OECD: Structural reform needed for Hungary’s full potential


The OECD urged Hungary to make further structural reforms to achieve full growth potential in an economic survey of the country published today: “Hungary has exited from recession in early 2013, but the recovery will be modest. Growth potential is held back by weak investment, low employment among low-skilled workers and shortcomings in labor and product markets, making further structural reforms essential,” read the executive summary of the report in part.

The OECD acknowledged that monetary easing by the National Bank of Hungary (MNB) had helped Hungary’s return to growth but said it was still unclear whether the central bank’s Funding for Growth scheme was creating new lending or displacing other credit. The OECD recommended assessing the effect of the scheme before extending it further.

According to the OECD, lending in Hungary remains hampered by poor bank profitability and a big stock of non-performing loans, and it suggested cleaning up portfolios, tightening reporting and provisioning requirements for restructured loans and lending to the riskiest sectors, and taking further steps to ease and stimulate collateral liquidation. It also recommended improving banks profitability by “reducing instability and tax burdens, and improving tax design.”

While recognizing the fiscal effect of special taxes introduced in recent years, the OECD report noted that these taxes had “begun to undermine the predictability and simplicity of the tax system.” It recommended a gradual scale-down of the special taxes and a reliance on more “growth, equity and environmental-friendly instruments.”

Addressing the issues of competition and business environment, the OECD said administrative burdens were still high and regulatory instability had worsened. It recommended raising the limit on the area of new retail spaces, ensuring mobile virtual operators access to networks with competition-enabling conditions, and moving towards market-based pricing for electricity and gas by giving the regulator the right to set prices.

The OECD said employment in Hungary is hindered by skill mismatches and low mobility, advising a further reduction of the tax wedge on low salaries, better reintegration of participants in fostered worker program, and targeting of resources to disadvantaged schools.

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