Note: This document may not always reflect the actual appropriations determined by Congress. Final budget allocations for USAID's programs are not determined until after passage of an appropriations bill and preparation of the Operating Year Budget (OYB).
HUNGARY
FY 1998 Assistance to Central Europe Request . . . . . . . . . . . . . . . . . $7,000,000 Introduction
United States political, security, and economic interests continue to be served best by an active foreign assistance program in support of Hungary's efforts to transform itself into a democratic, open market society. Hungary enjoys excellent relations with the United States, and participates actively in U.S.-led security initiatives, including the Organization for Security and Cooperation in Europe, and the North Atlantic Treaty Organization (NATO) Partnership for Peace Program. Seven countries share borders with Hungary, including Serbia, Croatia, and Ukraine. At considerable cost to its economy, Hungary collaborated fully in United Nations (UN) sanctions against Serbia-Montenegro The Hungarian Government (GOH) has actively supported UN and NATO peacekeeping efforts in Bosnia-Herzegovina, and -- as a major front-line State -- continues to provide a vital staging and support base for American and other IFOR troops serving in Bosnia. Over 3,000 U.S. support troops are currently stationed in southern Hungary, and a representative number of Hungarian support troops are also serving alongside NATO partners in Bosnia.Hungary has moved purposefully to establish a free market economy. A sound, broad legal and regulatory framework is in place, ensuring international corporate accounting standards as well as laws on bankruptcy and liquidation. A five-year program to bring 470 Hungarian laws into harmony with European Union standards was initiated in 1995 and is proceeding on schedule. Foreign capital is encouraged by a liberal foreign investment regime. The economic transition process has led to strong growth in new businesses. Small enterprises are playing an increasingly important role and now account for nearly one-third of Hungary's gross domestic product (GDP). Hungary leads the rest of Central Europe in privatizing State-owned assets, and its private sector is now reported to account for at least 70% of GDP. Liberalization of product, service, and capital markets, as well as deregulation of economic activities have largely been completed. Most consumer and producer price controls have been removed. Tariffs and import restrictions have been reduced significantly, and the bulk of trade (63%) is with European Union members and other Western partners. In October 1996, Standard and Poor followed another American credit rating agency, Duff and Phelps, in upgrading Hungary to investment rating level (BBB-), in response to the Government's ambitious debt repayment schedule.
By almost any standard, Hungary is a democratic country. The country has a fully democratic and representative political system based on free and fair elections. In March 1990, Hungary's first national parliamentary elections were held and were generally considered to be free and fair. The first post-communist era democratic government was formed in May 1990. In 1994, new elections resulted in the Socialist Party's (MSZP) regaining an absolute majority of seats (54%), replacing the previous center-right coalition. The MSZP has governed in coalition with the Free Democrats (SZDSZ), and has honored its platform commitment to free market restructuring and Hungary's integration into Western European economic and political institutions. Adjustment to democratic government has been rapid. Freedom House scoring (based on a scale of 1 to 7, with "1" representing the highest level of freedom,) is a good indicator of how far Hungary has come: with regard to political rights, Hungary's rating progressed from a "5" in 1988-89 to the highest democracy rating by 1993-94. With respect to civil liberties, Hungary rose from a "4" in 1988-89 to "2" in 1990-91.
The Development Challenge
Hungary's continuing transition from command to market economy has entailed numerous structural changes and resulted in largely privatizing the economy. The results, at the macro-level, became more pronounced in late 1995 and augur well for eventual economic recovery as this trend continues. In early 1995, the Hungarian Government embarked on a tough stabilization program, aimed at curbing the current account and budget deficits, as well as reaffirming the Socialist-Free Democrat coalition's commitment to privatization. This austerity program has shown encouraging results. GDP growth is modest, but current account and budget deficits continue to decline, and private direct foreign investment reached an unprecedented level of $13 billion by the close of 1995 (with $15 billion anticipated by December 1996). Hungary remains Central Europe's most favored recipient of foreign private investment, with the United States the single most important source, providing an estimated 40% of the total.The "twin deficits" (in the balance of payments current account and fiscal account) are un-sustainable, but progress is being made. Traditionally large trade imbalances have been reduced, although imports continue to exceed exports. The fiscal deficit declined from 7.5% of GDP in 1994 to 6.6% in 1995 and the current account deficit of the Balance of Payments declined from 9.5% of GDP in 1994 to 5.6% in 1995. With a public debt to GDP ratio of 0.71 at the end of 1995, Hungary's growth prospects may be compromised unless the process of expansion continues to be accompanied by steady reduction in the level of gross external debt to approximately 60% of GDP.
