IMF Executive Board Concludes Article IV Consultation with Hungary
IMF News, August 3, 2018
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- Published: August 3, 2018
Overall assessment and context
- Hungary has achieved several years of strong growth supported by accelerated absorption of EU funds and strong disposable income.
- External debt declined substantially over the past few years and public debt also declined, albeit at a much slower pace.
- The increase in domestic demand has moderated the external current account surplus from its 2016 record level, and the exchange rate has recently depreciated.
- Headline inflation has started to pick up, mainly due to higher energy prices; core inflation has been running sideways over the past six months despite emerging capacity constraints.
- Unemployment remains on a decreasing trend and labor shortages are intensifying despite improvement in participation rates.
Economic outlook and projections
- GDP growth:
- 2018: expected to be around 4 percent, similar to last year.
- 2019: growth will start to decelerate as absorption of EU funds tapers off and capacity constraints tighten further.
- Inflation:
- Inflation is projected to slightly exceed the MNB’s 3 percent inflation target.
- Staff projects the 2018 overall fiscal deficit at about 2.4 percent of GDP, in line with the budget’s target.
- In view of the strong cyclical position, the structural primary balance is expected to deteriorate by close to one percent of potential GDP.
Fiscal developments and risks
- 2017 general government fiscal deficit narrowed to 2 percent of GDP, compared to the budgeted 2.4 percent.
- The structural primary balance deteriorated by about 1.2 percent of potential GDP in 2017.
- Public debt ratio has come down only to a limited extent despite favorable fiscal outcomes.
- Executive Board view: expedite reversal of the pro-cyclical fiscal stance and reduce public debt to create policy space against shocks.
- Recommended fiscal measures:
- Phase out the remaining sectoral taxes.
- Broaden the tax base and further enhance tax administration to reduce distortions and boost revenue collection.
- Transform existing property taxes into a modern real estate tax to help local governments raise additional revenue for healthcare, education, and infrastructure while protecting the vulnerable.
- Reform public administration to reduce the wage bill, facilitate a competitive public salaries scale, and improve provision and quality of public services.
- Reduce spending on goods and services where possible.
- Eliminate generalized subsidies and protect the poor via targeted measures.
Monetary policy and financial conditions
- The Magyar Nemzeti Bank (MNB) further relaxed its monetary stance during 2017 and in early 2018, mostly using unconventional tools.
- Imported inflation has been low; large wage increases have been mitigated by lowering social security contributions.
- The MNB intends to let the Market-Based Lending Scheme expire by end-2018, as originally scheduled.
- Guidance:
- Once inflation sustainably approaches the upper half of the tolerance band (3±1 percent), monetary policy stimulus should be gradually scaled back.
- Removal of monetary accommodation should start with unconventional measures.
- Recent MNB communication emphasizing commitment to the inflation target and openness to take any action to achieve it is welcomed.
External position, competitiveness, and structural issues
- Hungary’s external position is broadly in line with medium-term fundamentals and desirable policies.
- