a
s insulation against the
government's financial and economic policies. To limit such use
25X1
of the funds, Budapest this year eliminated compulsory enterprise
contributions to reserve funds, but so far has a arently stopped
short of imposing new controls on drawdowns. 25X1
Despite reforms, Hungarian investment strategy still suffers
from a number of problems endemic to centrally planned economies:
-- A large backlog of unfinished construction projects is
tying up substantial resources. While admitting that
many of these investments should have been delayed or not
begun at all, policymakers and bankers are reluctant to
cancel them and thus incur permanent loss of the sunk
capital.
- Budapest has also failed in its attempts to scale down
excessive inventories, which put a strain on already
limited resources. Wharton Econometric Forecasting
Associates estimates that inventory buildup continued
through 1983 and that the share of net material product
used for increases in inventories grew from 2.6 percent
in 1980 to 5.3 percent in 1983. Stockpiling consists
partly of hoarding by enterprises of raw materials and
semi-manufactured inputs in anticipation of further
import cutbacks and price increases, and partly of
finished but unsold products. Rigidities in prices and
production, as well as inadequate interest charges on
inventories, reduce the willingness--and sometimes the
ability--of firms to cut output or lower prices to market
equilibrium levels.
- Many enterprises have not altered their decisionmaking
processes to respond better to priorities set in Budapest
because interest rates and the cost of labor are still
too low and because managers lack sufficient
entrepreneurial training. Moreover, the flow of capital
among enterprises is extremely limited and large amounts
of capital often lie idle when they could be used by
other prospering firms.
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administrative controls to channel the bulk of both new domestic
resources and incoming foreign capital away from inefficient and
unprofitable activities., such as heavy industry projects, and
into energy conservation, infrastructure, modernization, and
export promotion. A large chunk of state resources--including
$200 million in World Bank funding obtained in 1983 and 1984--is
being used for major industrial renovation to substitute gas for
oil use, increase and upgrade the quality of domestic coal
production, expand domestic gas production, and complete the Paks
nuclear power station. To better meet world market standards,
the Hungarians are also trying to upgrade their agricultural
products by expanding grain storage capacity, introducing more
mechanization, and improving packaging and food processing
techniques. At the same time, Budapest is using differential
credit policies to encourage enterprises to expand the volume and
improve the quality of their exports.
Consumer Policies
The Kadar regime faces a difficult challenge when
formulating consumption policies because its popular support and
political legitimacy depend on living up to a social contract
based on steadily improving living standards for the
population. While recognizing that consumption could not
continue to grow at the comfortable levels of the early and mid-
1970s, Budapest has consistently pledged at least to maintain
living standards and has described this goal as second only to
improving the balance of payments. Upholding its promise, the
regime has not only kept real private consumption from declining,
but has allowed it to grow at an average annual rate of 1 percent
since 1979. Official data show that real disposable income also
registered very modest growth between 1979 and 1983 (see Figure
2). It has held steady in the first half of this year, although
the IMF stabilization program (see Box II) calls for a 1.5-
percent drop.
Budapest has slowed real wage and income growth mainly by
imposing a series of consumer price increases and, to a lesser
extent, by regulating wages. In mid-1979, Budapest passed the
most significant consumer price hikes in 20 years, with the
largest increases--as high as 50 percent--applied to bread,
household energy, and luxury consumer goods. It raised prices
again in 1982--to try to counter the effects of an unexpected
surge in private sector incomes; in mid-1983--in the aftermath of
poor harvest results; and in early 1984--as part of its drive to
reduce consumer subsidies and safeguard food exports. Annual
consumer price inflation has generally ranged between 7 and 9
percent during this period, according to official statistics--and
probably is at least several percentage points higher in
reality. The Kadar regime often has tried to mollify the people
by explaining that these increases are necessary in order to
avoid the supply shortages that plague some other East European
countries.
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ilgure s
HUNGARY: SELECTED CONSUMPTION DATA
10 PE AGE CHANGE
Ir-
.. .......................r ...........................................,. % ................;* ..............................................
?
..................................4 ......................................................
f ? %
I ?
I ?
......................... \ ................................... .... ...............................................
ft-womb 400"Ob "-,%
................................. \ ....... ;;;40000-0 ............................................................. \ .............
1177
1978 1979 1980 1981 1982 1983 1984
1. Plan target.
DISPOSI6LE i
RE REAL AL DISPOSABLE
/
INCOME
NOt1I NAL
DISF O' PAE..L
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I I
BOX II
Hungary's IMF Experience
IMF membership has afforded Budapest greater financial
security by providing an independent source of funds and, at the
same time, bolstering Hungary's creditworthiness in the eyes of
Western bankers and businessmen. At the same time, the
conditionality of IMF credits has reinforced Hungary's
stabilization efforts and encouraged Budapest to move faster on
Budapest applied for IMF membership late in 1981 when its
payments position was deteriorating because of weak export
performance and high interest charges on its debt. By the time
it gained admittance in May 1982, Budapest had survived--with
help from Western central banks and the Bank for International
Settlements--the worst of a severe liquidity crisis brought on by
the sudden withdrawal of over $1 billion in credits by Western,
CEMA, and OPEC banks. In need of substantial new credits to meet
its borrowing requirements, Hungary immediately applied for
credit to the IMF, which granted a 13-month stand-by arrangement
The Fund's overriding priority in 1983 was to help Budapest
overcome the liquidity crisis. Consequently, the terms of the
agreement called for increased administrative control of demand--
mainly stricter government regulation of prices and wages.
Budapest met most IMF conditions, although it fell short of
several key targets--the most important being a $300-million
shortfall in the $600-million target for a current account
surplus. A sympathetic IMF noted that excess demand in the
private sector--together with buoyant enterprise investment--were
both largely caused by the government's attempts to free up the
economy. In effect, it recognized the inevitability of the
demand management problems Hungary faces in moving from a
centralized system of microeconomic-controls to a decentralized
one of macroeconomic-controls.
