The executive board of the International Monetary Fund said Hungary needs a policy the "restores confidence in economic governance" in an assessment attached to a staff report for Article IV consultation and post-programme monitoring discussions published by the IMF on Wednesday.
The executive directors said Hungary’s rebound from the crisis had been "modest" and "vulnerabilities remain high". "Concerns about domestic policies and rising global risk aversion are weighing on sentiments in financial markets," they added.
The directors "underscored the need for a well-crafted policy mix that restores confidence in economic governance, anchors the ongoing adjustment, and strengthens economic institutions".
Hungary’s growth prospects for 2012 are negatively affected by "spillovers from the eurozone crisis and domestic policy missteps", the directors said. In spite of the weaker growth outlook, "fiscal tightening is necessary given Hungary’s high public debt and uncertain financing prospect," they added.
The directors said the government’s 2012 deficit target of 2.5% of GDP is "broadly appropriate", but they suggested "identifying contingency measures, focusing on durable and fiscally-sustainable measures that help lay the groundwork for a credible medium-term fiscal stance".
The directors also called for a "coherent tax and expenditure policy mix that would limit the impact of fiscal consolidation on growth and protect the most vulnerable sections of the population".
The directors said lasting improvement in fiscal performance would require a strengthening of fiscal institutions and governance, and they underscored the need to strengthen the recently reformed Fiscal Council.
Addressing the financial sector, the directors acknowledged watchdogs’ proactive approach to addressing potential pressure on banks’ provisioning, capital and liquidity. They noted that an agreement between the government and banks on restructuring Swiss franc-denominated debt could help economic recovery but suggested the scheme could be better targeted.
The directors agreed that tightening of monetary policy in Hungary was "appropriate at this time to help contain inflation and better anchor inflation expectations". They added that changes to the governance structure of the central bank as a result of recently approved legislation "calls into question authorities’ commitment to central bank independence".
The directors said bottlenecks that impede investment should be tackled and particular attention must be paid to reforms that improve the business environment, competitiveness and labour supply.
The directors agreed that an IMF-supported financial assistance package, together with other international lenders, "would require a strengthened policy framework and strong ownership by the authorities".