Mr. Lamfalussy looks at the progress achieved by the Hungarian economy in recent years Address by the President of the European Monetary Institute, Mr. Alexandre Lamfalussy, at a conference organised by the Hungarian Banking Association on the occasion of the 10th anniversary of the establishment of the new Hungarian banking system and held in Budapest on 7/2/97. For at least three reasons, I have accepted with pleasure the invitation to share some thoughts with you on the occasion of these tenth anniversary celebrations. First, for obvious personal reasons, I enjoy spending some time in Hungary - even if it is only for less than a day. Second, I am absolutely convinced that an efficient financial system in general, and an efficient banking system in particular, together comprise an indispensable precondition for the proper functioning of a market economy and, indeed, for economic growth. Not a sufficient condition, but a necessary one. Third, I note that Hungary has made substantial progress in this direction in four key areas. The larger part of the Hungarian banking system is now in genuinely private hands; the financial health of most banks (which, not so long ago, was - to put it mildly - precarious) has improved; the legal, accounting and regulatory framework has been consolidated, and, last but not least, there is now an interbank payment system in place which can no longer be qualified as prehistoric.
Some of this deficit was covered by direct foreign investment, but the greater part of it was financed by borrowing, as a result of which by the end of 1994 the net external debt had reached 46% of GDP and the exceptionally high level of more than 160% of exports of goods and services and unrequited transfers. 2. I have not yet seen the full 1996 figures, but estimates based on the first eleven months suggest a current account deficit of around (or even less than) $ billion. This looks much more reasonable, not only because it was more than covered by foreign direct investment but also because of what lies behind this improvement. The $ billion drop in the current BIS Review 16/1997  -2-  account deficit between 1994 and 1996 was made possible (a) by a 35% increase in exports, accompanied by a modest increase in imports of about 14%, and (b) by the steady and rapid increase in services income, mainly (but not exclusively) derived from tourism. 3. Since there was also a sizable inflow of foreign direct investment in 1995 and 1996, the country’s net external debt dropped from $ billion at end-1994 to about $ billion at end-1996. Net external debt declined to 31.2 expressed as a percentage of GDP, and to 71.6 as a percentage of exports of goods, services and unrequited transfers.