While revenue from some late-1995 privatizations helped to reduce the debt, Hungary remains the single most heavily indebted country in Europe. Macroeconomic policy adjustments, taken in March 1995 to prevent further deterioration in the current account, appear to have succeeded. The Government plans on financing future current account deficits through foreign direct investment and increased exports, so as to avoid further increases in external debt.
Progress has not been achieved without considerable hardship and sacrifice. For most Hungarians, living standards have continued to decline since 1989. Health, education and social infrastructure -- heavily dependent on dwindling central budget allocations -- have deteriorated; employment and inflation have persisted at high levels; and the gap between rich and poor continues to increase. Unemployment and inflation rates remain high, officially estimated at 11% and 23% respectively, while real wages continue to fall by about 7% annually (in all cases actual rates may be higher than officially recorded). Efforts to overhaul central budget outlays, in order to bring them within the four percent of GDP level stipulated by the International Monetary Fund (IMF), are likely to continue effecting declining living standards for an increasingly large number of Hungarians. In 1994, it was estimated that one-quarter of the entire population were living at or below the poverty line. A 1995 World Bank study suggests that this number may now be even larger, with children, dependent mothers, and pensioners among the most vulnerable. A 1996 American Embassy analysis of health data also noted record low fertility and exceptionally high mortality rates -- the worst since World War II -- which had "accelerated since the fall of Communism...[and which] will have a significant impact on...the Hungarian economy in the next century." Early in 1996, after heated cabinet discussions over further social welfare and health program cuts, Finance Minister Bokros offered his resignation for a second time and it was accepted. His successor remains committed to austerity reforms, however, and the Government is pressing ahead with IMF-backed stabilization policies.
With the major structures of a functioning democracy in place at the macro level, continuing efforts are needed to promote democracy to the grass roots level. Many Hungarians are uncertain and skeptical as to how the new system provides for social welfare support (taken for granted for 40 years). To make Hungary a truly Western style democracy, continuing efforts are also needed to strengthen its civil society through improvements in the media and non-government organizational (NGO) structures.
Most local governments have yet to become effective and accessible, and need to foster the involvement of a rapidly growing NGO sector in community affairs, both as forum for day-to-day citizen participation and as effective partners working in the interest of local populations. Although most local government officials are competent and well motivated, many do not have access to the technical expertise associated with modern management. Management systems are generally incomplete, and cooperation with the new, burgeoning NGO community is often untested or less than enthusiastic.
Other Donors
SEED-funded USAID obligations for Hungary over 1990-96 amount to $240 million, primarily in the form of technical assistance and Congressional-earmarked capitalization of the Hungarian-American Enterprise Fund ($70 million).Since 1990 the European Union's (EU) Phare program has committed approximately $637 million in assistance to Hungary through technical assistance programs and loans. EU/Phare planned assistance to Hungary for 1995-1999 is estimated at $553 million. Enterprise development (including privatization), agriculture, and environmental projects account for over half of EU/Phare commitments.
The British Know How Fund has committed approximately $45 million in grant-funded assistance to Hungary over the same period. Although there is no fixed annual budget for Hungary, approximately $6.5 million is programmed annually. Assistance is mainly provided through grant support to individual projects supporting economic restructuring.
The German Government has, since 1990, provided approximately $71 million in assistance to Hungary through its bilateral assistance program. The emphasis of the German assistance program is on support to small and medium-sized enterprises -- about 40% of a $14 million-a-year grant program.
Since 1991 the European Bank for Reconstruction and Development (EBRD) has approved approximately $1 billion in public and private sector loans for 35 investment projects in Hungary which, in terms of lending magnitude, is second only to EBRD loans to the Russian Federation.
The World Bank has committed approximately $1.7 billion in loans since 1986. An additional 10 loans totalling approximately $950 million are currently under preparation. The Bank has focussed on supporting Hungary's efforts to create a market-oriented competitive economy more conducive to private sector development.
Cumulative Japanese grant assistance since 1990 totals approximately $15 million, and is directed primarily to environmental protection, agriculture, industrial and productivity development, health care, and cultural activities.