Hungary now has a second standby agreement, which provides
an additional $450 million. The objectives of this year's
program are to support Hungary in a difficult transition toward
more significant structural changes over the medium term. In its
mid-term review of the program in July, the Fund favorably
assessed Hungarian policies and results. It appears reasonably
confident that Hungary can meet this year's target for a $400-
million current account surplus if it will strictly enforce
planned adjustment measures. The IMF team remains concerned,
however, that real income growth in the legalized private sector
so far this year exceeds 30 percent and could jeopardize
Hungary's performance. While supportive of Budapest's
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decentralization efforts, the IMF is pressing hard for Budapest
to contain the growth of incomes from arivate activities through
25X1=
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Although Budapest managed to avoid an erosion in overall
private consumption levels through 1983, the leadership is
concerned that state industrial workers have suffered
disproportionately from the austerity program. Official
Hungarian data show that from 1982 through mid-1984 the real
purchasing power of a worker who derives his livelihood strictly
from a wage or salary has been steadily declining. In 1983, for
example, the 4.5-percent rise in wages in the socialist sector
ltgged behind the 7.3-percent inflation rate, while labor income
from private economic activities--the second economy and
agriculture--soared by 27 percent. IMF statistics indicate that
the disparity has widened further in the first part of this
year. Workers in heavy industry are particularly hurt because
government rules permitting the leasing of work facilities and
equipment to moonlighting workers tend to benefit workers in
light industry and the services sector; workers in foundries or
power plants have much less opportunity to supplement their
Although the regime has tried to protect the consumer,
industrial workers and trade union 25X1
leaders have opposed austerity measures.
trade union officials tried in vain to 25X1
dissuade the regime from increasing the price of basic foodstuffs
in September 1983, reportedly warning of violent worker 25X1
reaction. Moreover, in a blunt public appeal last fall that may
have ultimately cost him his job, Sandor Gaspar--then Director of
the National Trade Union Council (SZOT)--acknowledged to a trade
union meeting that the lives of many families had become more
difficult as a result of excessive retail price increases by the
government. In noting complaints from the rank and file that the
union leaders do not satisfactorily represent their views, Gaspar
also indirectly accused the party of stifling the union movement
by not giving it enough independence and by forcing union leaders
to endorse unpopular policies 25X1
Slowdown in Domestic Growth
The price of adjusting to external financial constraints has
been a more severe slowdown in economic growth than the
leadership bargained for. Except for the very modest growth in
the good agricultural years of 1980 and 1982, GNP has stagnated
or declined since 1978--a marked contrast to the 3-percent
average annual growth shown in the 1971-78 period. In 1984,
Hungary's IMF program calls once again for zero or only slightly
positive GNP growth. We estimate that industrial production
stagnated from 1979-1983, reflecting reduced availability of
imported capital equipment and raw materials and soft investment
demand.
Foreign Trade Strategy
Determined that they would not follow Poland, Romania, and
Yugoslavia down the road to debt rescheduling, the Hungarians
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have taken a variety of steps to improve export performance and
curtail imports. Through heavy emphasis on export promotion,
Budapest achieved a substantial jump in hard currency exports in
1979-80 but since then has been able to do little better than
hold to that level. At the same time, it has been unwilling to
accept the severe austerity that would have resulted from
draconian import cuts. Instead the Hungarians allowed hard
currency imports to grow by 16 percent in 1979-80 and only
thereafter began to prune them gradually and carefully. While
managing to achieve a small hard currency surplus in recent
years, the Hungarian government has relied heavily on the skills
of its bankers to arran a financing to meet its debt servicing
needs (see Figure 3). L 25X1
Export Incentives. The export sector has benefited from
preferential treatment throughout the adjustment period. Since
the late 1970s, the government has financed the full cost of
approved enterprise projects -devoted to export production--
compared with only about 70 percent of other investments--and has
rebated one-third of all interest charges to enterprises that
meet export commitments. It offered further incentives in 1982
and 1983, such as exempting outstanding export loans from
interest rate hikes. Credit guidelines for 1984 continue to
favor investment projects with demo potential for 25X1
increasing hard currency earnings.
Budapest a l s o has ad nted a more flexible exchange rate
policy. it devalued the forint against 25X1
the dollar by 11 percent during the second half of 1982 and by 14
percent in 1983. the real effective 25X1
exchange rate for the forint (against the basket of convertible
currencies to which it is pegged) depreciated by 8 percent
between June 1982 and September 1983. The forint was further
devalued twice in the first half of 1984 for a total of eight
percent (nominal terms).
Other regime moves to help exports include:
continuing the decentralization of the foreign trade
network by allowing more firms to trade directly rather
than through foreign trade organizations; for example, by
March 1984, 226 firms had exporting rights and this
number is to be expanded in 1984-85;
granting permission for large exporting industries--the
leather glove industry, for example--to set their own
foreign trade prices in order to compete better on
Western markets; and
- liberalizing joint venture regulations in order to
attract Western technology. 25X1'
Mixed Ex ort Performance. Despite these policies, official
trade statistics reveal that the Hungarian drive to expand
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flour. 3
HUNGARY: HARD CURRENCY TRADE
ftift.
IMPORTS
BALANCE
?..?---------------.,
10 "'.10
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exports to hard currency markets has faltered in recent years
(see Table 3). Following a surge of 56 percent between 1978 and
1980, the value of hard currency exports actually fell slightly
in 1981, grew only 2 percent in 1982, and stagnated in 1983.
Preliminary figures for the first seven months of this year show
export earnings running 3 percent below the same period last
year.
Budapest's recent poor showing is mainly due to a 7-percent
decline in sales to the developed West since 1980. The
Hungarians largely blame--and with some justification--forces
beyond their control such as Western recession, growing
protectionism in Western markets, and a serious domestic drought
in 1983. They especially single out EC import restrictions on
agricultural and industrial products. Foreign Trade Minister
Peter Veress also recently claimed that NATO restrictions on
technology sales are hurting attempts to update the country's
product profile. Finally, the Hungarians point to falling world
prices for their food products and raw materials, which account
for over 60 percent of convertible currency sales2 (see Table
4).
At the same time, the Hungarians admit that many of their
exports still suffer from weaknesses endemic to East European
products. Economic czar Ferenc Havasi told a
committee in June 1982 that export
problems result from inefficient production methods and poor
quality. He pointed out that Hungarian industry uses
approximately 20 to 30 percent more materials and energy than its
Western counterparts to produce a unit of output and that labor
productivity is only one-half or one-third of that in the West.
