RESTRICTED 
WORLD TRADE WT/BOP/R/3 
BOP/R/226 
31 July 1995 
ORGANIZATION 
(95-2267) 
Committee on Balance-of-Payments Restrictions 
REPORT ON THE 1995 CONSULTATION WITH HUNGARY 
1. The WTO and the GATT 1947 Committees on Balance-of-Payments Restrictions consulted 
jointly with the Republic of Hungary on 26 and 30 June 1995. The consultations were held under 
the Chairmanship of Mr. P. Witt (Germany) and in accordance with the terms of reference, pursuant 
to Article XII:4(a) of GATT 1994 and the Understanding on the Balance-of-Payments Provisions of 
GATT 1994. The International Monetary Fund was invited to participate in the consultation in 
accordance with Article XV: 2 of GATT 1994. 
2. The Committees had the following documents before it: 
Basic document supplied by the Republic of Hungary WT/BOP/2 
Background paper by the Secretariat WT/BOP/W/4 
Notification by Hungary under paragraph 9 of the WT/BOP/N/2 
Understanding on the Balance-of-Payments Provisions 
of GATT 1994 
International Monetary Fund Hungary. Recent Economic Developments and Background 
Issues dated 10 March 1995. 
Opening Statement by the Representative of Hungary 
3. The opening statement of the representative of Hungary is attached as Annex I. 
Statement made by the Representative of International Monetary Fund 
4. The Statement made by the representative of the International Monetary Fund is attached as 
Annex II. 
Discussion in the Committees 
(i) Balance-of-pavments position and prospects; alternative measures to restore equilibrium 
5. Members of the Committees welcomed that Hungary had recognized the need for structural 
measures to address the twin deficit problem of external imbalances and large budget deficit and 
encouraged Hungary to proceed with its economic reform. Members noted, however, that the package 
of stabilization measures announced in March 1995, although valuable, contained essentially short 
term corrective measures such as import surcharge and public sector real wage reductions. Members WT/BOP/R/3 
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hoped that Hungary would replace or supplement these by measures with lasting structural impact 
on the public sector finances and the balance-of-payments situation. 
6. The representative of Hungary stated that imbalances in domestic savings and investment 
had contributed to the worsening of the current account situation. The stabilization program focused 
on measures to increase overall savings: decrease of domestic demand; increase of the profitability 
of enterprises through cuts in real wages; and creation of incentives to increase household savings 
through changes in the pension system. The import surcharge was considered a temporary solution. 
Meanwhile the authorities*would explore ways of more permanent reduction in public expenditure through 
reform of the pension, health and education systems and cuts in various subsidies. Furthermore, the 
Government, with the co-operation of the National Bank, aimed to improve the structure of the budget 
deficit by further cuts in expenditures which would result in a 3 per cent reduction of the budget 
deficit/GDP ratio. The Hungarian authorities had chosen to introduce the import surcharge to improve 
the current account deficit rather than to face the inflationary effect of a larger devaluation of the forint. 
Hungary was a large importer of energy products and it was expected the exemption of such products 
from the coverage of the surcharge would help to prevent cost push inflation. 
7. With regard to the restructuring of the external debt, the representative of Hungary stated 
that the share of short term debt in the total had been reduced from over 70 per cent to less than 
20 per cent between 1990 and 1994 and the share of borrowing by the National Bank had fallen in 
favour of enterprise borrowing. 
(ii) System, methods and effects of import restrictions 
8. Members of the Committees expressed the view that the import surcharge was a price-based 
measure and, therefore, was preferable to other non-transparent measures. Nevertheless, they considered 
that import surcharges should be used to address balance-of-payments difficulties in exceptional 
circumstances and not as a panacea for dealing with a worsening fiscal situation. Import measures 
should be fully justified under the provisions of GATT and should only be maintained for a temporary 
period. Hungary was invited to provide a detailed time-table for the phasing out of the import surcharge. 
9. In response, the representative of Hungary stated that while Hungary had had budget deficit 
over the past several years, the import surcharge was introduced only when Hungary was faced with 
the exceptionally difficult current balance- of-payments situation. 
Conclusions 
10. The Committees commended Hungary for the progress achieved in its transition to a market-based 
trade and economic system. They noted with satisfaction that, since 1989, Hungary had taken significant 
steps to liberalize its trade régime and to move towards the convertibility of the forint. 
