Statement at the Conclusion of the IMF’s 2014 Article IV Consultation Mission to HungaryPress Release No. 14/115
March 20, 2014
A staff team from the International Monetary Fund (IMF), headed by Mr. Costas Christou, visited Budapest during March 5–17 to hold discussions for the 2014 Article IV consultation.1 The team met with Minister for National Economy Mihály Varga, Minister for National Development Zsuzsa Németh, Central Bank of Hungary (MNB) Deputy Governors Ádám Balog and Ferenc Gerhardt, other senior officials, and representatives from the private sector and think tanks. At the conclusion of the visit, Mr. Christou issued the following statement:
“The Hungarian economy emerged from the 2012 recession and posted 1.1 percent growth last year, mainly driven by government investment and consumption, as well as net exports. A moderate growth pick-up to 2 percent is expected this year as investment and private consumption continue to improve, while exports expand further. Notwithstanding this welcome improvement, medium-term growth prospects remain subdued.
“Hungary has reduced its vulnerabilities. However, still-high public and external financing needs, heavy reliance on nonresident funding, uncertainty regarding advanced economies’ monetary policies, and reemergence of financial stress in emerging markets pose risks. The recent market volatility illustrates the fragility of market sentiment and underscores the need for strong policies and clear communication to boost confidence.
“The Hungarian government has demonstrated a strong commitment to keeping the fiscal deficit within the EU limits: the 2013 deficit is estimated at 2.4 percent of GDP, over-performing the 2.7 percent target, as lower tax revenues were more than offset by prudent expenditure control. For 2014, the mission projects that the deficit target of 2.9 percent of GDP will be met only if budget reserves are saved. Public debt would remain broadly unchanged.
“The mission welcomes the government’s intent to reduce the structural fiscal deficit over the medium term. The needed fiscal consolidation should be gradual and growth-friendly, relying on durable expenditure reduction, a better composition of expenditure, and a gradual elimination of distortionary taxes. Such a strategy would ensure a sustainable reduction in public debt without weighing on growth.
“Following significant monetary policy easing, the policy rate stands at a record-low level of 2.7 percent. The mission recognizes that underlying inflationary pressures have eased and inflation expectations have come down to around the MNB’s inflation target. Going forward, inflationary pressures are set to build up as the economy recovers, the output gap narrows, and one-off effects on prices wane. This, together with geopolitical uncertainties, prospects for U.S. monetary policy normalization, and a less optimistic growth outlook in some large emerging markets, warrant a cautious policy stance in the period ahead.
“The banking sector remains under pressure and bank lending continues to contract, albeit at a slowing pace. A long-lasting restoration of financial intermediation should primarily rely on a sustainable improvement in banks’ operating environment, including steps to facilitate faster nonperforming loans resolution and reduce the tax burden. The first phase of the Funding for Growth Scheme proved successful in improving credit conditions for many Small and Medium Enterprises (SMEs). The mission sees scope for altering some of the scheme’s modalities to increase its impact on growth and better support the effectiveness of monetary policy transmission, while keeping the scheme time-bound and limited to SMEs.
“This is an opportune time to undertake structural reforms that would put Hungary on a higher, sustainable, growth trajectory. Past reforms to increase labor market flexibility and boost labor demand and supply have borne some fruit. Raising potential growth will require boosting labor demand further, enhancing the business climate and policy environment, reducing the regulatory burden, rationalizing taxes, and increasing productivity in the services sectors.”
The mission would like to thank its counterparts for the productive and open engagement.
1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with its member countries, 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.