In addition, food products--including wine, honey, and paprika--
are criticized in the West for poor processing, packaging, and
shipping procedures
Hungary's export earnings from the developed West would have
declined even more dramatically if Budapest had not begun to
import sizable quantities of oil from the Middle East on
favorable terms, and, in turn, to reexport the oil to the
developed West for hard currency. While Hungary's non-energy
hard currency export earnings declined moderately in both 1982
and 1983, energy 3arnings surged by 51 percent in 1982 and by 43
percent last year (see Tables 5 and 6). The value of these
energy sales almost tripled from $275 million in 1979 (6 percent
of hard currency exports) to $707 million in 1983 (14 percent of
hard currency exports) (see Figures 4 and 5).
2 For example, the volume of Hungarian exports of food exports increased 11
percent in 1982 and 3 percent in 1983, but the value of these sales leveled
011 in lydz a
3 We believe,
all to the de
that the oil sales are virtually
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HUNGARY:
HARD CURRENCY EXPORTS BY COMMODITY GROUP
1979
Row
Materials
39.01ro
1983
Raw
Materials
32.0 e ~- -
Machinery and
Equipment
13.0/0
Energy
14.0r.
Consumer Food and agri-
Durables cultural Products
12.0. 29.0%
n9um f
p . ,
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I I
All but a small percentage of these sales consist of
reexports of petroleum, some of which is directly transshipped
for sale as crude oil and the rest refined in Hungary and sold as
products, mainly to Western Europe. The main source of the oil
is the Middle East; official trade data show that in 1982
Budapest bought roughly as much Soviet oil as in 1981, but
sharply increased oil imports from Iran and bought oil from Libya
for the first time. Crude oil imports increased again in 1983
and preliminary data indicate that the increase again came from
Libya, with possibly small amounts from Iraq, Kuwait, and
Mexico. At least part of this oil trade involves either barter
arrangements--with very favorable terms for Hungary--or other
attractive financing.
In part to support these oil purchases, Hungary has pushed
exports to the LDCs, which climbed by two-thirds during 1980-83.
This trade raised the LDC share of Hungarian hard currency
exports from 15 percent in 1979 to 22 percent in 1983, mainly at
the expense of the developed West's share (see Figures 6 and
7). The Hungarians have had good success in boosting exports of
machinery and transportation equipment, and probably have been
able to peddle some exports that have fared poorly in developed
Western markets.
Budapest also substantially improved its hard currency trade
picture by boosting hard currency exports to the USSR (see Box
III and Table 7). In 1979-81, these exports--almost all
agricultural goods, especially meat--increased by almost 70
percent. In 1982, without the surplus with the USSR, Hungary's
overall hard currency trade would have remained in deficit
instead of moving into a $461 million surplus. In 1983, the hard
currency surplus with the USSR fell but still accounted for all
but $100 million of Hungary's overall $537 million hard currency
surplus. At the same time, since Budapest has been running large
deficits in ruble trade with the USSR, the Soviets are in effect
making large dollar payments for their hard currency deficit with
Hungary while receiving only clearing account credits for ruble
surpluses.
Moscow--facing its
. own economic problems--is pressing Budapest to bring both hard
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HUNGARY:
HARD CURRENCY IMPORTS BY COMMODITY GROUP
1979
Raw
Materiels ---~
57.0%
Machinery and
Equipment
t5.0/.
1983
Raw
Materials -~ .
Consumer
~- Durables
.-
6.
55.0. 140%
food and agri-
raw. s
cultural Products
Consumer
Machinery and Durables
Equipment 8.0%
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HUNGARY:
REGIONAL BREAKDOWN OF HARD CURRENCY EXPORTS
DEVELOPED WEST
0
LDCs
/670
SOCIAUST
210"
1983
DEVELOPED WEST
0-
58-0110
~`~"., .' 20.0/0
ilpun
1979
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HUNGARY:
REGIONAL BREAKDOWN OF HARD CURRENCY IMPORTS
? 1979
DEVELOPED WEST
73.0
1983
LDCs
1a.o
SOCIAUST
13.0
ftpurs 7
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BOX III
Soviet-Hungarian Hard Currency Trade
Hungary is unique among East European countries in that it
uses hard currency in roughly 20 percent of its trade with
socialist countries. It has consistently earned a surplus in
these special trade transactions. This trade--primari.ly
conducted with the Soviet Union--largely originated in 1974 when
the EC imposed tight restrictions on imports of beef and cattle
at a time when Hungary was investing heavily in expanding meat
production capacity to increase sales to West European markets.
The Soviets agreed to buy Hungarian meat for hard currency--
providing Hungary a market for its increased production and
permitting the USSR to raise its low level of per capita meat
consumption. Even though Moscow pays world prices, it saves on
transportation costs because of Hungary's proximity and on hard
currency value-added costs because the sales are primarily of
slaughter animals and raw meat processed in a Soviet plant near
the Hungarian border. For their part, the Hungarians incur some
hard currency costs--mainly imports of Western feed and meats--to
produce the exports for the Soviet market, but they almost
certainly benefit more than the USSR from the trade because of
the losses they would suffer if they had to divert sales t
saturated and quality-sensitive Western markets. 25X1
Livestock and meat sales continue to account for the bulk of
Hungary's dollar exports to the USSR, but other hard currency
sales contracts have been concluded for grain, textiles, wine,
and dairy products. Although the Hungarians do not publish CEMA
hard currency trade by either country or commodity, we estimate
that about three-fifths of total agricultural sales to the USSR
are for dollars. The Hungarians, in turn, have bought Soviet oil
for dollars to supplement their normal allocation of soft
currency purchases.