FY 1998 Program
The SEED program will assist Hungary in instituting more sound fiscal policies and fiscal management practices; creating a more competitive and market-responsive private financial sector; improving the performance of private small and medium enterprises; creating an economically sustainable, restructured energy sector; and creating an environment where better informed citizens increase their participation in decision-making at the local level. In so doing, USAID will have assisted Hungary in its national transformation to a democratic society, a market-oriented and private sector-led economy, integrated into key international systems and Western institutions.The 1998 Program has two general thrusts: support for the remaining activities aimed at macro-level issues such as fiscal and financial reform; and enhancing Hungary's ability to carry out the last stage of full democratic and economic transition: bringing both the responsibilities and benefits of the country's transformation to a level closer to the average Hungarian family and community -- in business, in government, and in non-governmental associations. Current budget plans propose FY 1998 as the final year of funding. However, macroeconomic analysis suggests that Hungary may require further assistance in the economic restructuring area. This need will be assessed during the next year.
Strategic Goal: Economic Stabilization and Transformation
Hungary has become the region's leader in privatization. Only 30% of the 1,857 State-owned enterprises (SOEs) in 1990 remained in state hands at the end of 1995. Cumulative direct foreign private investment since 1989 is estimated at $15 billion (foremost in the region, both in absolute and relative terms) and value added generated by the private sector is now close to 70% of total GDP, compared with scarcely 20% six years ago.
This outstanding performance resulted from the convergence of exceptional political commitment on the part of both post-1989 Hungarian administrations and a highly flexible, collaborative, and well targeted U.S. privatization assistance package (totalling more than $20 million in advisory services).
With early SEED/USAID assistance, Hungary's State Privatization Agency (SPA) became a respected and trusted organization. Early USG assistance also enabled the SPA to proceed to the second step and with a second stage of SEED assistance, write tender offers, evaluate environmental liabilities, find buyers, evaluate bids, and structure and negotiate deals. During the period September 1993 to July 1995, the SPA, with direct USAID input, sold 42 enterprises and closed 20 postponement, bankruptcy and liquidation transactions. The total value of these operations amounted to some $620 million: $241 million in sales proceeds and $379 million in new capital subscribed.
In late 1992, the privatization effort for the less profitable smaller firms and agriculture enterprises began to lag amid growing concern that undercapitalized Hungarian investors were unable to compete with foreign capital in the contest for the remaining stock of viable State-owned enterprises. SEED- funded assistance helped to develop a wider range of financing and management methodologies. In addition, USAID assisted Hungary in drafting Employee Stock Ownership Plans (ESOPs) enabling ESOP legislation which soon became the third ESOP law on the books in the world, after the United States and the United Kingdom. By the end of 1995, approximately 200 companies employing over 75,000 people had been privatized through ESOP plans.
In 1994, USAID also provided assistance to assist the then State Asset Holding Company (AVRt), and later known as the State Privatization and Property Company (APVRt), in working on politically or technically complicated privatization projects, such as companies producing national treasures (ceramics, for example) and companies producing in strategic areas. APVRt and KPMG completed the privatization of VIDEOVOX in January 1996. Hungary's APVRt is now fully qualified to complete on its own virtually any of the privatization actions that remain to be undertaken.
As a result of these successes, USAID considers this privatization Strategic Objective fully achieved and has closed it as an ongoing Strategic Objective. The last of important privatization activities, banking and energy, are critical to other strategic objectives and will be continued under other strategic objectives discussed below.
Strategic Objective: Increased Soundness of Fiscal Policies and Fiscal Management practices Large and general government deficits over a protracted period have destabilized the Hungarian economy. Domestic imbalances stemming from debt-financed government spending have spilled over into the external sector, creating large, unsustainable balance of payments deficits. Government recourse to the banking system to finance substantial government spending in excess of revenues compromises the Central Bank's ability to pursue coherent monetary policies and reduces financing availability at reasonable interest rates for increased private investment.
Strategic Objective: Improved Performance of Small and Medium Enterprises (SMEs) The SME sector is critical for Hungary's transition to a sustainable, market oriented economy for three reasons. First, the SME sector will help redress the problems of missing lead and lag industries which provide the interconnection among industries in the sector. Second, competition among small businesses will foster a culture of competition and private initiative, critical for a country aspiring to succeed in competitive international markets. Third, SMEs, for each dollar invested, provide the highest rate of employment generation, an issue which in Hungary is critical to sustaining popular support for transition itself.
