IMF Urges Hungarian Authorities to Carry out Structural Reforms

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The executive board of the International Monetary Fund (IMF) acknowledged Hungary's monetary and fiscal policy tightening amid high inflation and economic imbalances but urged decision-makers to stay consistent and carry out structural reforms in an assessment issued after regular bilateral consultations on Friday, according to a report by state news wire MTI.

After concluding the Article IV consultation, the IMF directors noted that Hungary's recovery from the coronavirus crisis was "robust" but said the country now faces high inflation, slowing growth, and large economic imbalances.

"Against this backdrop and given elevated downside risks to the outlook, directors stressed that a tight and consistent policy mix is needed to reduce economic imbalances and vulnerabilities. They also recommended structural reforms to sustain medium-term growth, strengthen energy security, and unlock EU funds to support the country's digital and green transitions," the IMF said in a press release.

The directors voiced support for the government's front-loaded fiscal tightening, but stressed that budget adjustments should be growth-friendly, "prioritizing productivity-enhancing expenditures and avoiding revenue measures that may discourage investment".

They called price caps the government has rolled out to curb inflation "costly and ineffective" and recommended relying more on direct support to vulnerable households. 

They said "further refinement" of the regulated utility price scheme for households would "improve price signals" as well as be more fair and cost-effective.

The directors welcomed monetary tightening by the National Bank of Hungary (MNB) but called for interest rate caps that "hamper monetary policy transmission" to be scrapped.

They stressed that strengthening governance and transparency, the rule of law, judicial independence, and frameworks for fighting corruption, money laundering, and the financing of terrorism would "improve the business environment, the efficiency of public spending, and medium-term growth".

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