Soviet-Hungarian hard currency trade dramatically shifted in
Budapest's favor in the late 1970s. The Hungarians in 1979-81,
in an effort to alleviate their balance of payments problems with
the West, rapidly expanded dollar sales of meat and grain to the
USSR while cutting dollar purchases of Soviet oil. Hungary's
hard currency surplus with the'USSR consequently jumped from an
estimated annual average of $123 million in 1976-78 to $422
million in 1980 and $532 million in 1981. The Soviets, at that
time in a strong hard currency balance of payments position, may
have encouraged this shift because they needed to supplement
domestic meat supplies in the wake of poor harvests and declining
meat production. The Hungarians also benefited from-the Soviet
decision to allow its East European partners to run ruble
deficits to cushion the effect of rising prices for Soviet oil on
the ruble account. Hungary's ruble trade deficit with the Soviet
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Union soared from an estimated $101 million in 1977 to $852
million in 1980. In 1978-83, these cumulative ruble trade
deficits amounted to an estimated $3.2 billion, with presumably
only about half of t h i amount offset by n services, ayments to
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The Soviets in recent years, however, have become
increasingly dissatisfied with the lopsided trade arrangement
where they earn clearing account balances for sales to Hungary of
oil and other desirable goods and pay hard currency for purchases
of agricultural goods. The Soviets also are less sanguine about
their own hard currency prospects and are less inclined to grant
preferential economic treatment to Eastern Europe. Moscow
consequently has insisted that the Hungarians cut back their
annual ruble deficits and has apparently reduced the volume of
its dollar purchases from Hungary since 1982. The Soviets have
reduced their dollar purchases gradually, however, because of
their continuing need for meat and their probable reluctance to
deal a sharp blow to the Hungarian economy. Moscow also has
pressured Budapest to move some dollar sales into the ruble
category but the Hungarians so far have apparently resisted,
probably pointing to their financial need and the hard currency
import costs embodied in the sales.
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currency and ruble trade into balance.
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Imports: Policies and Trends
Since the 1979-80 export drive faltered, the regime has
placed the burden of adjustment in-the hard currency trade
account on imports. Budapest has followed a gradual and measured
approach that first slowed the growth of imports and then
actually cut imports only after the payments position worsened.
While energy imports grew rapidly, import restrictions cut back
the value of non-energy imports by 14 percent in 1982 and by 5
percent last year (see Table 8). Reflecting the decline in
investment activity, the deepest cuts in real terms have been
made in imports of capital goods and equipment. In 1983, the
volume of these imports stood at 85 percent of their 1981 level
and only 69 percent of their 1978 level. In contrast, the 1983
volume of imported industrial consumer goods matched the 1981
level and exceeded the 1978 level by 27 percent, illustrating the
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When the balance of payments situation worsened in 1982,
Budapest turned increasingly to new administrative controls on
imports. Temporary quotas on a wide range of industrial and
agricultural raw materials were established and a 20-percent
surcharge was imposed on imports of components and spare parts.
At the same time, the government required its approval for all
applications for import licenses. Since 1983 Budapest has
gradually been removing these restrictions in response to IMF
criticism. It has lifted most quotas on raw material imports,
eliminated the surcharge on components and spare parts, and has
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substitution in order to cut back permanently on the need for
some hard currency imports. We cannot assess the full impact of
import substitution; from scattered evidence in the open press
it appears that the Hungarians are 25X1
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comparative advantage.5
Significant Help from the West
The Hungarians' financial strategy rests on exploiting their
reputation as sound and clever financial managers. Their aim is
to persuade Western commercial banks and international lending
institutions to supply enough credits to avert debt rescheduling
and deeper, more painful austerity. In early 1982, when the
pullout of over $1 billion in short-term credits by Western,
OPEC, and CEMA banks resulted in a liquidity crisis, Budapest
appealed for help from Western central banks and the BIS, which
extended $510 million in short-term bridge loans. This show of
official Western support encouraged 15 commercial banks to
arrange a $260-million commercial loan for Hungary. Later in the
year, having convinced the IMF that it was indeed imposing strict
stabilization measures, Budapest secured $620 million in credits
from the Fund, a third of which was disbursed immediately and the
remainder drawn in 1983. To meet payment obligations, the
Hungarians were also forced to draw down their hard currency
reserves by $733 million in 1982 (see Table 9).
Despite the unfavorable lending climate for Eastern Europe
in 1983, the Hungarian borrowing campaign again fared reasonably
well. In addition to the $350 million still available from the
IMF, Budapest obtained a $200-million three-year club loan from
Western banks, $239 million in project credits from the World
Bank, a $275-million commercial loan to cofinance the World Bank
projects, and more trade credits.
This year Western lenders are again signaling their approval
of Budapest's economic performance by responding enthusiastically
to loan requests. By the end of the first quarter, Hungary had
already obtained a new $450-million standby facility from the IMF
and $200 million in additional World Bank project loans. In
April, a consortium of US, British, Japanese, Arab, Austrian, and
Finnish commercial banks responded to Budapest's bid for a $150-
million credit with a $210-million loan syndication. In mid-July
final arrangements were worked out on a new World Bank
cofinancing package which is providing Hungary with an additional
$487 million to support industrial export development and energy
modernization. These loans more than cover Budapest's 1984
borrowing target of $1.1 billion.
5 The following are examples of three projects that are completed or in the
final planning stages and that have led to hard currency savings: (1) the
capacity for retreading car tires has been expanded enough in the last few
years to meet domestic demand and save millions of dollars each year; (2) in
1983 the chemical industry processed enough additional synthetic materials and
products for the food industry to save imports worth $13 million; and (3) as
of May 1984, scientists reportedly were developing an inexpensive herbicide in
order to reduce dependence on imports from Western Europe.
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External Adjustment Score Card
By the end of 1983, Budapest had survived the severe
liquidity crisis of thd' early 1980s and gained some improvement
in its external financial position (see Table 10). The hard
currency trade balance has moved gradually from a peak deficit of
$782 million in 1978 to a surplus of $877 million in 1983, while
the hard currency current account has improved by $1.5 billion
since 1978, registering a surplus of $297 million in 1983. This
improvement reflects not only trade developments but also a
strong growth in travel receipts, larger earnings from transit
trade, and higher fees and earnings from professional and
technical services as well as the decline in net interest
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The improvement in the current account was accompanied by a
decline in repayments due on maturing debt, largely resulting
from a $1.6-billion reduction in short term debt from 1981 to
1983. As Hungary's financing requirement declined from $4.8
billion in 1981 to $3.1 billion in 1983 and it was able to tap
credits from the IMF and BIS, Budapest was able to reverse the
erosion in its reserve position. After drawdowns of foreign
exchange reserves of $1.3 billion in 1981-82, Budapest built up
reserves in 1983 by $651 million to a level of $2.0 billion, or
somewhat over five months of convertible imports. This
strengthening in its external accounts renewed bankers'
confidence in Hungary's creditworthiness and helped avoid
rescheduling and even more painful austerity.
