IMF Executive Board Concludes Article IV Consultation with Hungary
May 12, 2017
On May 10, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Hungary.
Hungary has succeeded in achieving several consecutive years of high growth and debt reduction. The pick-up in growth was supported by high utilization of EU funds, a favorable external environment (low interest rates and commodity prices, and strong export growth), as well as accommodative monetary and fiscal policies. However, despite robust private sector consumption, GDP growth temporarily slowed in 2016 to an estimated 2 percent, mainly because of a decline in investment. This was mostly due to a slowdown in the disbursement of EU funds, related to the beginning of a new program period. Inflation was subdued for most of 2016, mainly due to low fuel prices, but picked up towards the end of the year, facilitated by strong consumption and increased energy prices. At the same time, unemployment continued its steady decline.
The government outperformed its 2016 fiscal target. The slowdown in EU funds disbursement coincided with an improvement in the collection of social security contributions and corporate income tax. Interest and EU funds-related outlays declined, but other expenditures increased, including on the wage bill and goods and services. Consequently, staff estimates that the general government deficit declined to about 1.7 percent of GDP in 2016 [2] , accompanied by a worsening of the structural fiscal balance.
The Magyar Nemzeti Bank (MNB) continued to ease its monetary policy stance in 2016. The base rate was lowered in three steps from 1.35 percent in March 2016 to 0.9 percent in May and the interest rate corridor was narrowed while, the 3-month money market (BUBOR) rate declined by about 80 basis points since July 2016. In addition, the MNB continued to gradually adjust its conventional and unconventional monetary policy instruments, including the Funding for Growth Scheme, which expired at end-March 2017.
Going forward, output growth is projected to accelerate to about 2.9 percent this year. The recovery in EU funds disbursement and related investment, together with planned projects in the automotive industry, will be the main drivers of growth. In addition, private consumption will remain strong as the wage increases will continue to boost disposable income. Unemployment is projected to continue its downward trend, while inflation is forecast to slightly exceed its 3 percent target by early 2018 but remain below the upper boundary of the tolerance band. Over the medium term, ensuring the effective utilization of EU funds and advancing structural reforms is key to boosting the potential of the economy.
Executive Board Assessment [3]
Executive Directors welcomed Hungary’s continued strong economic performance underpinned by supportive policies, a favorable external environment, and higher utilization of EU flows. The unemployment rate has fallen and external debt has declined. However, Directors noted that the still high external and public debt levels call for rebalancing the policy mix and advancing structural reforms to boost potential growth and ensure debt sustainability.
Directors encouraged the authorities to pursue growth‑friendly consolidation for faster deficit and debt reduction. They noted that priority should be given to enhancing the quality of expenditure and composition of revenue. They called for a gradual reduction in the elevated wage bill as part of a comprehensive administrative reform, and to rationalize and better target subsidies. They welcomed the successful efforts to improve tax compliance and encouraged action to further improve revenue by reducing exemptions and the number of items subject to preferential VAT rates.
Directors supported the current monetary policy stance, but highlighted the need to monitor inflationary pressures which may require a gradual removal of accommodation in the near term. They noted that in view of the improved economy and banking sector, and with new lending resuming, the usual monetary policy transmission mechanisms are likely to be restored. Therefore, Directors recommended a gradual phasing out of unconventional monetary and credit policies. They called for sustained efforts to strengthen the financial sector and reduce risks, especially monitoring of risks from higher real estate prices.
Directors emphasized that it is important to enhance the business environment by streamlining regulations and enhancing transparency and policy predictability. They called for stronger efforts to address skill‑mismatches and strengthen training to improve productivity, especially of participants in the public works schemes. In this connection, they welcomed the recent steps taken to encourage participants in these schemes to move to the primary labor market. Measures to increase female participation will also be helpful. Directors underscored that ensuring effective utilization of EU funds will be key to supporting growth.
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Hungary: Selected Economic Indicators, 2012–18 |
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] This preliminary figure has been revised slightly to 1.8 percent of GDP after the staff report was issued.
[3] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summing ups can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.
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