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U.S. DEPARTMENT OF STATE
HUNGARY: 1994 COUNTRY REPORT ON ECONOMIC POLICY AND TRADE PRACTICES
BUREAU OF ECONOMIC AND BUSINESS AFFAIRS





                             HUNGARY

                    Key Economic Indicators 1/
        (Millions of U.S. dollars unless otherwise noted)


                                      1992      1993     1994 2/
                                                         (est.)
Income, Production and Employment:

Real GDP  (Index: 1985=100) 3/        85.6      84.5        N/A
Real GDP Growth (pct.)                -4.3      -2.3        2.0
GDP (at current prices) 3/          36,500    36,055     41,777
By Sector:
  Agriculture                     2,394.46  2,133.76   2,486.00
  Energy/Water                    1,291.13  1,150.59   1,220.00
  Manufacturing                   7,397.74  7,301.17   8,463.00
  Construction                    1,940.50  2,021.94   2,600.00
  Rents                           3,934.20  4,423.90   5,376.00
  Financial Services              2,198.73  2,064.31   2,160.00
  Other Services                  7,103.80  7,589.10  10,185.00
  Government/Health/Education     4,893.67  5,180.35   7,098.00
Net Exports of Goods & Services 4/  10,131     7,990        N/A
GDP Per Capita (USD)                 3,441     3,700      4,056
Labor Force (000s)                  45,049    45,522     44,407
Unemployment Rate (pct.)              12.3      12.1       11.8

Money and Prices:  (annual percentage growth)

Money Supply (M2) 4/                  27.0      16.6        N/A
Base Interest Rate 4/                   22        21         25
Personal Saving Rate 4/               10.9       6.5        N/A
Retail Inflation                      25.0      25.5       22.0
Wholesale Inflation                   11.5      10.3        N/A
Consumer Price Index                  23.0      22.5       20.0
Exchange Rate
  Official                           79.00     92.04     103.00
  Parallel                              90       100        110

Balance of Payments and Trade:  5/

Total Exports (FOB)               10,678.5   8,912.0    9,625.7
  Exports to U.S.                    294.6     375.9      350.0
Total Imports (CIF)               11,120.3  12,635.9   13,383.4
  Imports from U.S.                  278.5     493.3        392
Aid from U.S. 5/                       116       155        193
Aid from Other Countries 5/          618.6     813.6      978.9
External Public Debt                21,438    24,560     26,556
Debt Sevice Payments (paid) 4/       4,653     4,806      5,232
Gold and Foreign Exch. Reserves 4/   4,381     6,763      7,000
Trade Balance                        441.8  -3,723.9   -3,757.7
  Trade Balance with U.S.             16.9    -117.3      -42.0


1/ Source: Central Statistical Office, unless stated otherwise;
provided in HUF and converted at the official exchange rates,
indicated in this table.
2/ Source: Ministry of Finance, except data on trade.
3/ At factor cost.
4/ Source: National Bank of Hungary.
5/ Source: Ministry of Industry and Trade; all 1994 data are
estimates.



1.  General Policy Framework

    Hungary is well along in its efforts to establish a full
market economy.  It has liberalized its trade regime
extensively during the last five years.  Ninety percent of
imported products no longer require prior government approval. 
Foreign direct investment has flowed rapidly into Hungary since
1990, bringing with it a greater familiarity with foreign,
including U.S., products.  Since the May 1994 elections, the
new coalition government has been formulating its economic
policy.  In response to the need to reduce government spending
and the current account deficit some GATT-consistent measures
are expected.  Two of the key tenets of the program are
promoting exports and investment.  The government ratified the
Uruguay Round Agreement at the end of 1994.  As a result,
quotas on agricultural products are being replaced by tariffs. 
Therefore, the only remaining vestige of protectionism after
ratification of the GATT will be consumer goods quotas on
manufacturing products.