Strategic Objective: A More Competitive and Market Responsive Private Financial Sector The financial sector in Hungary remains underdeveloped and unresponsive to the needs of Hungary's growing private sector. The financial system that embraces insurance, banking and other capital markets is immature and not yet fully capable of responding to the diverse needs of a growing, complex market economy, even though most of the policy, legal and regulatory framework needed for future success is in place. In 1996, the Ministry of Finance turned all rights over the country's national banks to the State Privatization Holding Company, un-blocking the possibility of bank privatization.
Strategic Objective: An Economically Sustainable, Restructured Energy Sector Without a reliable, economically and technically efficient energy sector, Hungary cannot realize its goals of economic growth and ability to compete in the world's market economies. The pre-transition energy sector was economically inefficient and technologically out of date, with no economic incentives to produce or use energy in a way that reflected its real costs. Specific end-use technologies were promoted by the former regime as a matter of national policy, which today are non-economic and often environmentally harmful. Under market conditions these inefficiencies are an impediment to economic growth and competitiveness of Hungarian industry. The Government of Hungary and USAID have identified an economically sustainable, restructured energy sector as a key condition for Hungary's economic growth and transition to a market economy.
Strategic Goal: Democratic Transition
Strategic Objective: Better Informed Citizens Increase Their Participation in Decision-Making at the Local Level Many Hungarians are frustrated by a new and unfamiliar form of government which they find difficult to understand. They see their standards of living eroding and do not see the new political system as providing them with control. Radical and rapid decentralization devolved major socio-economic responsibilities onto local communities unable to manage or to finance them. Nor was the devolution of responsibility from central to local government matched by a corresponding transfer of administrative experience and financial resources. Appeals to individual initiative and self help are without meaning to many Hungarians, who see no tangible alternative vision to the very broad safety net which the previous political system provided.
With the major structures of a functioning democracy in place at the macro level, Hungarians continue to need help in bringing democracy to the grass roots. The average Hungarian demands to know how the new system provides for social economic support taken for granted for 40 years and how to survive as well as prosper in the new system. To make Hungary a truly Western-style democracy, continuing efforts are needed to strengthen its civil society through improvements in the media, non government organization structure, and local government capacity building of elected leaders and technical staff.
Cross-Cutting and Special Initiatives
USAID/Hungary is utilizing 3 discreet activities to provide support for the strategic objectives in the form of activity monitoring, evaluation, and training. Over 200 Hungarians have been brought to the United States for training (usually short-term), in addition to which a number of Parliamentarians and high-level Government officials have been enabled to visit American communities, in order to see local government and modern production and marketing operations at first hand.
HUNGARY
FY 1998 PROGRAM SUMMARY*
Strategic Objectives
Economic Restructuring Democratic Transition
Social Stabilization Cross-cutting / Special Initiatives Total Privatization -- -- -- -- -- Fiscal Reform 1,750,000 -- -- -- 1,750,000 Private Enterprise 1,150,000 -- -- -- 1,150,000 Financial Reform 1,350,000 -- -- -- 1,350,000 Energy -- -- -- -- -- Citizens' Participation -- 1,750,000 -- -- 1,750,000 Legal Systems -- -- -- -- -- Local Government -- -- -- -- -- Crises -- -- -- -- -- Social Benefits -- -- -- -- -- Environmental Health -- -- -- -- -- Cross-cutting / Special Initiatives -- -- -- 1,000,000 1,000,000 TOTAL 4,250,000 1,750,000 -- 1,000,000 7,000,000 *Support for East European Democracy (SEED) Act funds
USAID Representative: Thomas F. Cornell
ACTIVITY DATA SHEET PROGRAM: Hungary
TITLE: Fiscal Reform, 180-S001.2
STATUS: Continuing
PROPOSED OBLIGATION AND FUNDING SOURCE: FY 1998: $1,750,000 SEED Act
INITIAL OBLIGATION: FY 1992; ESTIMATED COMPLETION DATE: FY 2000
Purpose: Increased Soundness Of Fiscal Policies And Fiscal Management Practices
Background: Sound fiscal policies and fiscal management practices are the necessary underpinnings of Hungary's efforts to achieve a dynamic private sector economy.
