MNB makes recommendations to support sustainable growth

Image by Jessica Fejos

MNB will publish the recommendations in detail later in the week.

Virág said Hungary needs a growth plan that can ensure the automatic recovery of the most important internal and external balances from 2022, in addition to strengthening economic growth.

A pickup in government investments, the reinforcement of state programs for home construction, investment support measures and targeted tax reductions can all rev up the engine of the economy, he said.

"We have every chance for a successful defense. But to achieve a dynamic recovery, Hungarian economic policy needs to find appropriate balances in at least nine areas," he added.

He stressed that the delayed impacts of the first wave of the pandemic on areas of the economy such as the labor market and the banking system, must be managed at the same time as the consequences of the second wave.

Virág said a shutdown of the economy as in the lockdown in spring is unlikely to be repeated, adding that companiesʼ reassessments of their business plans are the reason for the slow recovery.

"Many businesses exhausted their reserves during the first wave and could now be forced to adapt to an even greater degree," he added.

He noted that changes to the makeup of economies always occur after recessions: the importance of successful sectors may wane, while the contribution of other sectors grows.

"We must be prepared, even in the course of pandemic defense, to see that the restructuring necessary for a competitive jump-start of the economy takes place quickly and efficiently parallel with appropriate sectoral changes affecting labor, capital, and technology," he said.

"We cannot fall into the zombie company trap," he warned.

Virág said it is precisely the scale of economic reforms implemented in Hungary in the past decade that creates the chance for a confident intervention in extraordinary situations such as the one at present.

The importance of coordinated measures

"To successfully manage the pandemic, coordinated measures will be necessary in the areas of fiscal policy, monetary policy and structural policy that improves competitiveness," he added.

He argued that the wait for a COVID-19 vaccine has made economic players cautious: businesses are putting off investments, while families are making savings instead of consuming.

Thatʼs why itʼs important, he said, for the state to fill the gap created by the temporary decline in domestic demand to the greatest degree possible.

He said special attention must be paid to digitalization and sustainability when establishing investment programs, as "that is where Hungaryʼs future also lies".

Virág said emphasis must be placed on workplace protection until the end of the second wave. Expanding wage support, already successfully used in the first wave, may be necessary, while a targeted increase in tax preferences that are part of the job protection plan would be worth starting, he added. 

In addition to strengthening active labor market policies, he said the labor forceʼs skill levels must be improved so workers can be placed with more competitiveness businesses in the course of the economic recovery.

"In the coming years, the pro-cyclical operation of the banking system could again be enhanced," he said.

While the extension of the moratorium on loan repayments for vulnerable borrowers presents a temporary solution, preparations must be made for increases in the banking sectorʼs stock of non-performing loans as well as in overdue receivables outside of the banking system, he added.

He noted that the stable operation of the lending market remains a key focus of central bank programs, adding that the institution of guarantor could be better used.