    The population of Hungary is saddled with the highest per
capita foreign debt in Europe.  Interest payments on the debt
are expected to balloon in 1995 and 1996.  In addition, Hungary
has very large balance of payment and current account deficits,
the former of which was caused primarily by spending on social
programs and a rate of domestic consumption that surpassed
domestic production by almost 10 percent.  The government has
financed the deficit primarily through issuing government
bonds, both domestically and abroad.  At the same time, a tight
budget program is planned for 1995, projecting a $1.6 billion
primary budget surplus.  

  The government, describing the economic situation as a
crisis, is seeking to stabilize the economy by calling for zero
growth in net debt, keeping a tight lid on inflation, and
holding growth in real wages to four to five percent below the
rate of inflation.  The parliament is currently debating these
measures, as is the Interest Reconciliation Council (a
tripartite group on which government, employers, and employees
are all represented).  The final results of these discussions,
intended to be a three-year Social Pact, will not be known
until the end of the year at the earliest.  

    Promotion of foreign direct investment continues to be a
government priority.  The government has introduced regional
development programs that will provide tax preference to
investments in certain regions.  Tax preference for investments
will be normative and the threshold for equity will be
decreased.  Incentives are also provided for domestic private
investment.  Tax preferences are being proposed for enterprises
that reinvest their income and a less burdensome tax process is
being proposed for small entrepreneurs.  In addition, Hungarian
law provides for the establishment of companies in customs-free
zones.  The companies established there are exempt from customs
and foreign-exchange requirements as well as from indirect
taxation tied to the turnover of goods.  With respect to direct
taxes, these companies enjoy transitory preferences.  Effective
January 1994, the Corporate Tax Act allowed for a discretionary
tax reduction for companies meeting the prerequisites.  This
provision, however, has come under some criticism and the new
government is expected to legislate a number of investment
incentives which will not discriminate between domestic and
foreign investment.  It has also stated that it will eliminate
the minimum two percent turnover tax.

    The National Bank of Hungary (known by its Hungarian
acronym, MNB) is the primary monetary policy actor.  In order
to control the money supply, the MNB uses open market
operations to a large extent.  It controls the rate of interest
on government T-bills as well as the rate applied to repurchase
agreements.  Under conditions identical with the repurchase
rates, commercial banks can conclude foreign exchange swap
transactions with the MNB.  In addition to controlling the
money supply through open market operations, the government
also carried out a fairly active exchange rate policy in 1994. 


2.  Exchange Rate Policy

    The Hungarian forint is almost fully convertible for
current account transactions, but not for capital account
movements.  It should be noted, however, that while the
government is currently reviewing its Foreign Exchange Law with
an eye toward liberalizing both current and capital accounts in
an effort to meet OECD membership requirements, significant
changes in capital account restrictions are not expected for
several years.  Currently, the forint is pegged to a currency
basket consisting of the U.S. dollar (30 percent) and the
European Currency Unit (70 percent).  Inflation-led
appreciation of the forint has resulted in periodic
devaluations.  Exporters have been critical of the government's
exchange rate policy, claiming that the overvaluation of the
forint has priced them out of the foreign markets.  The
worsening current account fueled anticipation that a sizeable
devaluation would occur to correct the situation.  In August
1994, the government devalued the forint by eight percent --
the largest devaluation since 1991.  That was followed by a 1.1
percent devaluation in early October.  

    Although the forint continues to be a managed currency, it
is in essence fully convertible for business purposes. 
Foreigners may freely repatriate profits and dividends in hard
currency.  Foreign exchange controls have been liberalized
steadily.  Foreigners are now permitted to maintain forint
accounts which can be used to purchase goods domestically.  


3.  Structural Policies

    There are no centrally-determined prices for consumer
products in Hungary.  However, the prices for the state-owned
gas, electricity, and water utilities (the first two of which
may soon be partially privatized) are determined by the state. 
As privatization of these companies proceeds, prices will be
brought more in line with market prices.  The government offers
a wholesale floor price for unprocessed agricultural products,
but producers are not obliged to sell their products to state
companies at this price.  As a floor support price, this policy
has no impact on U.S. agricultural exports to Hungary.  

