1983 CONSULTATION WITH HUNGARY. Background Paper by the Secretariat

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1 GENERAL AGREEMENT ON TARIFFS AND TRADE RESTRICTED BOP/W/66 18 February 1983 Llmlted Dl3tributioll Committee on Balance-of-Payments Restrictions 1983 CONSULTATION WITH HUNGARY Background Paper by the Secretariat 1. This paper has been prepared in accordance with paragraph 7 of the Declaration on Trade Measures Taken for Balance-of-Payments Purposes (BISD 26S/ ). 1. Hungary's Accession to GATT 2. Hungary became a contracting party on 9 September 1973 on the basis of the Protocol of Accession reprinted in BISD 20S/3. Paragraph 3 of this Protocol permits Hungary to maintain its regulations on trade with countries listed in Annex A (Albania, Bulgaria, Czechoslovakia, the German Democratic Republic, the Democratic People's Republic of Korea, Mongolia, the People's Republic of China, Poland, Romania, the USSR and the Democratic Republic of Vietnam). Hungary undertook that its regulations on trade with these countries and any change in these regulations or in the list of countries in Annex A would not impair her commitments, discriminate against or otherwise operate to the detriment of contracting parties. According to paragraph 4 of the Protocol, the contracting parties still maintaining prohibitions or quantitative restrictions not consistent with Article XIII of the General Agreement on imports from Hungary shall not increase the discriminatory element in these restrictions and undertake to remove them progressively. The Protocol provides for the establishment of a Working Party to carry out reviews of the operation of the Protocol. The Working Party is to examine, inter alia, the evolution of imports by Hungary from contracting parties and the regulations affecting Hungarian foreign trade. The Protocol provides that, if, for exceptional reasons, prohibitions or restrictions not consistent with Article XIII on imports from Hungary are still in force as of 1 January 1975, the Working Party will examine them with a view to their elimination. So far, four reviews under the Protocol were held, the last one in December 1981 and March 1982 (L/5303). 3. In the Working Party which examined the application of the Hungarian government to accede to the General Agreement the representative of Hungary declared that it was the intention of the Hungarian authorities to carry on a liberal licensing practice provided that balance-of-payments considerations would not hinder this practice and provided that no discriminatory quantitative restrictions would be applied by contracting parties against Hungary (BISD 20S/37). The Working Party which conducted the fourth review under the Protocol of Accession from December 1981 to March 1982 noted that discriminatory quantitative restrictions not consistent with Article XIII of the General Agreement were still maintained against Hungarian exports by certain contracting parties (L/5303; C/M/156, page 10)

2 Page 2 4. The representative of Hungary further said in the Working Party which examined the accession application that the need for the maintenance of quantitative restrictions in Hungary arose from balance-of-payments considerations, and he stated the view that they were consistent with Articles XII-XIV. After accession, his country would consult regarding its quantitative restrictions under the relevant Articles of the General Agreement, it being understood, however, that since Hungary was not a member of the International Monetary Fund it undertook to act in these matters in accordance with the intent of the General Agreement and in a manner fully consistent with the principles laid down in Articles XII, XIII and XIV (BISD 20S/37). After its accession Hungary continued to maintain quantitative restrictions on consumer goods, which were discussed in the four reviews under the Protocol of Accession. No consultations under Article XII have been held by Hungary. On 6 May 1982 Hungary became a member of the International Monetary Fund. On 1 September 1982 it notified the GATT that it was introducing temporary restrictive measures on imports under Article XII:2(a) of the General Agreement, namely import quotas on certain primary and manufactured products and an import surcharge on certain components (L/5363 and Add.l). (These measures are discussed in paragraphs below). II. The Hungarian Import Régime (a) Licensing and import quotas 5. All imports are subject to licensing. A fee equivalent to two per cent of the value of the licensed import is levied. The licenses are given to enterprises which are entitled to carry out foreign trade activities. There are global licenses, which can be used to conclude several contracts, and individual licenses, which are limited to one contract. Both types of licences entitle the enterprises to import from any country. 6. Imports of consumer goods from the convertible currency area are subject to a global quota fixed annually in dollar terms and published in the Foreign Trade Gazette. In 1981 the import quota for consumer goods was set at US$118.8 million; it was reduced to US$103 million in For a number of licences for consumer goods issued for 1982 the possibility of utilization was postponed to the second half of the year. The consumer goods quota for 1983 has been set at US$95 million. In December 1981, on the occasion of the fourth review under the Protocol of Accession, the representative of Hungary indicated that his government had fixed a target date for the elimination of the consumer goods quota (L/5303, page 10). (b) Import duties 7. The weighted average tariff level applied on a most-favoured-nation basis was 17.2 per cent in 1979 and will be reduced to 10.7 per cent in 1987 in accordance with Hungary's MTN commitments. Duties on imports from Albania, the Democratic People's Republic of Korea and the member countries of the CMEA, that is Bulgaria, Cuba, Czechoslovakia, the German Democratic Republic, Mongolia, Poland, Romania, the USSR and Vietnam, are not collected if the import is effected within the framework of fixed quotas and prices. All other imports from these countries are dutiable.