Large general government deficits during 1991-1994 were identified as a principal reason for progressive destabilization of macroeconomic financial structures in the Hungarian economy. By 1993 domestic imbalances had spilled over to the external sector, resulting in unprecedented pressure on the balance of payments and the exchange rate. Official inflation figures rose from 21.1% in 1993 to 28.3% in 1995. During the period 1992-1994, the general government deficit averaged more than 7% of GDP. In 1993, total spending by Hungarians was 9% higher than incomes. The current account deficit of the Balance of Payments rose to the equivalent of 9.5 percent of GDP as exports declined and imports soared. Gross household savings declined from about 15% of GDP in 1991 to less than 8% of GDP in 1993. The stock of external debt rose 32% in 1993-1994, from 59% of GDP in 1992 to 69% of GDP in 1994. During the same two-year period debt service rose from 39% of exports of goods and non-factor services to 61%. Arrears, however, have not accumulated (as is often the case for countries with this magnitude of debt servicing burden).
The intrinsic causes of these imbalances have been political, bureaucratic, economic and technical. For political reasons the authorities sought to minimize hardship and other disruptions inherent in the change from a central command economy to one characterized by democracy and open markets. This has included maintaining an implicit social contract regarding health services and social security.
While Hungary appears as a moderately well-off middle income country in contrast to its neighbors, the loss of preferential COMECON trading arrangements and reduction in output wrought by dislocation and reorganization in the transition from predominately State to private ownership and management has very adversely affected household incomes and consumption patterns. Problems such as wide-spread unemployment did not exist before 1990.
The challenge facing the GOH is how to sustain needed fiscal reforms without compromising or stopping progress on economic restructuring or delaying economic recovery and expansion.
USAID Role and Achievement to Date: A major priority for the GOH is pension reform. USAID/Hungary assistance has been vital to the development of a reform framework and legislative options. Several USAID/Hungary activities have improved management practices in the health sector. An environmental economics program has demonstrated how different ministries can collaborate to achieve defined social goals more cost effectively.
Description: USAID/Hungary supports the GOH's global strategy for addressing fiscal reform. This strategy is based on the three principal elements of responsible fiscal management: more efficient budget and program management; improved revenue generation; and rationalization of the role of government.
USAID/Budapest is working with the GOH and other donor partners in developing effective, cost-efficient ways to strengthen the institutional underpinnings of sound fiscal policy-making andfinancial management. In addition to structural adjustment lending and balance of payments support, the IMF and the World Bank have provided important technical assistance to Hungary in tax administration, revenue forecasting, treasury/debt management, expenditure management, pensions administration and health sector reform. Complementary USAID assistance has been provided in many of these fields, particularly through SEED-financed U.S. Treasury assistance programs. USAID will continue to coordinate assistance efforts with those of the IMF and the World Bank to support the GOH's determination to improve fiscal policy and fiscal management practices, through technical assistance in budget and program management, improved revenue generation, and rationalization of the role of government.
Host Country and Other Donors: International Monetary Fund, World Bank, EU-Phare.
Beneficiaries: Every citizen is directly affected by how government manages fiscal policies. Thus, USAID's ultimate beneficiaries are the Hungarian people, who will enjoy higher quality government services delivered in cost effective ways that are expected to require a diminished tax burden over time. Principal intermediate beneficiaries are the Ministries of Welfare and Finance. Other key intermediate beneficiaries include the National Health Insurance Fund, National Pension Insurance Fund, and the Ministry of Environment.
Principal Contractors, Grantees, or Agencies: U.S. Treasury Department, U.S. Dept. of Health & Human Resources (USHHR), Financial Services Volunteer Corp. (FSVC), SOLON (health financing consultants), Center for International Private Enterprise (CIPE), and the Joint International Commission on Accreditation.
Major Results Indicators:* Baseline 1992 Target 1999Planned/actual budget deficit (actual 182.5% 6% as % of planned differential)
Tax audits 296,000 400,000
Tax returns 7,500,000 9,400,000
Government expenditures (as % of GDP) 54.2% 45%
* These and indicators shown in following Activity Data sheets are illustrative and still under review. USAID/Budapest is in the continuing process of developing measurable country-specific indicators and targets, to be completed in 1997.
ACTIVITY DATA SHEET PROGRAM: Hungary
TITLE: Private Enterprise, 180-S001.3
STATUS: Continuing
PROPOSED OBLIGATION AND FUNDING SOURCE: FY 1998: $1,150,000 SEED Act
INITIAL OBLIGATION: FY 1991; ESTIMATED COMPLETION DATE: FY 2000
Purpose: Improved Performance of Small and Medium Sized Enterprises (SMEs).
Background: The SME sector is of critical importance to the Hungarian economy. Some 50% of all jobs in Hungary are SME-generated and SME contributions to GDP approach 50%. SMEs also account for 30% of industrial exports. 97% of all SMEs are microenterprises with fewer than 11 employees. Positive SME growth has declined in recent years, as the number of productive firms has itself declined. Accordingly, there is a pressing need to support small enterprises with growth potential so that they can contribute more to the national economy. This premise guides USAID/Hungary's SME Strategic Objective.
USAID Role and Achievements to Date: USAID/Hungary assisted in the establishment of five total quality management (TQM) centers which serve hundreds of small entrepreneurs. The TQM model has been adopted in the formal curricula of major Hungarian Universities. Some 115 Hungarian entrepreneurs have received short-term training in the U.S. and have been given the opportunity to meet American counterparts. One result has been the formation of several joint ventures.
USAID/Hungary has provided curriculum and training in risk and credit management to senior and middle-level bank managers of the National Savings Bank (OTP). Implementation of these new procedures paved the way for a new small business loan portfolio guarantee program which will increase the availability of loans to SMEs.
SEED-funded assistance enabled USAID to arrange short-term technical assistance by U.S. business professionals to over 200 Hungarian SMEs, enabling the latter to develop business plans and institute modern management and production techniques.
Description: USAID/Hungary assists Hungarian SMEs by addressing constraints in four principle fields: access to commercial banking services; access to market and technology information; more efficient business systems and practices; and a more rational tax structure.
USAID/Hungary's efforts to improve access to commercial banking services include helping SMEs to prepare better loan applications, training loan officers and other key bank personnel on how to be more responsive to customers' needs, and providing information about available financial services. Other donors have significant resources available for sector lending. USAID/Hungary uses its limited resources, and the proposed Credit Guaranty Fund, to work with banks and other donors in developing "packages" of financing and technical assistance, enabling select SMEs to demonstrate the financial viability of such lending. SMEs engaged in agriculture and agribusiness are specifically targeted, since these entrepreneurs traditionally had very limited access to credit.
USAID/Hungary's efforts to improve access to market technology include access to the Internet, as a multi-donor-sustained system of information flows to SMEs. USAID/Hungary introduced the Internet through a system of 35 Local Enterprise Agencies (LEAs) established to provide training and support to local enterprises. Small entrepreneurs thereby gained access to information and were able to promote the sale of their own products and services. The resulting networks will make information on market opportunities available over strategically located computerized databases. Appropriateinformation is also available to banks and other lenders, to facilitate credit decision-making.
These efforts to improve business systems also support local organizations that help entrepreneurs acquire essential skills as, for example, in institutionalizing modern business and management instruction in universities and technical schools.
Host Country and Other Donors: To support Small and Medium Enterprises, USAID works with several other donors. The European Union's assistance program (EU-PHARE) provides credit resources for SMEs. Other donors providing significant bilateral assistance include Austria, Belgium, Finland, Italy, Ireland, Turkey, the Netherlands and the British Know How Fund.
Beneficiaries: It is estimated that there are about 800,000 SMEs in Hungary, of which about half are active. Although only a limited number receive direct assistance, a greater number eventually benefit when domestic services and resources become more available as the result of this assistance.
Principal Contractors, Grantees, or Agencies: KPMG-Barents, Center for International Private Enterprise, Volunteers in Overseas Cooperative Assistance, Agricultural Cooperative Development International, World Learning, State University of New York, Indiana University, Eastern Europe Real Property Foundation, International City and County Management Association, Urban Institute, The Center for International Private Enterprise, and the Share Participation Foundation.
Major Results Indicators:* Baseline 1991 Target 1999Banking system credit to small enterprises 2.2% GDP >2.5% GDP
Users of sponsored database facilities -0- 20,300
Targeted firms with business plans TBD TBD
Taxable private-domestic business profits -7.1% GDP 4.5% GDP
* These are illustrative indicators and are under continuing USAID/Budapest review.
ACTIVITY DATA SHEET PROGRAM: Hungary
TITLE: Financial Reform, 180-S001.4
STATUS: Continuing
PROPOSED OBLIGATION AND FUNDING SOURCE: FY 1998: $1,350,000 SEED Act
INITIAL OBLIGATION: FY 1992; ESTIMATED COMPLETION DATE: FY 2000
Purpose: A More Competitive and Market Responsive Private Financial Sector
Background: Modern, responsive financial systems embracing the banking system, the insurance industry, security and capital markets are necessary for efficiently and effectively channeling savings to the investment opportunities that propel and sustain economic growth. The financial sector in Hungary remains underdeveloped and unresponsive to the needs of a sustainable market economy.