This year Budapest has become increasingly concerned that
domestic demand would exceed the IMF annual targets, jeopardizing
Hungary's ability to meet its external account goals. Private
consumption through July was running slightly above the 1983
level, instead of falling by about 1 percent, and investment was
declining at a slower pace than planned. Hungary's revised IMF
program for the latter part of the year calls for:
-- additional cuts in consumer and producer price subsidies;
-- increased penalties on excess inventory accumulation;
-- increased turnover taxes on consumer goods and higher
taxation of private sector incomes; and
-- measures to ensure that state investment expenditures are
brought back in line with plan targets.
If these measures are effective, Budapest may come close to
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meeting the goal of a $400-million current account surplus by the
end of the year. The Hungarians project that hard currency
exports will increase 3 percent this year, despite the
disappointing performance in the first part of the year and an
expected 4-percent weakening in the terms of trade. Moreover,
Budapest is confident that a surge in hard currency imports in
early 1984 was a short term reaction to the lifting of import
restrictions, and that imports for the full year can be reduced 1
percent below the 1983 level. If so, projected improvements in
r
h hi h
e
trade and travel receipts should be enough to offset
to its bid for another $250 1 million loan, which should be signed
before the end of the year. The consequent strengthening in
Hungary's position might allow a further buildup of hard currency
th
i
l
x mon
s
y s
reserves, which had risen to $2.1 billion--rough
worth of hard currency imports--by the end of May.
Reform During Adjustment
Unlike the other East European regimes, which do not appear
to have serious plans for remedying their stagnant economies,
Hungary looks to systemic economic reform as the path to
revitalize growth and ensure external equilibrium over the long
term. Despite the reform's rocky, stop-and-start history, the
regime recognizes that in order to move the economy ahead it must
come to grips with the problems of:
-- Too many large monopolistic enterprises protected by
vested bureaucratic interests that block or weaken
incentives to use resources efficiently;
-- Too many export products that are not competitive in hard
currency markets;
-- Labor and capital that are in short supply but are
misallocated to activities with small profits or even
losses; and
-- Easy availability of bank credit and the lack of
institutions to channel it to uses yielding the highest
returns;
The pace and scope of economic reform during the adjustment
period has been called into question, however, because of the
tension between reform--with its attendant uncertainty and
decentralization--and the needs of short-run balance of payments
adjustment, which requires the central authorities to be able to
mobilize all resources toward the goal of improving external
performance. High-level party and government leaders have
intensely--and publicly--debated whether economic stringencies
require a more cautious or bolder approach to reform. The
gradualists have emphasized the priority of improving the
external payments position, even at the expense of temporary
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backsliding on reform. They argue that many of the proposals at
the heart of reform--such as closing down inefficient factories--
are too risky at a time of increased grumbling over austerity
programs. In contrast,'the reformist group in the leadership has
pushed for more rapid change, conceding that it may be disruptive
but claiming that it is the only way to solve the economy's
serious problems. The most radical pro-reform economists have
argued for immediate and drastic measures and have openly
criticized the leadership for excessive caution.
In 1980 and 1981, Hungary neither retreated from reform nor
introduced any far reaching changes. It did take several
measures to promote enterprise efficiency and modernize the
outmoded product profile (see Annex). We believe that by the end
of 1983, however, the pro-reform elements had won the debate. In
April 1984, the Communist party central committee plenum endorsed
in principle a comprehensive package of further reforms to be
implemented gradually over the period 1985-1990. The specific
measures to be implemented and their timetable are still being
worked out. The regime began an intensive education campaign
early in the year to prepare the population for sacrifices in
terms of unemployment, inflation, and a general loss of economic
security that the new measures will require.
Outlook
Need For More Austerity and Reform
While Hungarian leaders may now be united in their
commitment to reform, they remain divided on appropriate
macroeconomic policy for the years immediately ahead. Some
officials--such as Party secretary for economics Ferenc Havasi
and State Secretary of the National Planning Office Janos Hoos--
appear opposed to continued austerity beyond 1984. They argue
that further cuts in investment would hurt modernization efforts
and weaken export performance and that private consumption should
not be cut to improve the foreign balance. Other officials--such
as planning chairman Lajos Faluvegi--contend that external
equilibrium must continue to have priority in 1985-1987 over
economic growth.
Hungary's demanding schedule of debt service payments
supports the case for a prolonged period of domestic austerity if
Budapest is to avoid renewed liquidity problems. Hungary faces a
bunching of maturities on medium-and long-term debt for the next
several years as projected repayment obligations (interest plus
amortization) continue to rise through 1987 and remain at $2
billion annually through 1989 (see Table 11). These payments
could increase considerably if international interest rates rise
or if Hungary's financing requirements increase as a result of
negative developments in foreign trade. Even under 'fairly
optimistic assumptions, however, the debt service ratio will
remain between 30 and 40 percent.
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The cuts in investment made so far, in our view, have not
seriously damaged the growth potential of the economy and there
may well be more room to trim. Like other East European
countries, Hungary historically has built up a huge fixed capital
stock that, despite its redundancies and outdatedness, is large
enough to keep the economy going through this transition
period. We estimate that in 1982 the Hungarians were operating
at only about 82 percent of average industrial utilization rates
for the previous five years, which suggests a substantial
increase in F_ I
output is possible without expanding existing
S
We believe that the regime must be careful, however, in
fine-tuning its future austerity measures for consumers and
workers. The leadership so far has been very attentive to
monitoring the degree of confidence the populace holds in the
system and the level of austerity it will tolerate. Despite
their grumbling, Hungarian workers now show-no sign--of taking to
the streets. Nevertheless, the strong feeling of some workers--
particularly in heavy industry--that they have unfairly borne
most of the sacrifices means that a serious miscalculation by the
regime could lead to more widespread popular discontent--and
possible unrest.
In the long run, in our view, only structural reform can
free Hungary from economic stagnation and persistent balance of
payments difficulties. Beginning in 1985 and continuing through
the decade, Budapest plans gradually to implement further changes
in the price and wage systems, introduce worker participation in
enterprise management, decentralize domestic banking and credit
operations, and revamp the personal income tax and turnover tax
systems. If Budapest continues its practice of phasing in
reforms slowly and retaining many safeguards, we believe that the
new reforms may require at least five years before they have much
impact on performance. Experience also shows that Budapest can
quickly reverse the direction of its reform if pressured strongly
enough by domestic or external opposition. For the time being,
Budapest appears to have the go-ahead from the Soviet Union, but
Moscow no doubt is watching to make sure that nothing too radical
is undertaken, particularly in areas where economic
decentralization could lead to a weakening of the role of the
party.