3 Page 3 (c) Import deposit scheme 8. An advance import deposit scheme was introduced in The enabling legislation remains in force but, since 1971, the applicable deposit rate has been zero. (d) Forint cover 9. In order to obtain an import license for capital goods, importers must submit a certificate issued by a bank certifying that they have sufficient resources to cover the value of the planned imports, the customs duties and any related import expenses. This certificate is only issued after the forint equivalent of the total import costs has been lodged with the National Bank of Hungary in a separate non-interest bearing account and the investment project for which the imports are made is either export-oriented, government-approved or has been subjected to a feasibility study by the Bank. The retention period can last one year in the case of sophisticated equipment or turn-key plants and then raises import costs by up to 14 per cent in terms of interest forgone or paid. (In 1982 enterprises obtained six per cent interest on one-year time deposits and had to pay up to 14 per cent interest for medium-term working fund credits). 10. The forint cover is a precondition for the making of payments abroad. It was in effect at the time when Hungary became a member of the Fund. Hungary avails itself of the transitional arrangements of Article XIV of the Articles of Agreement of the Fund which permit it to maintain restrictions on current payments that were in effect on the date on which it became a member. The forint cover is however not only a precondition for making payments abroad but also for the issuing of an import licence. Interest charges and costs associated with the lodging of a security deposit required to effect imports are, according to a Panel report adopted by the CONTRACTING PARTIES in 1978 (BISD 25/103), "charges" within the meaning of Article II: 1(b) and are inconsistent with this provision if in excess of the bound rate. The forint cover is required for all imports of capital goods irrespective of whether the items concerned are bound. Hungary does not invoke balance-of-payments reasons to justify the forint cover. The purpose of the decree introducing the cover was to ensure that enterprises wishing to import have the required financial means. The Hungarian authorities informed the secretariat that the link between the forint cover and the import licensing would be eliminated within a reasonable period of time. 11. The legislation on the forint cover was until 1 April 1982 generally not applied to imports of goods other than capital goods. However, from then on, owing to severe payments constraints, importers of all products were required to lodge the full value of the contemplated imports at banks before opening a letter of credit with the National Bank. However, in the case of imports other than capital goods the deposit period is normally very short giving rise to only nominal additional costs and the issuing of the import licence is not dependent on the forint cover. III. Hungary's Restrictive Import Measures Taken for Balance-of-Payments Purposes 12. Hungary invokes the balance-of-payments provisions of the General Agreement to justify an import quota system for certain primary and manufactured products and a surcharge on imports of components (L/5363 and Add.l).

4 Page 4 (a) Import quota for certain primary and manufactured products 13. The Minister of Foreign Trade decreed that, as of 1 January 1983, annual import quotas shall be established for certain goods, For 1983 maximum import values or volumes were fixed for the following items: Office equipment and requisites Anilin colours, auxiliary chemical material for the textile, leather and fur industries Motor vehicle tyres of which: Tyres for passenger motorcars and for trucks size 7x9 120 Million forint (which is equivalent to $ 3 million at the 12/82 exchange rate) 2,000 Million forint ($50 million) 75,000 pes 30,000 pes - tyres for lorries, buses and other trucks pes PVC powder and hard granules 8 Polystyrene and styrene copolymers 16 Fertilizers (in active ingredient) Plant protection chemicals and their active ingredients N P. K: y 2,500 Million forint ($63.1 million) Paper, cardboard Protein fodder of animal and vegetable origin Fodder concentrate Animal feed phosphate Chemicals intended for use as feed 1,500 ($37. 9 Million forint million) 14. Quotas had also been established for 1982 (BOP/231, page 15). A comparison of the product coverage of the quotas of 1982 and those for 1983 reveals some marked changes. In 1982, quotas had been established mainly for industrial raw materials, agricultural raw materials (cotton, hides and skins and protein