    Hungary overhauled its tax system in the late 1980's,
instituting a western-style system.  It is now in the process
of reforming the entire budget system, including some taxes. 
The most important taxes for a foreign investor are:  company
tax (36 percent of corporate profits); the general turnover tax
(a value-added tax attached to the value of goods and services
supplied domestically, imported, or exported; current rates are
0, 10, and 25 percent, but the new government proposes raising
the 10 percent rate to 12 percent); and personal income tax
(current rates range from 0 to 44 percent, but a proposal
before the Parliament would add a 50 percent bracket for those
whose annual earnings exceed one million forints, about
$10,000).  In addition to taxes, employers must also pay
contributions to the Social Security and Solidarity
(unemployment) funds (44 and 7 percent respectively.) 

    As mentioned above, the new government is now debating its
economic policy for 1995 and subsequent years.  Tax laws are
likely to change as a result of these discussions.  The
government has indicated that promoting investment is one of
its primary goals.  According to tax proposals before
Parliament, tax on profits will be 18 percent if they are
reinvested and 36 percent if they are remitted as dividends to
shareholders.  In 1992, the Act on Separate State Funds
established an Investment Promotion Fund to encourage foreign
investment in infrastructure, new technology, and public
utilities.  To qualify for subsidies from this fund, a company
must have at least 30 percent foreign participation, a minimum
of $500,000 in capital, and the foreign contribution must be in
convertible currency and not less than 50 percent of the
foreign partner's share.  Companies that meet the first two of
these requirements and invest in manufacturing that generates
more than half of their gross revenues may qualify for a 60
percent tax exemption for the first five years and a 40 percent
exemption for the next five.  If they invest in one of 15
designated sectors, they could receive a 100 percent tax
exemption for the first 5 years and a 60 percent exemption for
the second five.

    Act LXXXVI of 1990 on the Prohibition of Unfair Market
Practices (the "Competition Act") is actually a comprehensive
law intended to foster the establishment and maintenance of a
competitive market.  The Competition Act addresses consumer
fraud, the restriction of competition, abuse of a dominant
market position, and unfair competition.  The Competition Act
created the Economic Competition Office.  This office is
responsible for investigating and stopping any unfair market
practices.


4.  Debt Management.

    As mentioned earlier, Hungary has the highest per capita
foreign debt in Europe.  Despite this, it has never sought debt
forgiveness or debt rescheduling.  As a result, Hungary has a
generally good relationship with commercial creditors, the IMF,
and the World Bank.  It fell far short of IMF target figures
for debt as a percentage of GDP and for the budget deficit in
1993.  Currently, the Government of Hungary and the IMF are
negotiating a new agreement to replace the 18 month agreement
that expired in December 1994 (an agreement that has been
dormant for much of its term).  Although the government is
seeking a three-year agreement to facilitate economic
restructuring, it is more likely that it will reach agreement
on a one-year credit in the short run, with prospects for a
longer-term agreement linked to an acceptable three-year
economic program.  Hungary's foreign debt totals approximately
$27 billion, with interest payments on the debt ballooning in
1995 and 1996.  The government is counting on an improving
current account balance and increased foreign investment to
lessen this burden.


5.  Significant Barriers to U.S. Exports.

    Hungary has liberalized its market substantially in recent
years.  While Hungary's average tariff rates are decreasing,
peak rates are exceptionally high (on coffee, for example). 
Hungary imposes a $750 million global quota on imports of
consumer goods.  American companies have complained about an
insufficient quota to properly supply the market. 
Additionally, by the terms of the Association Agreement,
Hungary has reserved quota allotments for imports from the
European Union.  As a result of the Uruguay Round, quotas on
agricultural products and processed foods will be replaced by
tariffs.  On November 1, prior to ratification of the GATT
Agreement, the government increased tariffs on agricultural
products that are not bound by GATT; during the first half of
1995, a further increase will take place in accordance with the
Uruguay Round Agreement's requirement that non-tariff barriers
be replaced by tariffs.    