11. The Committees recognized that Hungary had experienced a deep recession with high inflation 
in the years 1991-1993. The growth rate of 2.6 per cent in 1994 was accompanied by a further serious 
decline in exports (on a balance-of-payments basis) and by a high level of imports. The 
savings-investment imbalance worsened considerably in 1993 and 1994. The Committees noted that 
both external factors and domestic policy failures had contributed to the deterioration of the current WT/BOP/R/3 
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account in the past two years. The deficit had been financed by capital inflows, allowing the reserve 
position to improve, but external indebtedness had further increased. 
12. The Committees recognized that Hungary had introduced the import surcharge in March 1995 
to address the imminent threat of a serious decline in its balance of payments. The surcharge formed 
part of an economic stabilization package aimed at correcting current account and fiscal imbalances. 
The package also included austerity measures to curb budgetary expenditures, a one-step devaluation 
of the forint and the introduction of a crawling peg exchange rate régime. 
13. The Committees welcomed the fact that Hungary had notified the import surcharge to the WTO 
before its introduction. They recognized that the measure was price-based, uniform and non­
discriminatory, that the surcharge applied to all imports except primary energy products, and that it 
was reimbursable on investment machinery. 
14. The Committees noted Hungary's intention to reduce the import surcharge progressively, 
beginning not later than 1 January 1997, and to eliminate it by 1 July 1997. They endorsed the statement 
by the IMF stressing the importance of eliminating the surcharge within the intended schedule, or 
preferably sooner, and emphasized that import surcharges should not be used for fiscal purposes but 
only in the case of severe balance-of-payments difficulties. The Committees expressed their hope that, 
by the time of the next consultation, to be held in summer 1996, Hungary would be in a position to 
evaluate the effects of the surcharge on its balance of payments and to elaborate on its intention to 
replace the surcharge by permanent structural measures. The Committees requested Hungary also 
to present for the next consultation a concrete time-table for the reduction and elimination of the import 
surcharge. 
« WT/BOP/R/3 
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ANNEX I 
Opening Statement by the Representative of Hungary 
1. The Hungarian Government wishes to present to members of this Committee and, through 
them, to other WTO Members the case of the temporary import surcharge that has been applied by 
Hungary since 20 March 1995 in order to forestall the imminent threat of a serious decline in its 
balance-of-payments position. In doing so, we act pursuant to the provisions of Article XH:4 of the 
General Agreement and m conformity with the relevant provisions of the 1979 Declaration on Trade 
measures taken for Balance-of-Payments Purposes and the Understanding of the Balance-of-Payments 
Provisions of the GATT 1994. 
2. The surcharge was notified by Hungary before its introduction, as required by Article XII :4(a). 
Pursuant to the Decision of 31 January 1995 on avoidance of procedural and institutional duplication, 
this notification, contained in WTO document WT/BOP/N/2, dated 29 March 1995, is deemed to be 
also a notification for the purpose of Article XII of GATT of 1947. The Basic Document for this 
consultation provided by the Hungarian authorities is contained in WTO document WT/BOP/2, dated 
6 June 1995. 
3. The temporary surcharge, that has been introduced by Decree 9/1995 of 17 March, is applied 
on imports of goods. No measure has been taken under the Balance-of-Payments Provisions of Article 
XII of the General Agreement on Trade in Services. 
4. Let me turn to the general context of, and particularly the specific circumstances that led to 
the temporary import surcharge. The profound and radical systemic changes that has taken place in 
Hungary in the late 80's and early 90's accelerated the economic reforms and redirected them to a 
transformation into a market, free-enterprise economy. One of the most important changes that resulted 
from these reforms was a significant deregulation in, and opening up of, the economy in general, and 
a fundamental liberalization of the foreign trade régime and market access in particular. 
5. The process of opening to the world economy resulted in structural changes and shifting trade 
patterns which, coupled with the downfall of the CMEA-system and particularly the collapse of our 
most important former markets in Eastern Europe, led to a considerable reorientation of Hungary's 
trade relations. Trade with OECD countries expanded substantially to reach the share of about three 
fourths in total Hungarian trade, while trade with former CMEA countries, which had accounted for 
over one-half of Hungary's total trade has fallen to less than one quarter by 1994. 
6. As to particular trade measures, Hungary significantly reduced or liberalized tariffs and non-tariff 
measures as a result of both autonomous actions or contractual obligations. Autonomous tariff reductions 
that had been introduced in recent years have reduced the average MFN duty level from 13 to less 
than 10 per cent. In the Uruguay Round Hungary committed itself to reduce its tariffs on industrial 
products by 28 per cent over the implementation period, by the end of which the average level will 
fall below 7 per cent. 