5 Page 5 fodder), semi-finished and finished paper products and above all chemicals. Manufactures, other than chemicals or paper products, had not been affected. In 1983, the quotas for finished paper products, anilin colours (for the textiles, fur and leather industries), PVC, and protein fodder were maintained while the quotas for the other restricted products were lifted. New quotas, however, have been established for office equipment, tyres and a wide range of agricultural inputs. The latter comprise fertilizers and a variety of inputs needed in meat production (chemicals as well as fodder). It is not clear how the product coverage and the changes in product coverage relate to Hungary's balance-of-payments situation. 15. The quota system was announced as temporary. No time schedule for its removal has been announced in accordance with paragraph 1(c) of the Declaration on Trade Measures Taken for Balance-of-Payments Purposes. The requirement to announce a time-schedule whenever practicable was introduced by the CONTRACTING PARTIES because they were convinced, as they stated in the sixth preambular sentence of the Declaration, "that the contracting parties should endeavour to avoid that restrictive import measures taken for balance-of-payments purposes stimulate new investments that would not be economically viable in the absence of the measures." (b) Surcharge on certain components 16. The Minister of Finance decreed that, as of 1 January 1983, a surcharge equivalent to 20 per cent of the customs value would be levied on the importation of "components". Components were defined as products of the machine, plastics and rubber industries imported from convertible currency sources for use as spare parts, for their incorporation in manufactured products or for direct resale. 17. Enterprises may not pass on the cost of the surcharge to the final consumer because the surcharge may not be taken into account as a price formation element. The surcharge must be paid out of profits which could otherwise - depending of course on the concrete financial situation of the company - possibly be used to pay premia to managers or bonuses to workers. As a result of these two constraints enterprises may have a strong incentive to avoid importing goods subject to the surcharge. A strict application of the price formation and accounting rules relating to the surcharge could for some enterprises have the effect of making imports impossible. There are three types of prices in Hungary: prices fixed by the government, prices that may fluctuate between or rise up to limits fixed by the government, and free prices. For two-thirds of the agricultural goods and about one-fifth of the goods of the manufacturing industry the government has fixed the price or the price margins. The formation of prices for goods falling into the "free" category are subject to detailed rules. Domestic prices of raw materials and energy sources must be linked to world market prices. The domestic prices for manufactured goods are linked to the export prices obtained for the goods. The domestic prices charged by manufacturing enterprises which export the equivalent of at least five per cent of their domestic sales are in general based on production costs plus profit margins equivalent to the enterprises' export profit margins. The enterprises with export sales below the five per cent margin determine the domestic prices on the basis of various calculation elements prescribed by the Materials and Price Board. (For a description of the price system see: IMF "Hungarian People's Republic - Recent Economic Developments", dated 14 September 1982, pages 134-7).

6 Page If the enterprises needing components switch to domestic suppliers or to importers from non-convertible currency sources the normal price formation and accounting rules apply. In that case any price increases may therefore be passed on to the final consumer and be taken into account in calculating the profits of the enterprise. The price formation and accounting rules are thus internal regulations which distinguish between imported and domestically produced products and also between different external sources of supply. 19. Some of the goods subject to the quotas (for instance tyres) could be imported as components and thus be subject also to the surcharge. In such cases, there would be a simultaneous application of more than one type of trade measure for balance-of-payment purposes, a practice which should be avoided according to paragraph 1(b) of the Declaration on Trade Measures Taken for Balance-of- Payments Purposes. 20. The surcharge was announced as temporary but no time-schedule for its removal has been announced in accordance with paragraph 1(c) of the Declaration. IV. Recent Economic Developments (a) Economic performance 21. The faltering growth of the world economy during the 1970s, its stagnation in and the sharp increase in relative energy prices have been a drag on the Hungarian economy. The growth of net material product (NMP), the most widely used indicator of overall economic activity, slowed down from 6.2 per cent in to 3.2 per cent in and 1.5 per cent in Industrial production, which accounts for nearly 50 per cent of the NMP, expanded slightly faster than NMP in the last two five-year plan periods, as well as in the period. Agricultural production, accounting for 20 per cent of NMP, increased on average less than NMP. The growth of agricultural output was 4.0 per cent in , slowed down to 2.9 per cent in and stagnated in Gross fixed investment in the Hungarian economy expanded very rapidly throughout the 1970s up to 1979 but has been declining sharply since then. If the planned investment decrease was realized in 1982, investment will have been about 15 per cent below its peak level in The slowdown in the growth of consumption during the 1970s from 4.6 per cent in to 2.9 per cent in was much less pronounced than that of investment, although always below NMP growth. In , consumption growth equalled NMP growth while investment was declining. (b) The external sector 24. Throughout the 1970s the volume growth of Hungarian exports was among the highest in Europe and exceeded by far the average expansion of world trade. Although the average export growth declined somewhat between the and period (from 9.1 to 7.2 per cent), the expansion was twice as fast as the growth of the net material product. In 1981, however, exports increased by only 2.6 per cent and according to incomplete data showed only a marginal increase in

