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IMF Staff Acknowledge 'Encouraging Signs' in Hungary

Analysis

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International Monetary Fund (IMF) staff acknowledged a rapid decline in inflation, a "resilient" labor market, and financial sector, and recovering economic output in Hungary in a statement released after regular bilateral consultations on Friday, according to a report by state news wire MTI.

After concluding Article IV consultations, the IMF staff pointed to the impact of effective monetary policy and a tighter fiscal stance on the decline in inflation. They also noted that Hungary's large current account deficit in 2022 had turned into a surplus.

The IMF staff projects Hungary's GDP will grow 2.3% in 2024, a tenth of a percentage point higher than the forecast in the IMF's latest World Economic Outlook released in April. 

In spite of these "encouraging signs", the staff said "significant challenges" remained, noting fiscal deficit and state debt ratios over 2019 levels. The staff also said windfall profit taxes had created investor uncertainty, interest rate caps, and subsidized lending had distorted market rates, and significant state ownership in key sectors impeded competition.

Additional fiscal consolidation measures would help safeguard fiscal sustainability and reduce sovereign risk, the staff said, adding that limiting household utility subsidies to a basic subsistence amount would yield savings, reduce fossil fuel consumption, and insulate the budget from energy price fluctuations. 

The staff said tax reforms should focus on improving the efficiency and equity of the tax system and suggested that higher marginal personal income tax rates for high earners would increase revenue and enhance fairness. The staff also recommended that the taxation of businesses be made more equitable and efficient by rationalizing tax incentives and increasing the tax rate. There is also scope for raising more revenue from property taxes, they added.

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