7. Concerning non-tariff measure, the general licensing requirement that had prevailed until the 
late 1980's had been abolished and the scope of products subject to authorization considerably reduced 
since 1989. As a result of liberalization measures, non-tariff barriers applied in the form of import 
licensing and the global quota on consumer goods have been significantly relaxed or abolished in recent 
years. As part of the implementation of Hungary's Uruguay Round market access commitments, 
discretionary licensing for primary agricultural goods and the global quota restriction on food products WT/BOP/R/3 
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as well as that on underwear have been abolished on 1 January 1995. Products still falling under the 
global quota (passenger cars, textile and clothing products, footwear, household detergents) represent 
less than 5 per cent of total imports. At present about 8 per cent of imports are subject to licensing. 
8. Hungary is also committed to further liberalization measures under bilateral or plurilateral free 
trade agreements that have been concluded with some of its European partners, namely the European 
Communities, the EFT A States, the countries parties to the Central-European Free Trade Agreement 
and Slovenia. 
9. As a result of different liberalization measures, growing import demand as well as adverse 
external circumstances, Hungary's trade performance in the past two years showed unfavourable 
tendencies. The value of exports in 1994, after a steep fall in 1993 climbed back to the 1990 level 
of US$10.7 billion. At the same period, responding to trade liberalization, strong internal demand 
and real appreciation of the Hungarian Forint, imports grew steadily from the 1992 level of 
US$11 billion to US$12.5 billion and US$14.5 billion in 1993 and 1994, respectively. While by 1994 
real GDP remained roughly at the level of 1992, real growth of imports increased over 20 per cent 
in the past two years. 
10. The trade deficit that had been US$356 million in 1992 increased tenfold in 1993 and further 
expanded to reach US$3.9 billion in 1994. Trade imbalances with developed market economies 
accounted for about two thirds of the total deficit. 
11. Deterioration of the trade balance constituted the single most important cause for the emergence 
of a serious current account deficit, reaching US$3.9 billion and exceeded 9 per cent of the GDP in 
1994. 
12. The current account deficits had been financed to a large extent by official and enterprise 
borrowing, as a result of which the external debt increased. The ratio of net foreign debt to GDP reached 
46 per cent last year. Growing imbalances in the current account and increased external indebtedness 
have been coupled by the deterioration of the budget deficit in recent years. The deficit in the 
consolidated state budget amounted to the level of over 6 per cent of the GDP in 1994. 
13. Developments in early 1995 showed tendencies of further aggravation of the situation. In the 
first 4 months of the year the balance of trade showed a deficit of over US$1.5 billion , and increase 
of 36 per cent of the same period last year. The current account deficit amounted to US$1.420 million 
in the first quarter. 
14. It was against this background that the Government of Hungary had to resort to measures 
addressing the situation characterized by an imminent threat of a serious decline in the 
balance-of-payments. On March 12, the Hungarian Government adopted a package of stabilization 
measures of which the temporary surcharge was one component. 
15. The package that required amendments to 21 different laws, aims at restoring the macroeconomic 
balances by cutting domestic demand and improving the competitiveness of Hungarian production. 
For reducing the growth of domestic demand the package includes: 
(i) a significant cut in Government expenditures, particularly reducing social transfers as well 
as funds for institutions financed by the Government; WT/BOP/R/3 
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(ii) measures to increase budgetary revenues by strengthening control over illegal economic activities 
and improving tax collection; and 
(iii) lowering the growth of wages in the budgetary sectors and in the state-owned companies which 
employ together more than half of the Hungarian working force. Due to the lower growth 
of wages in these sectors the wage growth in the private sector also substantially declined and 
the real wage level in the first quarter of the year has declined more than 8 per cent. 
16. For improving the^ competitiveness of the Hungarian production the most important steps are 
the following: 
(i) a one time 9 per cent devaluation of the Forint, following further pre-announced crawling peg 
devaluation steps. As a result of this the real exchange rate of the Forint has improved 
substantially, especially on a unit labour cost basis. The pre-announced crawling peg has cut 
speculation and capital flight. 
(ii) further liberalization in the foreign exchange regulations, eliminating the surrendering obligation 
in the business sector, thus cutting the costs for those companies which have important export 
and import turnover. 
(iii) substantial increase of capital in the Hungarian Export Credit guarantee Agency and in the 
Hungarian Exim Bank. 