Relations with East and West
Regardless of Budapest's skill in managing its problems, the
Hungarian economy will remain extremely vulnerable to external
shocks and will continue to depend on support from both East and
West. Its ability to expand hard currency export earnings, for
example, will rest to a large extent on the strength.of Western
recovery, trends in world prices for its export goods, and
Moscow's willingness to pay hard currency for Budapest's
a ricultural exports. Its ability to stay afloat financially
will depend not only on these factors, but also on maintaining
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I I
the confidence of Western banks, governments, and financial
institutions. F I
Moscow probably wfiil continue to toughen its trade terms by
demanding higher quality goods and balanced soft currency
trade. In addition, to the extent that Budapest is able to
restore economic growth and ease its hard currency burden--
perhaps largely through Western credits or preferential
tX eatment--Moscow will be tempted to demand additional deliveries
to repay accumulated ruble debt and to reduce sharply its hard
currency outlays for Hungarian goods by paying rubles.instead of
dollars. This could lead to significant declines in hard
currency earnings that Budapest might not be quickly able to
offset. If Moscow does move in this direction, it may do so
slowly out of concern for the negative impact that a quick,
across the board change would have on economic and political
stability in Hungary.
In order to gain increased access to foreign markets,
technology, and credits, we expect that the Hungarians will
continue to seek improved economic and political relations with
Western governments. To help provide the environment for
improved relations, the Hungarians, in our view, will continue to
try to encourage dialogue and ease tensions between the
superpowers by Joining with other East European states to try to
soften the Soviet line toward East-West issues and by opposing
any turn inward by CEMA. They also will try to maintain an
active schedule of meetings with Western leaders, as they have
this year with the visits of Prime Ministers Thatcher and Craxi
and Chancellor Kohl to Budapest, and Kadar's recent trip to
The deterioration in East-West relations in recent years,
however, is forcing Budapest to perform a delicate balancing act
between its desire to improve relations with the West and its
unwillingness to defy the Soviet Union. Primarily because of its
geopolitical position as well as because of its fear of losing
Moscow's economic subsidies and tolerance of its reform program,
Budapest has fallen into line after Soviet pressure on such
issues as the Olympic boycott and the aborted trip by East German
leader Honecker to Bonn. It is likely to bow again to any
strongly stated Soviet wishes.
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Annex
Recent Reform Measures
Industrial Reorganization
In recent years the government has moved to-decentralize and
stimulate the economy by reducing vertical hierarchies in
mpnagement and overcentralization in industry. Budapest also has
legalized many activities in the private sector to encourage
creativity and entrepreneurship.
Ministry Changes. In January 1981, Budapest merged the
Ministries of Heavy Industry, Light Industry, and Metallurgy and
Machine Industry into a single, less powerful Ministry of
Industry in order to break down bureaucratic links between
ministry chiefs and their client industries and to give
enterprises greater autonomy. A further merger of the Ministries
of Foreign Trade, Domestic Trade, and Industry was reportedly
being considered as of mid 1983.
the purpose of creating the "super-ministry" would be to
have et economy directed as far as possible by market forces and
to remove the bureaucratic separation of production from
consumption and foreign trade.
Enterprise Decentralization. To promote competition and
make industry more adaptable to changing world trade conditions,
Budapest since 1980 has dismantled roughly 40 large enterprises
and horizontally-structured trusts--primarily in the food and
building materials industries--into over 300 independent small
and medium-sized companies. In an interview following the July
1983 break-up of the giant Csepel Iron and Metal Works, a top
Hungarian industry official said that each of the 13 successor
firms will be required to do its own planning, rationalize
resources and capacity, improve products, and develop markets.
We expect enterprise decentralization along these lines to
continue throughout the decade: a survey recently conducted by
the Hungarian Academy of Sciences showed that profits and exports
of the new organizations rose faster than in their branch in
general.
Expanded Private Sector. Beginning in 1982 the regime also
has spurred the growth o he private sector by legitimizing a
wide range of activities in the second economy in areas beyond
agriculture and retail trade. One goal of the small enterprise
program is to ease the burden for the population of the austerity
program by providing an opportunity for supplementary income and
by filling gaps left by the socialized sector in the supply of
many consumer goods and services. Another objective is to enable
the government to better monitor and tax the vast volume of
economic activity that exists outside the mainstream-of Hungarian
life. Although most private entrepreneurs to date are providing
only domestic (non-exportable) services and still operate on a
fairly small scale, we believe that some of the more successful
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ventures could potentially become significant hard
earners.
Producer Price Reform
Since 1980 the price authorities have been experimenting
with a new mechanism for determining wholesale prices in order to
sensitize enterprises better to the true costs of inputs and to
the world market value of their products. They have replaced the
old method of determining industrial prices based on production
costs with a system that links domestic prices to world markets
via a complex network of exchange-rate conversions and various
tax and subsidy adjustments. Beginning this year, Budapest is
further refining the system--which many Hungarian economists
believe is too complicated to be effective. A "club of elite
enterprises" has been given unprecedented freedom to set their
own prices, the only constraint being that their domestic prices
cannot exceed the equivalent forint price of similar products
imported for hard currency. Members of the club represent the
star performers in manufacturing in that they must be major
exporters operating at a profit whose products are subject to
"adequate" competition in domestic markets. The government
expects that 60 to 80 enterprises will convert to these new
pricing procedures by the end of this year. If successful, the
program will be gradually implemented throughout the economy.
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Wage Regulations Linked to Profitability
The Hungarians have likewise been experimenting with various
programs to increase labor productivity and encourage labor
mobility between enterprises. Measures introduced in 1983 and
continued this year raise the relative cost of labor (by
requiring enterprises to pay a higher social security
contribution per worker) and offer tax breaks for personnel
reduction. These provisions are expected to persuade managers to
reduce redundant labor and to incorporate more efficient 25X1
technology into the production process. The basic wage system
also has been modified to encourage greater wage differentiation
in industry and to reward employees who do outstanding work.