7 Page (about 1 per cent). The slowdown in the volume of exports in 1981 was concentrated on exports to the market economies. Exports by product groups to this region show that the decline was most pronounced in semi-manufactures (iron and steel, textiles), crude materials, fuels, and food, whereas the machinery exports continued to increase by more than 3 per cent. (Detailed volume data for 1982 are not available to the secretariat.) 25. The rate of expansion in the volume of Hungarian imports, which was cut by one-half between the first and the second half of the 1970s (from 7.3 to 3.6 per cent), was 0.9 per cent in 1981 and turned negative in The sharp increase in energy prices which led to a pronounced deterioration in Hungary's terms of trade provoked a near stagnation of energy imports between 1975 and In addition, due to the fall of fixed investment since 1980, a pronounced reduction in machinery imports took place (-11.5 per cent between 1979 and 1981). 26. The growth of exports by region in dollar terms showed great variation in 1981 reflecting both the different strength of the export markets as well as the :f» dollar value of the respective currency. Exports to OPEC countries increased sharply by 33 per cent, to North America by 20 per cent, to the Eastern trading area by 5 per cent and to the non-oil developing countries by 3 per cent. On the other hand exports declined by 4 per cent to EFTA countries and dropped by 16 per cent to the EC member countries, one of Hungary's major export markets. The share of Hungary in EC imports of manufactures declined only slightly. 27. In terms of SDR the Hungarian currency appreciated sharply in both 1980 and In the first half of 1982 the forint continued to appreciate vis-à-vis the SDR but depreciated thereafter with the result that the annual average forint-sdr rate remained unchanged between 1981 and As the currencies of the Western European countries (Hungary's most important trading partners in convertible currency trade) depreciated against the SDR between 1979 and 1982 the forint's trade-weighted exchange rate recorded a significant appreciation. 28. Hungarian imports which declined by nearly 1 per cent in dollar terms in 1981 showed in their regional developments a mirror image of exports, i.e. negative or minor import increases from the expanding economies but high imports from stagnating regions. Imports from OPEC countries declined by 30 per cent, from «North America by 10 per cent and from the Eastern trading area by 1.5 per cent. Imports from the EC and the non-oil developing countries, however, increased by 2 and 15 per cent respectively. 29. Estimates based on incomplete trade data for 1982 point to an increase in the dollar value of exports to industrial countries by 4.5 per cent and a decrease in imports of 7.5 per cent. Trade (exports and imports) with the non-oil developing countries declined, while trade with the oil-exporting developing countries and the Eastern trading area expanded. (For shifts in market shares see Table 2.) 30. Preliminary data for trade in convertible currencies show that in 1982 the dollar value of Hungary's exports in convertible currencies continued to expand by nearly 1 per cent while imports declined by 7 per cent, thereby increasing the. trade surplus to $800 million. Imports in convertible currencies in 1982 were below the level of 1979, while exports expanded by more than 20 per cent between 1979 and For the last year, as well as during the period (as a

