WASHINGTON, Nov 6 (Reuters) - The International Monetary Fund on Thursday approved a $15.7 billion (12.3 billion euro) loan program for Hungary and agreed to immediately disburse $6.3 billion of the credit to the government.
The loan is part of a $25.1 billion economic rescue package for Hungary that includes $8.1 billion from the European Union and $1.3 billion by the World Bank.
The remaining portion of the IMF loan will be disbursed in five installments that are subject to quarterly performance reviews.
Hungary's economy and banking system has been hard hit by the global financial crisis that has made it difficult to finance its deficit, while the credit market turmoil has affected funding for its banks.
The IMF said Hungary's economy is expected to contract by 1 percent this year from around 1.75 percent last year. Growth is not expected to reach its estimated potential of 3 percent until after 2011, it added.
"The program is based on two key objectives: to implement a substantial fiscal adjustment to ensure that the government's debt-financing needs will decline; and to maintain adequate liquidity and strong levels of capital in the banking system," the IMF said.
To reduce Hungary's large public debt, which is currently two-thirds of gross domestic product, the government has targeted a fiscal deficit in 2009 of about 2.5 percent of GDP.
"This is consistent with a primary surplus of about 2 percent of GDP, which will help reduce public debt over time," James Morsink, division chief in the IMF's European Department, told a conference call with reporters.
He said measures to reduce government expenditure included wage freezes and the suspension of a 13th-month salary bonus for public servants in 2009, which was introduced in 2003.
Low-income pensioners will be exempt from the elimination of pension bonuses, the IMF added.
The program will also ensure that Hungary's banks are capitalized to weather the economic downturn, while a guarantee fund will be set up to ensure interbank lending.
Morsink said conditions under the program were focused on "key measures that are required to stabilize the situation in the short-run."
"That means we're focusing on the government deficit and the banking system," he added.
He said the IMF was confident the program would be thoroughly implemented because it was developed by Hungary's government and the central bank that reflected "strong ownership."
(Reporting by Lesley Wroughton. Editing by Diane Craft) Keywords: IMF/HUNGARY

(lesley.wroughton@thomsonreuters.com; Tel: 1-202-898-8317; Reuters Messaging: lesley.wroughton.reuters.com@reuters.net)

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