Hungary requires the most urgent fiscal consolidation of any emerging market country in Europe; however, the government's plans to reduce the fiscal deficit from this year's expected 10% of GDP by four percentage points in 2007 mainly through increased tax revenue could hurt the country's growth potential, the International Monetary Fund (IMF) said in a report published on Thursday.
In its World Economic Outlook, the IMF projects Hungary's GDP growth will slow from 4.5% in 2006 to 3.5% in 2007. It says inflation will pick up from 3.6% in 2006 to 5.8% in 2007. The IMF puts Hungary's current account deficit at 9.1% of GDP in 2006 and 8% in 2008. It blames the country's big current account deficit on government overspending rather than investment money which flowed in after Hungary joined the EU.
It also warns that Hungary's big external financing requirement puts it a greater risk because of the increased volatility of global markets. Meeting the Maastricht criteria to adopt the euro will require a disciplined and sustained fiscal policy, the IMF says. It adds that structural reforms are of key importance to improving economic flexibility and closing the productivity gap with the EU15.