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 Sanitized Copy Approved for Release 2010/07/12 : CIA-RDP85T00287R001100920001-0
I I
Hungary: Struggling with Economic Adjustment
Frank Vargo Dept. of Commerce
DDI
DDI Registry
D/EURA
C/EURA/EE
DC/EURA/EE
C/EURA/CE
DDO SE
IMC/CB
IMC/CB 7G07
IMC/CB 7G07
IMC/CB 7G07
EURA Production
25X1
14 - EURA Production
15,1
17 -
18 -
19 -
20 -
(14 Nov 84)
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25X1
EURA/EE/EW
25X1
EURA/EE/CE
25X1
rono
Prod.
A/EE/CE
EURA/EE/CE
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Table 1
Hungary: Selected Financial Indicators, 1971-1978
(Hard Currency in Millions US$)
Trade Balance
Exports
Imports
Current Account Balance
Gross Debt
1971 1972 1973 1974 1975 1976 1977 1978
-197 -2 174 -506 -416 -426 -619 -1183
912 1157 1754 2378 2305 2490 2891 3160
1109 1159 1580 2884 2721 2916 3510 4343
1071
-239 -751 -1242
4049 5024 7290
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 Sanitized Copy Approved for Release 2010/07/12 : CIA-RDP85T00287RO01100920001-0
Table 2
Hungary:
Domestic Economic Indicators
(Percent Change)
1977
1978
1979
1980
'1981
1982
1983
Western Accounting Concepts
Real Gross National Product
6.3
2.4
0.3
1.0
-0.1
1.5
-0.5
Industrial Production
4.6
3.6
1.0
-1.3
-0.9
0.3
0.7
Agricultural & Forestry Production
13.0
-0.8
-2.8
6.0
-0.6
5.6
7
-2
Rest of the Economya
4.1
3.4
1.3
0.3
0.8
0.3
.
-0.2
Socialist Accounting Concepts
'
National Income
Utilized
Real Gross Fixed Investmentb
13.0
4.9
1.0
-5.8
-5.1
-2.2
-3.3
Real Private Consumption
4.1
3.3
1.9
0.6
2.6
1.3
0.3
Real Disposable Income
5.6
3.6
4
-0
0
2
7
3
0
8
0
6
Nominal
Wages in the Socialist Sector
7.8
7.8
.
7.0
.
7.4
.
6.5
.
6.3
.
4.5
Nominal
Income in the Private Sector
na
na
na
na
na
15.8
26.8
Consumer
Price Index
3.9
4.6
8.9
9.1
4.6
6.9
7.3
Includes water management, construction, transport, communications, trade, housing, communal services,
b finance, government administration, health, education, welfare, scientific research and military personnel.
Includes private sector investment
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 Sanitized Copy Approved for Release 2010/07/12 : CIA-RDP85T00287RO01100920001-0
Table 3
Hungary: Hard Currency Trade by Region
(Million US S)
1978
1979
1980
1981
1982
1983
Total Hard Currencya
Exports
3,160
4,255
4,924
4,890
4,997
5
015
Imports
4,343
4,627
5,025
4,973
4,536
,
4
478
Balance
-1,183
- 372
- 101
- 83
461
,
537
Developed West
Exports
1,963
2,699
3,124
2,639
2,659
2,899
Imports
3,205
3,388
3,775
3,687
3,236
2
936
Balance
-1,242
- 689
- 651
-1,048
- 577 -
,
37
Socialistb
,,,
Exports
679
894
1046
1,237
1
197
1
010
Imports
512
584
471
530
,
392
,
423
Balance
167
310
575
707
805
587
Exports
517
660
752
1012
1,139
1
106
Imports
626
655
779
756
908
,
1
119
Balance
- 109
5
- 27
256
231 -
,
13
Totals may not add because of rounding.
b Includes Albania, Bulgaria, China, Cuba, Czechoslovakia, East Germany,
Korea, Laos, Mongolia, Poland, Romania, USSR, Vietnam, and Yugoslavia.
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 Sanitized Copy Approved for Release 2010/07/12 : CIA-RDP85T00287RO01100920001-0
Table 4
Hungary: Value, Volume, and Price: Hard Currency Exports
(Percent change over previous year)
Value
Energy Products
Raw Materials
Machinery and Equipment
Consumer Durables
Food Products
Volume
Energy Products
Raw Materials
Machinery and Equipment
Consumer Durables
Food Products
Price
Energy Products
Raw Materials
Machinery and Equipment
Consumer Durables
Food Products
1978 1979 1980 1981 1982 1983
9 35 16 - 1 2 0
38 56 23 - 4 51 43
8 46 14 - 12 - 7 6
15 39 7 8 25 - 15
15 20 11 - 6 - 12 - 2
2 25 24 14 0 - 10
2 16 2 2 11 11
20 9 - 9 - 15 71 59
1 15 1 - 5 0 15
5 27 - 2 11 '0 - 10
5 9 - 2 - 3 - 6 7
2 12 8 12 11 3
8 16 13 - 2 - 8 - 9
15 43 35 13 - 12 - 9
9 26 13 - 7 - 7 - 9
9 9 9 - 3 - 4 - 6
10 10 13 - 3 - 6 - 8
4 11 14 2 - 10 - 12
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 Sanitized Copy Approved for Release 2010/07/12 : CIA-RDP85T00287RO01100920001-0
Table 5
Hungary: Hard Currency Trade
(Million US S)
1978 1979 1980 1981 1982 1983
Exports
Imports
Balance
Exports
Imports
Balance
Energy Products
176 275 339 326 493 707
334 415 297 221 466 622
- 158 -140 42 105 27 85
Non-Energy Products
2984 3980 4585 4564 ,4504 4308
4009 4212 4728 4752 4070 3856
-1025 -232 -143 -188 434 452
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 Sanitized Copy Approved for Release 2010/07/12 : CIA-RDP85T00287RO01100920001-0
Table 6
Hungary: Hard Currency Trade by Commodity Group
(Million US S)
1978
1979
1980
1981
1982
1983
Ezportsa
3
160
4
255
4
924
4
890
4
997
5
015
Energy Products
,
176
,
275
,
339
,
326
,
493
,
707
Raw Materials
1,127
1,640
1,863
1,643
1,528
1
614
Machinery and Equipment
369
513
550
593
744
,
632
Consumer Durables
571
684
758
714
625
615
Food and Agricultural Pr
oducts 917
1,142
1,413
1,614
1,608
1,447
Importsa
4,343
4,627
5,025
4,973
4
536
4
478
Energy Products
334
415
297
221
,
466
,
622
j Raw Materials 2,432
2,638
3,092
3,008
2,613
2
462
Machinery and Equipment 710
697
643
671
631
,
506
Consumer Durables 269
279
327
396
352
347
Food and Agricultural Products 598
598
667
676
474
541
Totals may not a ecause of rounding.