Hungary's overall financial system is weak and its banking sector is dominated by poorly performing state-owned banks. Financial system supervisory institutions are in a start-up phase and not yet developed. The extent to which supervisory agencies can be genuinely independent is not yet established in Hungary. Inefficient banking system intermediation has resulted in inappropriate asset structures, high spreads and poor average operating performance. Average capitalization of banks is not adequate by international standards.
Of the 43 banks in Hungary in 1995, 22 were partially or wholly foreign owned. These 22 banks controlled just 21% of banking assets, yet accounted for 44% of the corporate lending market. The large state-owned banks have difficulty competing in the financial market place despite expensive government attempts to restructure them in recent years.
In August 1996, the Economic Cabinet approved the new banking law which will merge the bank and stock exchange regulatory agencies. This development makes the job of banking supervision complex, because of the need to incorporate into the institution building task responsibilities related to the stock exchange.
USAID Role and Achievements to Date: Through USAID/Hungary assistance, a draft of the Financial Institution Law has been refined for submission to Parliament and is expected to be effective in 1997. A centralized Treasury Department in the Ministry of Finance is now fully operational.
On-site bank audits by the Hungarian State Banking Supervision Agency are now being done.
USAID/Hungary is assisting the Hungarian Bank Association sponsoring a new credit rating agency expected to be operational in 1997. In collaboration with U.S. Treasury advisors, substantial support has been provided to GOH agencies in bank restructuring and privatization. By the end of FY 1996, eight state-owned banks were wholly or partially privatized. Four additional banks are expected to be privatized by the end of 1998.
Description: USAID/Hungary is assisting Financial Market reform by addressing constraints in the areas of regulation and supervision and operational efficiency.
USAID/Hungary is assisting Hungary to improve financial regulation and supervision and operational efficiency through activities designed to referee the system in terms of its principal institutions: The Ministry of Finance, regulatory agencies, a credit rating agency, The Hungarian Bank Association, the Budapest Stock Exchange, Securities Clearance and Settlements Facility and similar institutions.
USAID/Hungary provides expert technical assistance to review draft legislation in this area (such as the proposed new Banking Law) and Bank Supervision rule-making capability. U.S. assistance in this area is a key element in assuring the outcome. U.S. Treasury advisors advise Hungarian government officials in bank restructuring preparations for bank privatizations and debt management. USAID/Hungary housing related assistance, including a loan guarantee program, encourages mortgage lending and reform policies affecting the housing finance market.
Host Country and Other Donors: Other major donors involved in this sector include the International Monetary Fund, EU-PHARE, the World Bank and the British Know How Fund.
Beneficiaries: The ultimate beneficiaries of activities under this Strategic Objective, are savers and investors and the institutions they do business with. Intermediate beneficiaries include the Ministry of Finance the three regulatory agencies, the credit rating agency and the Securities Clearance and Settlement Facility.
Principal Contractors, Grantees, or Agencies: U.S. Department of Treasury, Financial Service Volunteer Corps (FSVC), KPMG-Barents, First Washington Associates, EU/Phare, the British Know-How Fund, the Hungarian Banking Association, the Urban Institute, and the Center for International Private Enterprise.
Major Results Indicators:* Baseline 1991 Target 1999Financial sector assets (as % of GDP) 93% 120%
On-site bank examinations/audits (yearly) -0- 18
Return on invested capital (financial 2.2% 4.5%
institution profits as % of GDP)
* These are illustrative indicators and are under continuing review by USAID/Budapest.
ACTIVITY DATA SHEET PROGRAM: Hungary
TITLE : Citizens' Participation, 180-S002.1
STATUS: Continuing
PROPOSED OBLIGATION AND FUNDING SOURCE: FY 1997: $1,750,000 SEED Act
INITIAL OBLIGATION: FY 1991; ESTIMATED COMPLETION DATE: FY 2000
Purpose: Better informed citizens increase their participation in decision-making at the local level.
Background: It is recognized that the consolidation of democracy depends in large measure on the ability to honor public expectations as, for example, in the government's ability to address problems such as unemployment, economic insecurity, social injustice, while completing difficult market-oriented reforms essential for longer-term prosperity. Successful consolidation also entails institutionalizing democratic processes and values, by demonstrating that these are indeed workable.
