OREANDA-NEWS. June 30, 2009. During the first day of his working visit to Hungary, Valdis Dombrovskis, Prime Minister of the Republic of Latvia, met his Hungarian counterpart Gordon Bajnai and Minister for Finance, Dr. Peter Oszko. The sides discussed the economic situation in both countries and exchanged views concerning overcoming the economic crisis and cooperation with international lenders, reported the Official website mk.gov.lv.

Hungarian Prime Minister Gordon Bajnai acknowledged participation of Valdis Dombrovskis in the official ceremony devoted to the 20th anniversary of fall of the Iron Curtain on June 27, in Budapest. About 30 high-level delegations from various European countries will attend the events.

The Prime Ministers and Ministers for Finance discussed the main solutions for the economic crisis. Valdis Dombrovskis informed about the latest decisions of the Latvian Government and the budget decrease by 500 million LVL aimed at overcoming the crisis, as well as outlined the basic principles of the structural reforms.

The Hungarian Prime Minister and the Minister for Finance described their domestic situation which is similar to Latvia’s economic crisis. In mid May Hungary was visited by delegations of the International Monetary Fund (IMF) and the European Commission (EC) in order to prepare the second report concerning the international loan granted to Hungary. In view of the latest forecasts of the economic recession indicating that the GDP could fall by 6.7% this year, the Hungarian Government and their international lenders agreed on an increased budget deficit amounting to 3.9% of GDP instead of 2.9% as planned previously. The Hungarian Government has expressed its commitment to ensure that next year the budget deficit would not exceed 3.8% but in 2011 it would be below 3% of GDP.

After the meeting the IMF announced that the Hungarian Government has secured obligations with regard to its debts, inflation and international reserves and that it has fulfilled its structural reform tasks related to the pension system and ensuring governmental loans to banks. On June 23 the Board of the IMF adopted a decision to grant Hungary the third part (1.43 billion EUR) of its total loan amounting to 20.1 billion EUR.

The Hungary, similarly to Latvia, has also signed a Memorandum with the European Commission stipulating the pre-conditions for the next part of its loan in the amount of 1.5 billion EUR. The Memorandum sets forth that Hungary should reduce compensation part of salaries in the public sector (in Hungary some part of public sector employees are paid by means of various compensations and bonuses), it should also abandon its subsidy system for acquisition of housing, reduce the local government budget by 430 million EUR and ensure other expenditure cuts in the amount of 40 billion EUR.

The Memorandum also stipulates a number of other structural reforms, for instance, changes in the children and family benefit system, reduction of heating subsidies, ensuring free-of-charge meals for children at schools, restructuring of the taxation system, increasing taxes on consumption, for example, on real estate, aircrafts, etc.

After taking the office, on April 20, Gordon Bajnai presented the Action Plan of its Government for next 12 months aimed at overcoming the economic crisis in Hungary. The plan included an increase in the value-added tax (VAT) and a reduction of social payments. It is planned that the Hungary will raise its VAT from 20% to 25% by preserving the current 18% for specific groups of food products and for heating. The excise tax will be increased from 6% to 8%; taxes will be increased on income allocated through offshore companies; the solidarity tax of 4% for companies will be abandoned but the corporate tax will be increased from 16% to 19%. Similarly to Latvia, it is planned to reduce public sector expenditure, for instance salaries of ministers are reduced by 15%, business trip costs – by 50%; a considerable reduction of salaries of board members of state-owned companies is also planned.

The programme envisages a GDP decrease by 6% instead of 3% as planned previously; and it also states that the recession in Hungary will continue in 2010. According to the Action Plan, the main priorities and measures of the Government are dividend in four categories – short-term crisis management, stabilisation measures, support to economic growth and rebuilding trust in the Hungarian economy.

At the beginning of May the Hungarian Parliament approved amendments to the relevant laws and regulations implementing changes in the pension system – the most important change is the increased pension age from 62 to 65 years during a period of six years starting from 2012.

The Prime Ministers shared the view that cooperation of Latvia and Hungary should be developed, in particular in such areas as pharmaceutics, energy and tourism. By now bilateral economic cooperation cannot be described as dynamic and rapidly growing. One of the reasons – businesses of both countries are traditionally focused on different markets and different business cooperation regions. Since accession of Latvia and Hungary to the European Union economic and trade relations of both countries are regulated by the legislation of the EU and the principles of single market opening new opportunities for more extensive economic cooperation. Valdis Dombrovskis and Gordon Bajnai expressed their conviction that the potential of the EU single market should be exploited more actively.

Cooperation with the relevant Hungarian organisations and businesses in the area of energy has also been insufficient; in future such cooperation could be developed in framework of various programmes, for instance energy efficiency programmes and programmes aimed at energy-efficient products and manufacturing and use of energy-efficient equipment.

The Prime Ministers also discussed the energy issues of the Baltic region and the region of Visegrad States (Hungary, the Czech Republic, and Poland). Latvian Prime Minister Valdis Dombrovskis informed about the background of the formation of the common energy market in the Baltic region and opening of the energy market. He noted that Latvia’s priority is a functioning energy market which implies opening of the Estonian market by 2013 and actual market liberalisation in Lithuania. Along with the market liberalisation Latvia would expect implementation of infrastructure projects and projects aimed at increasing the power of energy in the framework of the new EU financial budget.

The Hungarian Prime Minister informed about the situation in his country concerning risks related to gas supplies from Ukraine. On January 6 this year Ukraine completely stopped its gas supplies to Hungary, and it was necessary to find an urgent solution to cope with the consequences of the Russian and Ukrainian gas dispute. Hungary decided to reduce gas supplies to the big industrial consumers, urgent to transform electric power stations in order to use oil and decided to open its gas reserves. In the result Hungary survived the crisis successfully not just with regard to Hungarian gas consumers but it could also provide help to neighbouring countries experiencing the most serious problems.

The Hungarian Prime Minister explained the main principles of the gas main project Nabuko. In January this year, in Budapest, a summit was organised on this gas main which was also participated by Andris Piebalgs, Energy Commissioner of the European Commission. The summit adopted a declaration stating strong support to the implementation of this project.

Another gas project of similar importance for Hungary is gas main South Stream. In March this year the Hungarian Prime Minister visited Moscow and met representatives of Russian energy companies and the Russian Government; the sides signed an agreement on establishment of a common company which would be responsible for the construction of the gas main in the territory of Hungary. For Hungary, similarly to Latvia, diversification of sources of energy resources is of great importance in order to divide risks and reduce dependence on one supplying country.

Both Prime Ministers discussed bilateral cooperation in international organisations, bilateral business projects which could be of interest for both countries, as well as international and cross-regional cooperation projects launched in the framework of the European Union. At the end of the meeting Valdis Dombrovskis encouraged Gordon Banjai to develop bilateral economic cooperation and active exchange of views concerning the implementation of crisis measures.

Valdis Dombrovskis expressed his gratitude for the invitation to the events devoted to fall of the Iron Curtain and stressed that is a historic event for all European countries. His Hungarian counterpart presented to Valdis Dombrovskis a small part of the „Iron Curtain” – barbed wire which dividend Hungary and Austria and was cut in 1989.