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 Sanitized Copy Approved for Release 2010/07/12 : CIA-RDP85T00287RO01100920001-0
Table 7
Hungarian-Soviet Trade
(Million current US $)
1976
1977
1978
1979
1980
1981
1982
1983c
Hard Gurre c Tradea
~
fin s
279
289
243
410
554
685
651
498
Imports
174
191
220
.244
132
153
75
60
Balance
105
98
23
166
422
532
576
438
Ruble Tradeb
Exports
1902
2386
2815
3185
3548
4061
4522
5033
Imports
2045
2487
3316
3926
4400
4493
4955
5281
Balance
-143
-101
-501
-741
-852
-432
-433
-248
Assumed -to equal percent of Hungarian hard-currency exports to and imports from socialist countries other
Forints, converted into rubles
converted into dollars
,
.
C Preliminary
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 Sanitized Copy Approved for Release 2010/07/12 : CIA-RDP85T00287RO01100920001-0
Table 8
Hungary: Value, Volume, and Price: Hard Currency Imports
(Percent change over previous year)
Value
Energy Products
Raw Materials
Machinery and Equipment
Consumer Durables
Food Products
Volume
Energy Products
I Raw Materials
Machinery and Equipment
Consumer Durables
Food Products
Price
Energy Products
Raw Materials
Machinery and Equipment
Consumer Durables
Food Products
1978 1979 1980 1981 1982 1983
24 7 9 - 1 - 9 - 1
55 24 - 29 - 25 111 33
24 9 17 - 3 - 13 - 6
42 - 2 - 8 4 - 6 - 20
45 4 17 21 - 11 - 1
- 8 0 12 1 - 30 14
16 - 10 - 3 4 - 2 6
53 - 20 - 43 - 39 127 48
15 - 11 4 3 - 8 2
30 - 11 - 16 8 - 2 - 13
32 - 5 6 27 - 7 7
- 10 - 5 4 7 - 17 22
7 18 12 - 4 - 7
1 56 25 22 - 7
7 21 12 - 5 - 6
10 10 9 - 3 - 4
9 9 10 - 5 - 5
2 6 8 - 5 - 15
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 Sanitized Copy Approved for Release 2010/07/12 : CIA-RDP85T00287RO01100920001-0
Hungary:
Selected Financial Indicators
(Hard currency in million USS unless otherwise indicated)
1978
1979
1980
1981
1982
1983a
Gross Debt
7,290
8,140
9,090
8,699
7,715
8,257
Commercial
7,197
8,008
8,790
8,334
6,955
6,947
Government-backed
93
132
300
365
525
740
IMF/IBRD/BIS
235
570
Reservesb
c
2,136
2,230
2,558
2,033
1,300
1,951
Net Debt
5,154
5,910
6,532
6,666
6,415
6,306
Debt Service Ratiod
(Percent)
na
33.1
30.9
32.7
33.0
30.7
Trade Balance
-782
-167
276
445
7?
877
Current Account Balance
-1,242
-826
-370
-727
-92
297
Change in Terms of Trade
(Percent)
0.9
-1.2
1.4
2.2
-1.1
-2.4
Preliminary- estimate.
Includes gold holdings valued at $126 per ounce in 1978 and
$226 per ounce thereafter.
Gross debt minus reserves.
Repayments of medium-and long-term debt plus interest payments as a
share of current account earnings.
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 Sanitized Copy Approved for Release 2010/07/12 : CIA-RDP85T00287RO01100920001-0
Table 10
Hungary: Financing Requirements and Sources 1980-1984
(Million USS)
1980
1981
1982
1983a
1984b
Financing requirements
-
4,477
5,004
4,226
3
048
3
358
Current account bal
ance
-370
-727
- 92
,
297
,
400
Trade balance
276
445
766
877
1
07
Exports
4,863
4,877
4,876
4,848
,
8
4
994
Imports
4,587
4,432
4,110
3,970
,
3
916
Net interest
-409
-1
100
- 976
- 662
,
7
Other net invisibles
-237
,
-72
118
82
- 6
1
- 7
Repayment of medium-and
long-term debt
-811
-826
- 894
-1,216
-1
535
Repayment of short-term
debt
-3,172
-3
347
-2
848
-1
764
,
-2
123
Net credits extended
-124
,
-104
,
- 192
,
- 65
,
- 100
BIS
0
0
- 200
- 300
0
Financing sources
4,624
4,816
4,310
3,100
3
402
Credits
'
4,952
4,291
3,577
3,751
,
3
276
Medium and long-term
1,605
1,443
1
068
276
1
,
1
226
Short-term
3
347
2
848
,
1
764
,
123
2
,
1
600
IMF, net
BIS
,
0
,
0
,
235
,
352
,
450
0
0
510
0
0
Change in reserves (minus=increase)c - 328
525
733
- 651
126
Errors and omis
sions
-147
188
-84
- 52
44
-
Preliminary.
b Projected.
C Includes changes in gold holdings.
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 Sanitized Copy Approved for Release 2010/07/12 : CIA-RDP85T00287RO01100920001-0
Table 1
Hungary: Selected Financial Indicators, 1971-1978
(Hard Currency in Millions USS)
Trade Balance
Exports
Imports
Current Account Balance
Gross Debt
1971 1972 1973 1974 1975 1976 1977 1978
-197 -2 174 -506 -416 -426 -619 -1183
912 1157 1754 2378 2305 2490 2891 3160
1109 1159 1580 2884 2721 2916 3510 4343
-215 -158 161 -535 -441 -239 -751 -1242
1071
1442
2129
3135 4049 5024 7290
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Iq
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