The IMF said Hungary’s macroeconomic policies had “contributed to a welcome reduction in vulnerabilities, strong growth, and a reduction in unemployment”, but added that the country “remains susceptible to shocks and its medium-term growth prospects are subdued”.
The IMF called the juncture “a window of opportunity” for policymakers to continue fiscal consolidation “based on more efficient, equitable, and growth-oriented public expenditure and tax policies”, to carry out structural reforms that support economic growth, and to preserve price stability and revive financial intermediation “including by improving the operating environment for the banking sector”.
The mission said “distortionary” sectoral taxes “undermine investment and long-term growth” and recommended a “growth-friendly and inclusive fiscal consolidation strategy”. Human and physical capital as well as overall productivity could be boosted by enhancing the efficiency and progressivity of the tax system, reducing public sector employment while improving the delivery of public services, and boosting efficiency in the social welfare system.
Addressing monetary policy in the statement, the mission said further easing “should be considered” as disinflationary pressure persists.
“The mission, therefore, sees scope for further cautious monetary easing, particularly given the improved resilience of household balance sheets to exchange rate risk, and also in light of the recent quantitative easing by the ECB,” the statement said.
The mission said “repairing financial intermediation is critical for sustained growth over the medium term” and recommended reducing the tax burden on banks. It also encouraged the government to discuss with banks ways to improve their operating environment.
Among the structural reforms the mission recommended were measures to boost labor market participation rates, especially among women; steps to improve the environment for doing business by making policy more predictable and transparent; and efforts to improve competitiveness by boosting productivity and increasing the diversity of exports.
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