(BUDAPEST) - Hungary must press ahead with economic reform, the central bank said Wednesday, even though most of the population appears to be against large parts of the reform programme.

In a special report on Hungary's progress toward meeting euro adoption criteria, the central bank urged Budapest to "implement additional reforms in the product and labour markets for Hungary to become a competitive economy."

A plebiscite called by the opposition on March 9 dealt Prime Minister Ferenc Gyurcsany a humiliating defeat when nearly 83 percent of the population voted against the reforms of health-care and tuition fees.

JP Morgan warned that the outcome of the referundum would deliver a "severe blow" to the reform of the country's health-care system and other sectors.

And if the government decided to slow down the partial privatisation of the health insurance market out of fear of another defeat in a second referendum in September, reforms in general could come to a halt, the investment bank said.

The right-wing Fidesz party and its leader Viktor Orban are planning a second such referendum in the autumn if the government presses ahead with plans to partially privatise the social welfare system.

"We strongly advise the government to withdraw the law ... if it doesn't want another slap in the face," said Orban recently.

Under a new law, adopted by parliament on February 12, the state national health insurer is to be replaced by 22 regional entities in which private insurance companies will be allowed to hold stakes of up to 49 percent, with the state retaining the rest.

The opposition conservatives and unions are up in arms, arguing profit-orientated private insurance firms will not want to insure the chronically ill and the elderly, or only at far higher prices.

In Gyurcsany's centre-left coalition of Socialists and Democrats, the democrat SZDSZ party has threatened to quit if the reforms are dropped.

But the premier's Socialist MSZP party insists that will not be the case.

"We will not renounce reforms or Ferenc Gyurcsany", it said.

The central bank's new report entitled "Analysis of the Convergence Process" will provide tailwind for the government and its reform programme.

Indeed, the central bank insisted that additional structural reforms would maximise the benefits of joining the euro, if and when Hungary finally decided to adopt the single European currency.

"The sooner these reforms are carried out the better," the report said.

On the budget, Budapest should "relentlessly pursue" fiscal consolidation, the central bank urged.

Countries wanting to join the euro must cut their public deficits to less than 3.0 percent of gross domestic product (GDP).

In 2007, the Hungarian deficit ratio stood at 5.7 percent and the government is aiming to cut it to 4.0 percent this year.

"Long-term success relies largely on growth-friendly measures, such as reducing the tax (take) or cutting back on social policies which hinder labour supply," it said.

The central bank said there would be "considerable advantages" for Hungary to join the euro and it believed it "should be adopted as soon as possible."

After the March 9 referendum, the international credit rating agency Standard and Poor's downgraded its outlook for Hungary to negative from stable because of the weakening perspective for sustained consolidation of the country's public finances.

S and P said political opposition to budgetary reform was growing.

The defeat in the referendum would have only a minor effect on this year's budget deficit but it "confirms fading appetite among Hungarians to continue with the consolidation process," the agency said.

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