Broadening participation in governance decision-making, to include non-governmental organizations (NGOs) and public-private partnerships, serves to improve the quality of a country's governance, as well as to increase the likelihood that essential governance reforms are undertaken and sustained. Effective and sustained governance depends not only on increased political participation by the governed, but also increased transparency and accountability by those who govern.
USAID Role and Achievements to Date: USAID/Hungary consultants monitored elections, strengthened political parties, and helped to equip the library and executive offices of the Hungarian Parliament in the early years of the democratic transition. Visits of U.S. Congressional leaders to Hungary have provided opportunities for valuable dialogue on such critical issues as freedom of the press and protection of minority rights. The regionally financed Salzburg Seminars brought together political leaders and academics to discuss issues central to the democratization process. SEED-funded consultants advised Hungarian Government administrators and Parliamentarians on local government issues, the broadcast media bill, and the National and Ethnic Rights Bill.
SEED-funded environmental protection consultants have advised municipalities, enabling the latter to prioritize and manage solid waste and wastewater issues. Training has also been provided through SEED funding and USAID contractors to enable local governments to undertake more effective budget planning.
USAID/Hungary was directly involved in the framework analyses for an NGO law submitted to Parliament. In cooperation with the Ministry of Culture and Education, civil debates to discuss the NGO draft law took place in all 21 Hungarian counties. Over 90 grants have been provided to support the activities of local NGOs.
Over 30 local television station professionals from 13 Hungarian cities have been trained in local news production, business management, marketing, and advertising, as well as in the uses of the Internet and the World Wide Web in communicating with other stations to exchange resources and programs.
In 1995, twelve Hungarian mayors completed USAID/Hungary funded training programs to learn how American practices can be applied to representation and employment generation in the cities they manage. This was followed, in November 1996, by a two-week visit to various U.S. cities by fifteen senior Hungarian public administration officials, to see municipal government and NGO operations in action.
Description: USAID/Hungary is assisting local level democratic reform by improving access to useful information, by helping citizens become more active, and by helping local governments to operate moreeffectively and to be more responsive to their citizens. Increased flows of useful information are occurring through strengthened local independent media and through developing mechanisms for local governments to provide citizens with increased access to information about local issues. A more active and responsive civil society is being achieved by fostering cooperation between local governments and NGOs to deliver key services, helping local governments and NGOs create mechanisms for collaborative decision-making, training NGOs to advocate for issues more effectively, NGO capacity-building, and assisting in the drafting of NGO-related policies, laws, and regulations.
USAID/Hungary efforts focus on fostering local government and NGO cooperation to deliver key services and improve the general management capacity of local governments. This includes developing and implementing improved financial administration at the local government level, and includes helping municipalities develop and institutionalize processes that generate annual capital budgets that integrate citizen inputs for establishing capital improvement priorities. These efforts extend to increased inter-local cooperation, which has improved the ability of county labor centers to respond to employment crises; assisted in the creation of mechanisms for dispute resolution, promoted changes in national level frameworks, to enhance the policy environment and diversify municipal revenue sources conducive to increasing the overall effectiveness of local governments.
To ensure that replication vehicles for models are institutionalized, USAID has contracted an Advocate for Civic and Municipal Innovation. This Advocate is developing a strong outreach capacity to make local governance innovations available countrywide, empower indigenous Hungarian associations and other institutions to develop the capacity to support outreach on a sustainable basis, and facilitating communication and coordination between and among relevant USAID/Hungary activities and other donors.
Host Country and Other Donors: Ongoing efforts in democracy building are coordinated with those of other donors, including EU/PHARE, British Know-How Fund, Organization for Economic Cooperation and Development (OECD), SIGMA, and the Soros Foundation.
Beneficiaries: This effort seeks to benefit local communities by ensuring greater participation and more useful information. Local governments and NGOs will be the intermediate beneficiaries.
Principal Contractors, Grantees, or Agencies: Environmental Protection Agency (EPA), Regional Environmental Center, United States Information Agency, United Way International, Local Environmental Management, Urban Institute, International Research and Exchanges Board (IREX), and International City Management Association (ICMA).
Major Results Indicators:* Baseline 1996 Target 1998Voter turn-out for local initiatives 5% 50%
Public relations/media plans developed and 30 500 initiated by local governments
NGOs engaged in advocacy-related activities 518 (1993) 650
Inter-local cooperative councils/fora established 20 500
* These are illustrative indicators and are continuing review by USAID/Budapest.
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