    Foreign companies complain that the implementation of new
regulations with no advance notice disrupts trade.  For
example, in October 1993 the Government passed new regulations
mandating that quality control certificates were required for
consumer goods imports to be customs-cleared.  There was no
advance notice of the implementation of the new regulations. 
Consequently, neither the importers nor the
testing/certification agencies were prepared for the regulatory
change.  Similarly, the government gave only a 5 day advance
notice of tariff increases on agricultural imports (mentioned
above).  

    While the investment market in Hungary is substantially
liberalized, there are still some potential barriers.  Act XVI
of 1991 on Concessions authorizes the state to provide
investors with concessions in return for their investment in
infrastructure and certain other sectors.  In general, though,
100 percent foreign ownership is permitted in sectors open to
private investment.  Exceptions include restrictions on foreign
investment in defense-related industries, in the media, and on
foreigners' acquisition of land.  While screening of foreign
investments does not normally occur, Hungary does screen
investments in financial institutions and insurance.  However,
a number of foreign banks and financial institutions currently
operate in Hungary despite this screening process; the Embassy
has received no reports of established U.S. banks or other
financial institutions being denied permission to operate in
Hungary. 

    Foreign investors are nearly always accorded national
treatment under law.  Nevertheless, a few instances of
discrimination do exist.  For example, foreign investors may
only exercise shareholder rights if they have purchased
registered shares (although if they buy unregistered shares,
they may petition to have those shares converted to registered
shares).  The Investment Act guarantees foreigners the right to
repatriate "in the currency of the investment" any dividends,
after-tax profits, royalties, fees, or other income deriving
from the operation or sale of the investment.  The Act also
grants foreign employees of foreign investors the right to
transfer abroad fifty percent of their after-tax salaries. 
Foreign investors are also allowed to keep any cash
contributions made in a convertible currency in a foreign
exchange account.  All companies registered in Hungary,
including those with foreign participation, are required to
sell foreign exchange receipts from exports to the National
Bank within eight days of receipt unless an exemption has been
granted by the MNB.  One notable exception allows a company to
maintain a foreign currency account to pay for foreign travel,
advertising, and related expenses.  All companies must obtain
permission from the National Bank before taking out a hard
currency loan (although this requirement will reportedly be
dropped as part of the governments rewrite of the Foreign
Exchange Law).

    Hungary is not a signatory to the GATT Agreement on
Government Procurement.  Increasingly, foreign businesses
criticize the tendering processes, citing non-transparency and
irregularities.  The government is likely to promulgate new
government procurement guidelines that may address some of
these issues, but could, at the same time, establish local
content requirements.

    All importers and exporters must file a VAM 91 document
which can be obtained from the Hungarian Customs.  Essentially,
this document serves as a declaration for the type and number
of goods being imported or exported.  This document must
contain the Product Code Number which identifies the
classification of the goods.  The Product Code Number can be
obtained from the Central Statistical Office.  

    Upon the importation of goods, the importer must present
certification documents from the Commercial Quality Control
Institute (KERMI); goods cannot be customs-cleared without the
KERMI permits.  In certain instances, the KERMI permit may be
substituted by documentation from other testing and
certification agencies such as the National Institute for Drugs
and the Quality Control Office of the Building Industry.  All
food products must be labelled in Hungarian and must give the
following information:  net quantity, name/address of producer
(or importer), consumption expiration date, recommended storage
temperature, listing of ingredients/additives, energy content,
and approval symbols from the National Institute of Food
Hygiene and Nutrition (OETI) and KERMI.  There are also
specific marking and labelling requirements for cosmetics as
well as human and animal pharmaceuticals.  