17. As to the temporary surcharge, which amounts to 8 per cent, I would like to emphasise the 
following: 
(i) The Hungarian Government opted not to apply quantitative restrictions or discretionary licensing 
for balance-of-payments purposes. By choosing a price-based measures as one of the tools 
for addressing the serious trade imbalances, the Government honoured its commitment in the 
Understanding to give preference to a measure that has the least disruptive effect on trade. 
(ii) Furthermore, Hungary has not introduced more than one type of restrictive import measure, 
as is required in paragraph 3 of the Understanding. 
(iii) The surcharge is applied only to exercise control on the general level of imports. One of its 
most essential features is that it is not providing relief or protection to any specific industry. 
It is applied across the board, the only products excluded from its scope being primary energy 
carriers, while in the case of complete machines and auxiliary machines falling under Chapters 
84 and 85 of the Harmonized System that are imported for investment purposes, the surcharge 
is reimbursable. The exclusion from the scope of application or the reimbursement of the 
surcharge for these products is necessitated by their essential nature in the sense of paragraph 
4 of the Understanding, i. e. these are products that meet basic consumption needs and contribute 
to Hungary's efforts to improve its balance-of-payments situation. 
(iv) Another fundamental characteristic of the surcharge is its uniform and non-discriminatory 
application. It is levied on an erga omnes basis on imports from all sources, irrespective of 
whether or not Hungary's trade relations with a given country are based on Article XXIV of 
GATT. 
(v) The Surcharge is calculated on the basis of the customs value of the imported products. WT/BOP/R/3 
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(vi) Furthermore, the level of the surcharge does not exceed what was strictly necessary to address 
the balance-of-payments situation. The short period since the introduction does not permit 
the assessment of the trade effects of the surcharge, but it may hopefully slow down the dynamics 
of the prevailing strong import growth. 
18. Based on the above features, my Government considers that the import surcharge is in full 
compliance with the requirements in Article XII of GATT, the Declaration on Trade Measures taken 
for Balance-of-Payments Purposes and the Understanding on Balance-of-Payments Provision of GATT 
1994. 
19. Hungary recognizes the exceptional nature of trade restrictions taken for balance-of-payments 
purposes and wishes to fully adhere to the commitments in this area resulting from the Uruguay Round. 
20. In this context, I wish to announce that, pursuant to paragraph 1 of the Understanding, the 
Hungarian Government intends to reduce progressively and eliminate the temporary import surcharge 
by 1 July 1997 unless developments in the balance-of-payments situation does not require otherwise. 
21. I would also like to reconfirm my Government's commitment to continue to pursue liberal 
and open trade policies. 
22. The Hungarian delegation is ready to respond, to the best of its abilities, to any questions and 
comments from members of the Committees. We count on your understanding and friendly partnership. WT/BOP/R/3 
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ANNEX 2 
Statement by the IMF Representative 
at the 1995 Consultation with Hungary 
In March 1995, the Hungarian Government adopted a substantial policy adjustment package 
that included among other, measures the imposition of an 8 percent import surcharge. The package 
came in response to a large and rising external deficit and an incipient widening of the fiscal deficit. 
The rebound in domestic demand in 1993/94, coupled with an inadequate domestic supply 
response, was reflected in a sharp deterioration in the balance of payments. Exports were hampered 
partly by exogenous factors-including the recession in Western Europe through 1993, the U.N. embargo 
on the Former Republic of Yugoslavia (Serbia/Montenegro), and drought conditions with a negative 
impact on agricultural exports. However, earlier losses in cost competitiveness and the slow progress 
in many areas of structural reform in recent years also limited the domestic supply response. These 
developments also contributed to the strong increase in imports. Moreover, consumer goods imports 
were boosted by a decline in the household saving rate in 1993 and by rapidly rising real wages in 
1994. Under these circumstances, the external current account deficit increased to close to 10 percent 
of GDP in 1993 and remained at that level in 1994. While foreign direct investment inflows continued 
at historical levels, the larger part of the deficit was financed by borrowing by the National Bank of 
Hungary and the enterprise sector in international capital markets. As a consequence, net external 
debt increased to US$19 billion (46 percent of GDP) at end-1994 and the debt-service ratio reached 
about 53 percent of exports—a high level in international comparisons. 
