The International Monetary Fund (IMF) projects Hungary's economy will grow by about 2.5p% in both 2011 and 2012, the head of an IMF mission to Hungary said in a statement by the fund on Monday.
"The Hungarian economy is gradually recovering from the 2008-09 crisis. Exports and industrial production are expanding, but domestic demand remains feeble amid contracting credit and persistently high unemployment. Overall, output is projected to grow by about 2.5% both this year and next," said Christoph Rosenberg after holding talks with Hungarian authorities on April 4-11 as part of regular Post-Programme Monitoring. "The 2012 outlook, however, depends crucially on the eventual size and composition of the planned structural reform package which may initially weigh on aggregate demand, before boosting economic growth in the medium-term. Inflationary pressures stemming from increases in global energy and food prices appear relatively contained and inflation is projected to fall to the central bank's target by the end of the policy horizon," he added.
The IMF mission expects Hungary's fiscal balance to be "broadly in line with" authorities' recently revised target of a 2%-of-GDP surplus in 2011, supported by transfers of assets of private pension fund members returning to the state pension pillar, Mr Rosenberg said. But a strong fiscal effort – including but not limited to the recently announced measures – will be necessary to bring the 2012 deficit close to 3% of GDP, he added.
Rosenberg called the government's recently unveiled structural reform programme, dubbed the Széll Kalman Plan, "a welcome step towards growth and sustainability" but added that "important details still need to be specified...including in crucial reform areas such as restructuring local governments and state owned transport companies".
The government's planned cuts in social benefits should be income-tested rather than applied across the board "to ensure durability and avoid putting a disproportionate burden on the poor", he said. "It will also be important to reduce policy uncertainty and improve the investment climate, including by quickly eliminating sectoral levies," he added.
"Steadfast implementation" of the structural reform programme will be critical to make fiscal savings, boost confidence and maintain market access, Rosenberg said, noting that the reform effort is all the more important in view of a "challenging sovereign amortization schedule" over the next few years. In this context, he urged the government and central bank to make every effort to safeguard external and fiscal buffers.
He welcomed plans to end a moratorium on foreclosures but said that in designing support measures, care should be taken to minimize potential fiscal cost and moral hazard.
The IMF mission worked in close cooperation with a parallel mission from the European Commission.
The IMF and EU provided Hungary with a EUR 20 billion financial assistance package at the height of the global crisis in 2008.