Hungary can compensate for its paucity of natural resources only by engaging in foreign trade, which, in the late 1980s, accounted for about half the country's national income. After the Great Depression, commerce with Germany dominated Hungary's external trade, and agricultural products accounted for most Hungarian exports. After World War II, the communist government limited its economic contacts with the West, and the Soviet Union became the country's principal trading partner. Hungary significantly increased trade with the West after the 1968 economic reforms when its economy could no longer grow without imports of technology and raw materials from the Western nations. It signed the General Agreement on Tariffs and Trade in 1973 and, in the midst of a balance of payments crisis, joined the World Bank and the International Monetary Fund (IMF--see Glossary) in 1982. Although in the late 1980s the Soviet Union remained Hungary's principal trading partner, almost half of Hungary's trade was with Western countries. Production shortfalls had forced the Soviet Union to slow exports of oil and other key raw materials, forcing Hungary to strive to utilize raw materials more efficiently and increase exports to the West to pay for additional raw-material imports. The need to boost efficiency and make Hungarian goods competitive on Western markets also prodded the government to undertake economic reforms.

Ever-worsening terms of trade, increasing Western protectionism, reduced access to foreign credit, interest-rate increases, and the generally slow response of Hungarian enterprises to changing market conditions brought the country serious foreign-trade imbalances after 1987. The net foreign hard currency debt more than doubled from US$7 billion in 1981 to US$15.5 billion in 1987, making its per capita foreign debt the highest among the communist states. Hungary had to spend between 65 and 70 percent of its convertible-currency earnings to service its debt. Despite the fact that the economy did not meet the government's debt-reduction target in 1987, analysts predicted that the convertible-currency debt crisis would recede as a government austerity program began to take hold. The debt and current accounts deficit, which analysts estimated to be US$1.2 billion in 1987, prompted Hungary to conclude a standby credit agreement with the IMF in 1988.

Data as of September 1989