    The Hungarian Standardization Office (MEI) oversees the
standards system.  There are currently two types of standards: 
national and sectoral.  National standards are issued by the
MDI.  These standards are binding and supersede sectoral
standards.  Sectoral standards are issued by individual
ministries and other central government agencies.  National
standards conform to international norms.  Hungary is a
signatory to the GATT Agreement on Technical Barriers to Trade
(Standards Code).  Hungary also participates in the
International Organization for Standardization (ISO) and the
International Electro-technical Commission (IEC).

    New consumer goods are subject to an approval process
implemented by KERMI.  The Hungarian Electro-technical Control
Institute (MEEI) controls electronic/technical goods; approval
is based on compliance with Hungary's standards on protection
against electric shock.  In order to import or market these
highlighted products, they must be tested and certified by
these control institutes. 


6.  Export Subsidies Policies

    There are no subsidies on exports of industrial products. 
Various agricultural product groups, however, receive a certain
percentage subsidy from the state.  The general level of
agricultural subsidy, however, is relatively low.  Two
institutions were established in 1994 to support exports:  the
Export Import Bank and the Export Credit Guarantee Ltd.  The
two institutions will provide credit or credit insurance for
about 8 to 10 percent of total exports.  Upon ratification of
the Uruguay Round Agreement, Hungary will become an automatic
signatory to the GATT Subsidies Code.


7.  Protection of U.S. Intellectual Property

    The Hungarian legal system protects and facilitates the
acquisition and disposition of property rights.  The basic
legislation providing protection for inventions is Act II of
1969 (as amended) on the Patent Protection of Inventions.  The
Patent Act provides twenty years of protection from the date of
filing at the National Office of Inventions, as opposed to the
American system which extends protection from the date of
invention.  Licenses may be granted.  Compulsory licensing to a
Hungarian enterprise may be ordered in certain circumstances
when a patent has not been used within four years of the date
of application or three years from the date of issue.

    Act III of 1969 (as amended) on Copyrights is intended to
protect literary, scientific, and artistic creations. 
"Computer programs and the related documentation" (software)
are expressly included in the list of protected works. 
According to the law, "the consent of the author shall be
required for any use of his work" or of the title of the work. 
"Use" is defined as "the process in the course of which the
work or a part thereof is communicated to the public" and
pertains to "alterations, adaptations, and translations."  The
law includes under communication "posters, newspapers,
programs, films, radio, television, etc." relating to the 
work.  There have been numerous complaints that Hungarian
enforcement of the Copyrights Act has not been sufficiently
vigorous and that significant quantities of pirated and
counterfeit software, sound recordings, etc., are marketed in
Hungary.

    The registration and protection of trademarks is governed
by Act IX of 1969 on Trade Marks and related decrees.  The
application process can take from six months to a year. 
Foreigners are required to appoint a Hungarian attorney to
represent them.  Decisions by the National Office of Inventions
to deny an application or cancel a registration may be appealed
to the Supreme Court.  Registrations are valid for ten years
and can be renewed.  Licensing of trademarks is permitted.  The
law protects well-known marks, stating that "the existence of a
well-known mark (whether registered or unregistered) is a bar
to registration of an identical or confusingly similar mark,
regardless of the goods concerned."  While there are no
statutory use requirements, "failure to use a mark over a
five-year period renders the registration open to cancellation."

    Trade secrets are protected by Act LXXXVI of 1990 on the
Prohibition of Unfair Market Practices.  The law expressly
forbids obtaining or using business secrets "in an unethical
way" and disclosing them to unauthorized persons or making them
public.  Business secrets are defined as "every such fact,
information, solution, or data related to economic activity
that it is in the entitled person's interest to have remain
secret."

    Two new laws protecting intellectual property entered into
force in January of 1992.  Act XXXVIII of 1991 protects utility
models, and Act XXXIX of 1991 protects the topography (layout
design) of semiconductor chips.

