IMF welcomes Hungaryʼs economic performance, but calls for reforms

Analysis

In a statement issued Friday following regular Article IV consultations, executive directors of the International Monetary Fund (IMF) praised Hungary for its continued strong economic performance but noted that still high external and public debt levels call for rebalancing the policy mix and advancing structural reforms, Hungarian news agency MTI reported.

The IMF encouraged the Hungarian authorities to pursue growth-friendly consolidation for faster deficit and debt reduction. Priority should be given to enhancing the quality of expenditures and composition of revenues, the fund added, while a gradual reduction in the elevated wage bill could be part of a comprehensive administrative reform to rationalize and better target subsidies. 

The IMF welcomed improvement in tax compliance and encouraged action to further improve revenues by reducing exemptions and the number of items subject to preferential VAT rates.

IMF directors supported Hungaryʼs current monetary policy stance, but highlighted the need to monitor inflationary pressures. With the economy and the banking sector improving and new lending resuming, the usual monetary policy transmission mechanisms are likely to be restored, they added. 

The fund recommended a gradual phasing out of unconventional monetary and credit policies and called for sustained efforts to strengthen the financial sector and reduce risks, especially monitoring of risks from higher real estate prices.

Enhancing the business environment by streamlining regulations and improving transparency and policy predictability remains a priority, according to the IMF. Measures to increase womenʼs participation would also be helpful, it added. The directors underscored that ensuring effective utilization of EU funds will be key to supporting growth.

Stronger efforts should be made to address skill mismatches and strengthen training to improve productivity, especially of participants in public works schemes, the IMF directors said, adding that encouraging participants in these schemes to move to the primary labor market is a step in the right direction. 

The IMF projects 2.9% GDP growth this year and 3% growth in 2018 in Hungary. The projections are below the Hungarian governmentʼs forecasts for GDP growth of 4.1% in 2017 and 4.3% in 2018.

Private consumption could rise by 2% and 1.9% in 2017 and 2018, respectively, while the IMF sees average inflation in the two years concerned at 2.5% followed by 3.2%.

Investments could increase by 18.6% in 2017 and 19% in 2018, while the budget deficit could be 2.6% of GDP, then 2.5% of GDP in 2018, said the IMF. Public debt could fall from 73.1% of GDP this year to 71.8% next year, the fund added.

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