Analyse the debt of Hungary in the 1990's. Use economic theory to explain the relationship of debt with the macroeconomic aims and indicators.

The balance of payments depends mainly on how the revenues and expenditures change within a given time period. How these change depends on the economic policy, because the stimulating economic policy is likely to bring deficit and the restrictive one profit (sufficit) or little deficit. But the economic policy is only one factor that affects the process of changing in the revenues and expenditures. It has proved that when looking at the business cycle of one country, mostly in times of recession there is a deficit and in times of prosperity there is a sufficit or very little deficit. This is an effect of economic stabilisers, because the reduction in GDP causes in the meantime the reduction of tax revenues. The growth in unemployment has just the same effect. The increase of inflation causes a growth of the interest rate, which means that the interest costs of the state debt will be risen as well.

We should define here now what primary deficit and what total deficit mean. The primary deficit is the difference between the revenues and the expenditures. If interest payment on debt is added to it we will get total deficit. If in a given time period there is primary deficit in the economy, the total deficit will rise as interest should be paid on debt, which interest has grown as the interest rate has risen due to the deficit. This way a cycle can be born, which causes that the deficit makes the debt to rise, the bigger debt causes that bigger interest should be paid on debt, which again makes the deficit grow. And the bigger deficit makes the debt grow again and so on, and so forth. This problem can only be solved in a way that primary deficit should be ceased, and this will make the debt to decrease. So the expenditures should be decreased in such a way that they should equal revenues or even revenues should exceed a little expenditures. This can be of course very painful to the economy and can even cause a fallback in economic growth. Which is again a contradiction to one of the macroeconomic aims of an economy that is high and stable economic growth . Having known all these we can look at how the deficit and debt formed in the period 1990-1997.

The analysis of debt in the 1990’s

For analysing the debt in Hungary in the 1990’s we would like to use Tables 1, and 2 in the Appendix. . In Table 1 we can see the percentage change from year to year of GDP, which reflects the economic growth of the country, it also shows the unemployment rate, the current account balance, the amount of foreign debt. Table 2 shows the current account balance and external debt as a percentage of GDP. These all will be needed for the analysis and to draw conclusion how debt has affected the macroeconomic aims and indicators. We would also like to use Diagrams 1-4,6.

Two main periods can be distinguished in all 4 diagrams. The first period between 1990-1994, and the second period between 1995-1997. From 1991, we can see a rapid economic growth (there was a need to change the whole economic system), and this economic growth had commenced alongside decline of inflation, resulted in a dramatic increase of imports and a rapid increase of indebtedness of the state and the country. In 1995 a change come to all this, because the new government introduced tough stabilisation measures, and began to apply a fundamentally new economic policy. This policy is equally characterised by efforts made at stabilisation and improvement of competitiveness. Therefore, while in 1994-1997 the indicators of equilibrium and indebtedness improved radically. The growth of GDP slowed down only for an interim period. (See Diagram 3) There was also a growth in exports. The inflation process that accelerated again in 1995 as an unwelcome consequence of the adjustment was brought under control already in 1996 and in 1997 the rate of price increase continued to substantially decelerate. (Diagram 7.) This process was also followed by a decline of interest rates. 

 Let us look at the cause one by one. The state debt has grown very rapidly in the first period. This was mainly due to the increase of budget deficit (which has grown ever since 1990 until 1994), and on the other hand because the privatisation began, so it decreased the property of the state. In most of the cases privatisation would reduce the debt, but in Hungary the revenues from privatisation were spent, which caused excessive expenditures.  In 1995 a law was passed in, which stated that the revenues from privatisation should be spent on debt service, that is to reduce the debt of the country.. This brought its effect, as the debt has decreased from 1995, with special regard to foreign debt. The decline of debt, mainly the decline of external debt was due to the big inflow of foreign capital, the firm and bank sector took up foreign credits; (the interest in foreign countries was smaller, and less risky), and most of the privatisation revenues came from abroad. The first two of the mentioned have a real macroeconomic effect, they increase the net internal debt, by decreasing the net external debt Privatisation revenues increase only the internal debt if they make the government to spend more. The internal debt has increased again because from 1990 the developed countries and foreign organisations no longer financed the budget deficit. The state debt could have also grown because of another fact. The currency of Hungary was not convertible until 1996. We know from above that the current devaluation of the Forint made the interest rate on debt grow, that is why there was extra debt generated. Since 1995 the budget deficit is declining, which is also a cause of the decreasing debt. The decreasing deficit is mainly due to the cut in the expenditures, (which caused the slow down of economic growth in 1995-1996). The reduction of expenditures was extremely radical and was not limited to the financial restrictions applied of necessity. “Reform type initiatives were taken in areas hardly affected earlier (education, social policy) and effective selection was carried out in the institution system, the separated state funds, in the principles of funding. A fundamental and comprehensive reform took place in 1997 in the pension scheme, albeit the transformation of the whole of the social security system is still to be undertaken.”(Tables 1,2,and Diagrams 1-4, 6)

The changing of the external debt brought a positive image for Hungary. It became an attractive and reliable place for investment. The attraction of foreign currency to the country is very essential, cause it may help to speed up economic growth of the country, may reduce unemployment by providing new places of work for the citizens of the country, and although not directly but it may reduce inflation. (More people can work, more people can pay taxes, increase in government revenues, no or less price increase). But the too big amount o foreign investment in the long run will not be good either, as it causes an increase in the internal debt.

 We have not yet examined yet how the exchange rate changed in the above mentioned two periods. Let us look at Diagram 8..There we can see that there is stable growth in the Forint dollar exchange rate without any fluctuations.  We can state that as the Forint approached to became convertible, the exchange rate went higher and higher, and there were not two periods here, which may mean that there was ever growing interest towards Hungary.

Conclusion

Altogether  we can summarise that from the four macroeconomic aims, goods steps were made towards achieving most of them. Economic growth is not to fast, but the aim here would be to achieve economic growth without any shock, (the increase of inflation and so on). There were good steps toward reducing unemployment, but the unemployment rate is still too big and something should be done about the black labour force market as well as there are many people working unregistered, that is they have incomes without paying taxes. It is very good that the exchange rate between the dollar and Hungarian Forint is not fluctuating, that is it is stable. The deficit of the budget is still too big. It would be essential to reduce this to the extent so that no primary deficit would be achieved so as to stop the increase of internal debt. If the internal debt is too big there will be inflation again which is not good for the economic development of the country.

To the extent of economic policy definitely retains the requirement of improving competitiveness and the of preserving equilibrium for the following years. It will be possible for the economic development of Hungary and her economic policy to get over the decades’ old dilemmas of “balance or growth” and “stimulation or restriction” and a balance keeping economic growth based on the improvement of competitiveness may gradually accelerate. This would be very essential to achieve as Hungary wishes to be part of the European Union  soon, which may also arise new economic problems, and in the meantime better solutions for the country.

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