    In 1993, the United States and Hungary signed a
comprehensive Intellectual Property Rights Treaty.  Law Number
VII (1994) on the Amendment to Industrial Property and
Copyright Legislation was adopted by Parliament and implemented
on July 1, 1994.  This law amends several existing laws and
serves to extend patent protection for pharmaceutical and
chemical products (previously, Hungary issued only process
protection for products in these categories); addresses who
controls the rights of works; extends and unifies the terms of
protection; expands protection for the original layout designs
incorporated in semiconductor chips; provides the legal means
to prevent proprietary information from being disclosed or
acquired without the consent of the trade secret owner by other
than "honest commercial practices"; and ensures enforcement
procedures are available under civil, criminal, or
administrative law to permit effective action against IPR
infringement.

    Hungary is a member of the World Intellectual Property
Organization and a signatory of important agreements on this
issue, such as the Paris Convention for the Protection of
Industrial Property, the Nice Agreement on the Classification
and Registration of Trademarks, the Madrid Agreement concerning
the Registration and Classification of Trademarks, the Patent
Cooperation Treaty, the Universal Copyright Convention, and the
Bern Convention for the Protection of Literary and Artistic
Works.


8.  Worker Rights

    a.  The Right of Association

    The labor code passed in 1992 recognizes the right of the
unions to organize and bargain collectively and permits trade
union pluralism.  Workers have the right to associate freely,
choose representatives, publish journals, and openly promote
members' interests and views.  With the exception of military
personnel and the police, they also have the right to go on
strike.

    b.  The Right to Organize and Bargain Collectively

    The 1992 labor code permits collective bargaining at the
enterprise and industry level and it is practiced.  Minimum
wage levels are set by the Interest Reconcilation Council
(known by its Hungarian acronym, ET), a forum for tripartite
consultation among representatives from the employers,
employees, and the government, and higher levels (but not lower
ones) may be negotiated at the plant level between individual
trade unions and management.  By agreement, the legal minimum
wage is centrally negotiated at the ET in order to control
inflation.  The Ministry of labor is responsible for drafting
labor-related legislation, while special labor courts enforce
labor laws.  The decisions of these courts may be appealed to
the civil court system.  Under the new legislation, employers
are prohibited from discriminating against unions and their
organizers.

    c.  Prohibition of Forced or Compulsory Labor

    Forced or compulsory labor is prohibited by law, which is
enforced by the Ministry of Labor.

    d.  Minimum Age of Employment of Children

    Labor courts enforce the minimum age of 16 years, with
exceptions for apprentice programs, which may begin at 15. 
There does not appear to be any significant abuse of this
statute.

    e.  Acceptable Conditions of Work

    The legal minimum wage is established by the ET and
subsequently implemented by Ministry of Labor Decree.  The 1992
labor code specifies various conditions of employment,
including termination procedures, severance pay, maternity
leave, trade union consultation rights in some management
decisions, annual and sick leave entitlements, and labor
conflict resolution procedures.

    f.  Rights in Sectors with U.S. Investment

    Conditions in specific goods-producing sectors in which
U.S. capital is invested do not differ from those in other
sectors of the economy.      



  Extent of U.S. Investment in Selected Industries.--U.S. Direct
Investment Position Abroad on an Historical Cost Basis--1993

                    (Millions of U.S. dollars)
                                                                
              Category                          Amount          

Petroleum                                                 0
Total Manufacturing                                     315
  Food & Kindred Products                   (1)
  Chemicals and Allied Products             -24
  Metals, Primary & Fabricated              (1)
  Machinery, except Electrical              (2)
  Electric & Electronic Equipment           (1)
  Transportation Equipment                    3
  Other Manufacturing                       (1)
Wholesale Trade                                          66
Banking                                                 (1)
Finance/Insurance/Real Estate                           (1)
Services                                                (2)
Other Industries                                        (1)
TOTAL ALL INDUSTRIES                                  1,001    

(1) Suppressed to avoid disclosing data of individual companies
(2) Less than $500,000
Source: U.S. Department of Commerce, Bureau of Economic
Analysis

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