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BUDAPEST, Dec 15 (Reuters) - Hungary is on track to meet its deficit target this year and the 2009 budget is also expected to deliver the fiscal cuts envisaged in a programme agreed with the IMF, the head of the Fund's delegation to the country said on Monday.
Hungary needed a $25.1 billion rescue package from the IMF, the European Union and the World Bank to avert financial crisis in October and halt a sharp weakening of the forint.
Financial market conditions have improved since then and the exchange rate has been broadly stable recently but Hungary must stick to policies in line with the programme as external financing conditions will remain difficult next year, James Morsink told a news conference.
"Continued implementation of economic policies consistent with the programme is essential to maintain investor confidence and minimise the depth of the economic downturn," he said.
The forint, which slumped to all-time lows past 286 versus the euro during the market upheaval, has firmed and stabilised since then and on Monday traded at around 266.
The IMF, which visited Hungary to review recent financial and economic developments, said government bond yields have dropped and parent banks continue to support their subsidiaries in Hungary.
"However, external financing conditions remain difficult and, with global deleveraging expected to continue in 2009, could deteriorate further," Morsink said.
The economy is expected to slide into recession next year due to a downturn in Hungary's main export markets in western Europe, and a tightening of lending conditions.
Hungary has so far drawn upon about 5 billion euros from the IMF which was put into the central bank's reserves, and has also drawn upon 2 billion euros worth of funds from the European Union, half of which will be used to finance debt this year.
The country will use further -- mostly EU -- funds for debt financing next year, the debt agency said last week.
Morsink said Hungary was expected to meet this year's deficit target of 3.4 percent of gross domestic product and is expected to cut the deficit further in 2009 as planned.
Next year's budget, which aims to cut the deficit to 2.6 percent of GDP, will go to a final vote in parliament later on Monday and is expected to pass with the support of the opposition Free Democrats.
Parliament will also vote later in the day on a bill to support the banking sector, and the IMF said that while banks were in a strong solvency position, it was important that they have access to capital enhancement and borrowing facilities.
The IMF said central bank rates cuts totalling 100 basis points since October had been appropriate, but warned further reductions should be gradual and cautious.
"Unsettled financial market conditions point to the need to exercise caution in cutting the policy rate further," the IMF delegation said in a statement. (Reporting by Krisztina Than and Gergely Szakacs; Editing by Patrick Graham and Toby Chopra)