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Sustainable and Inclusive Growth ‘Well Within Hungary’s Reach,’ IMF Says

Analysis

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An International Monetary Fund (IMF) mission has presented its findings on the strengths and weaknesses of Hungarian economy at the conclusion of the so-called Article IV consultation for 2024.

The mission, led by Anke Weber and and comprising Chris Jackson, Jakree Koosakul, Augustus Panton, and Atticus Weller, visited Budapest from June 11-21 to conduct discussions with the Hungarian authorities.

In their concluding statement, the IMF team acknowledged that Hungary is emerging from a period of shocks: The pandemic, Russia’s war in Ukraine, and crisis-related stimulus widened fiscal and external imbalances and “triggered double-digit inflation in 2022,” the team said.

Effective monetary policy response, aided by falling commodity prices and a tighter fiscal stance in 2023, had seen inflation decline rapidly, while the labor market and financial sector have remained resilient. The report also noted that a large current account deficit in 2022 had turned into a surplus, and output is starting to recover.

‘Challenges Remain’

However, it also noted that “significant challenges remain. The fiscal deficit and public-debt-to GDP ratio remain well above 2019 levels, and various temporary windfall taxes have created investor uncertainty. Interest rate caps and subsidized lending measures have distorted market rates, and significant state ownership in key sectors impedes competition,” the IMF team found.

Despite some progress, the ongoing negotiations on the European Commission’s super milestones, including the assessment of governance conditions, are delaying the disbursement of some EU funds that are vital for supporting digitalization, regional integration, and the green transition.

“With the right policies, sustainable and inclusive growth is well within Hungary’s reach. Rebuilding buffers through a credible and growth-friendly fiscal adjustment plan would reduce sovereign risk and support the central bank in its disinflation efforts,” the team found.

“Such adjustment should be rooted in a medium-term budget process with a more balanced revenue structure and a growth-friendly spending mix. Stability-oriented macro-financial policies should raise countercyclical capital buffers and allow market forces to drive credit allocation. Coordinated structural reforms are key to addressing Hungary’s lagging productivity relative to the EU average and accelerating progress toward the green transition,” the concluding statement ends.

What is an Article IV Concluding Statement?

The Article IV consultations focus on creating “orderly economic growth with reasonable price stability” among IMF member countries. The concluding statement describes the preliminary findings of IMF staff at the end of an official visit. The views expressed are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings from their mission, the team will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

This article was first published in the Budapest Business Journal print issue of June 28, 2024.

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