IMF: Hungary’s economy recovering yet susceptible to shocks

Analysis

Hungary’s economy is recovering but remains “susceptible to shocks”, according to an International Monetary Fund (IMF) staff report published late Friday.

“The economy is recovering gradually, helped by supportive macroeconomic policies, favorable external conditions, and improved market confidence,” the IMF staff said in the report, noting that this had supported Hungary’s financial stability during volatility in emerging markets in the past year.

“Nevertheless, external and public debts remain high, thus making the economy susceptible to shocks; and the country faces subdued growth prospects,” the staff added.

The IMF staff noted that the government’s strategy to address these challenges had included “a sizable fiscal consolidation and unconventional measures that increased the state’s role in the economy and shifted the burden of adjustment to specific sectors”.

The IMF staff said that the government’s policies should aim at “building buffers and comprehensively addressing obstacles to strong, sustained growth”. It recommended a fiscal strategy that is growth-friendly while reducing public debt as a ratio of gross domestic product, adding that the strategy should rely on “durable” consolidation on the expenditure side while gradually eliminating “distortionary taxes”.

The IMF staff said monetary policy easing should end and rate-setters should be ready to tighten “if market conditions warrant”.

The staff recommended measures to support the financial sector, including steps to facilitate the faster resolution of nonperforming loans and to reduce the tax burden on banks. They added that the National Bank of Hungary’s Funding for Growth Scheme, which makes cheap credit available to SMEs, should “remain limited, targeted, and time-bound, with fiscal costs clearly recognized”.

In an assessment published at the same time as the report, the IMF’s executive board welcomed Hungary’s economic recovery, “supported by accommodative policies”, but noted that the uncertain global environment, still high public debt, large financing needs, and reliance on foreign funding, present „significant risks” for the economy. They stressed the need for a „recalibration of macroeconomic policies to rebuild policy buffers and ambitious structural reforms to improve medium-term growth prospects”, naming strengthening institutions, increasing policy predictability, and promoting private sector participation in the economy as priorities.

The executive directors acknowledged Hungarian authorities’ commitment to fiscal prudence and sustainable debt reduction, but urged the implementation of a “durable” adjustment strategy that cuts spending and eliminates “distortionary taxes”. They encouraged continued effort to reduce tax exemptions and crack down on VAT fraud. At the same time, the government should carry out “growth-friendly fiscal reforms” which, they said, could entail better targeting of social benefits, restructuring at state-owned companies, and the “streamlining” of public sector employment.

State secretary for tax and finance Gábor Orbán told the Hungarian news agency MTI that the observations in the IMF’s fresh report show the fund acknowledges the obvious results of the government’s efforts, such as the stronger economy, the recovery from the recession, the big current-account surplus and disciplined fiscal policy. He added that the IMF’s stand on goals for the future was close to that of the Hungarian authorities’, even if they may differ on the way these goals are achieved.

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