Fiscal policy continued to be too expansionary in 1994. Even though fiscal revenues benefitted 
from the resumption of economic growth-GDP increased by some 2 percent-the deficit of the 
consolidated state sector (excluding privatization receipts) declined only marginally to 6.9 percent of 
GDP in 1994 from 7.5 percent in the previous year. Monetary policy was tightened significantly during 
1994; this continued during the first part of 1995 as official interest rates were raised and reserve 
requirements were increased in several steps. However, inflation began to accelerate after the first 
quarter of 1994 and was boosted in early 1995 by sharp increases in energy prices and rising food 
prices; subsequently, price increases were affected by the impact from the policy package of March 
1995. As a result, the year-on-year increase of consumer prices accelerated to above 29 percent in 
April 1995 from a low of 16.5 percent in early 1994. 
Available indicators suggest that the broad macroeconomic trends of 1994 continued in early 
1995. The external current account deficit was US$1.4 billion in the first quarter, adding further to 
external indebtedness. In flow terms, foreign exchange reserves fell by US$1 billion even though the 
stock at end-March still stood at US$6.8 billion, a result of favorable movements in cross exchange 
rates. 
Against this background, and signs of a widening fiscal deficit in early 1995, the authorities 
adopted an adjustment package in mid-March that is now being implemented. It comprised three principal 
components: a set of fiscal measures, including reforms to some social programs, designed to hold 
the budget deficit (excluding privatization) to about 6 percent of GDP in 1995; a step devaluation of 
the forint followed by a switch to a pre-announced crawling peg exchange rate; and policies designed 
to substantially lower the real wage bill in the government sector and the state enterprises. The package 
is geared at achieving a reduction in the external current account deficit to US$2.5 billion in 1995 from WT/BOP/R/3 
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US$3.9 billion in 1994. With sizable privatization receipts expected from foreign sources as well as 
continuing other regular foreign direct investment, the authorities estimate that a current account deficit 
of this size could be financed almost in full without an increase in net external debt. 
A key element of the measures adopted in March was an 8 percent import surcharge effective 
March 20, 1995. By increasing the relative price of imports, it is expected to have a direct positive 
effect on the balance of payments. The surcharge is estimated to raise budget revenues by about 
1 percent in 1995. As it would have been preferable to lower the fiscal deficit through other means, 
Executive Directors of the IMF, at the time of the Article IV consultation in March 1995, regretted 
the introduction of the import surcharge, and they stressed the importance of its elimination by mid-1997 
according to the intended schedule, and preferably sooner. 
To switch resources to the external sector and cushion the output effects of the fiscal adjustment, 
the exchange rate of the forint was devalued by 8.3 percent effective March 13. At the same time, 
a crawling peg exchange rate arrangement was adopted with a view to stabilizing inflation expectations 
and to preventing the short-run speculative pressures that characterized the previous system of ad hoc 
exchange rate adjustments. Under the new arrangement, the forint is being depreciated by 1.9 percent 
per month during the second quarter; in the second half of the year, when inflation is expected to 
decelerate, the rate of crawl will be reduced to a maximum of 1.3 percent per month. 
For the most part, Hungary's external trade and exchange system is free of restrictions. A 
new foreign exchange law and accompanying regulations have been submitted to Parliament and are 
intended to ensure that the new legislation will allow Hungary to adopt the obligations under Article 
Vin, Sections 2, 3, and 4 of the IMF's Articles of Agreement. Further trade liberalization measures 
were adopted at the beginning of 1995 in the context of agreements under the Uruguay Round and 
with the EU, EFTA, and CEFTA, and the few remaining restrictions are detailed in the Secretariat's 
background note. 
The Government's March adjustment package presents a courageous first step towards securing 
macroeconomic stability. However, there are significant risks that the policy program on its own will 
not fully achieve the authorities' targets. The program relies heavily on wage restraint to effect a 
projected 15 percent improvement in competitiveness; but it remains uncertain if the implied large 
decline in real wages can be achieved. Moreover, even if wages could be restrained as envisaged, 
major effects on the external accounts are likely to arise only with some lag. From a saving-investment 
balance perspective, the fiscal adjustment may prove insufficient in 1995 with a budgeted improvement 
in the fiscal deficit (excluding privatization) of less than 1 percent of GDP, and a significant risk of 
slippages in some areas. In all, and taking into account first quarter developments, it is unlikely that 
the authorities' current account target for 1995 will be achieved, unless additional measures are taken. 
Moreover, even the envisaged current account target would not arrest the accumulation of external 
debt, as privatization is likely to be delayed and yield less than programmed. Under these circumstances, 
additional steps will have to be taken quickly-backed by structural measures, including pension reform, 
to increase domestic saving—to effect a more ambitious improvement in the external current account. 
The steps will need to include further fiscal consolidation, inter alia, to compensate for the phasing 
out of the import surcharge. 