8 Page 8 whole), Hungary's exports in convertible currencies exceeded the expansion of world trade while imports showed a fall. 31. Trade in non-convertible currencies, in contrast, showed a trade deficit in the order of $400 million in both 1980 and (Given a further rise in fuel prices in 1982, it can be expected that the deficit has remained.) 32. Hungary's trade deficit (f.o.b.-f.o.b.), which reached $1.2 billion in 1978, turned into a small surplus in 1981 and is expected to record a somewhat larger surplus in The shift in the trade balance is due primarily to a combination of export performance from 1978 to 1980, a limitation of energy imports (combined with a shift to cheaper fuels), and, since 1980, a reduction in machinery imports due to the fall in domestic investment. 33. The services account (excluding investment income) has moved from balance in 1978 to a surplus of about $180 million in This development can be traced primarily to a sharp increase in net revenues from tourism. (c) Current account developments 34. The current account deficit, which declined from a record $1.4 billion in 1978 to $0.6 billion in 1980, widened again to about $1 billion in 1981, despite a marked improvement on both the trade and balance of services other than investment income. The change was due to higher interest rates, which increased on the outstanding debt from 5.9 at the end of 1979 to 14 per cent in Between 1980 and 1981 the deficit on investment income tripled from $387 million to $1,120 million, while the net foreign debt by an estimated $187 million. High interest rates in 1982, and the scaling down of loans by the private banks caused severe strains on Hungary's financial situation. The result was a sharp decline in Hungary's international reserves (-$936 million in the first half of 1982), and a drawing on various standby credits from the IMF and the BIS. (d) Economic aspects of the restrictive import measures taken for balance-of-payments purposes 35. The secretariat cannot provide an assessment of the economic effects of the trade measures taken for balance-of-payments purposes because it has no data on the value and distribution of trade in of those products to which the quotas and the surcharge are applied. 36. According to estimates provided by the Hungarian authorities, the value of the products subject to quotas in 1983 accounts for 9.5 per cent of 1982 imports originating from convertible currency sources. This represents a decrease in the trade coverage of quantitative restrictions by 2.5 percentage points (the 1982 quotas covered 12 per cent of the corresponding imports). However, as the import surcharge applied in 1983 affects products which account for 17.9 per cent of imports in 1982 according to estimates by the Hungarian authorities, the value of imports falling under both categories of restrictions increased from 12 to 27.4 per cent (on the basis of 1982 trade data).

9 BOPA-7/66 Page 9 TABLE 1. - HUNGARY: GENERAL ECONOMIC INDICATORS (Annual percentage changes) Population Net material product Gross fixed investment Consumption P -2.0 P 0.5 P Agricultural production Industrial production Industrial employment Labour productivity a 3.4 a Wages: average earnings Consumer prices a 7.2 Exports (volume) Imports (volume) Exports (dollar value) Imports (dollar value) Export prices (dollar) Import prices (dollar) a -0.4 a " 1-3 b -4.8 b -3.7 a -1.3* p planned. January-September. January-October. Source: IMF, International Financial Statistics, and national statistics.

10 BOP/w/66 Page 10 TABLE 2. - HUNGARY: STRUCTURE OF FOREIGN TRADE A. Trade by region, Balance (f.o.b.-c.i.f.) (Million dollars) 1981 Imports (shares) Jan.-Nov. Exports (shares) Jan.-Nov. All regions Industrial countries North America Japan Western Europe EC(10) EFTA Developing countries OPEC Other developing countries Eastern trading area B. Trade by commodity, 1981 Imports Total trade Exports Trade with industrial countries Imports Exports All products (total trade) Primary products Food Fuels Manufactures Iron and steel Chemicals Semi-manufactures Engineering products Textiles and clothing Source: UN, trade data tapes and national statistics.

11 * t TABLE 3. - HUNGARY: FINANCIAL INDICATORS, (million. US dollars, unless otherwise stated) a Exchange i rates Commercial rate Forint per US dollar SDR Reserves (excl. gold) Assets Total Indebtedness ' Liabilities Maturity up to 1 year Net Total foreign debt Gross Average interest rate on outstanding debt Total Trade balance (f.o.b.-f.o.b.) in convertible currencies nonertible conv CUI rencies , 716 d H 417 d oor Period averages. End of period. \fis-a-vis commercial banks in group of ten countries (BIS reporting system). Thd of June Sources: IMF, International Financial Statistics; Hungary: An Economic Survey; BIS, The Maturity Distribution of International Bank Lending, and national statistics. y be* & H ON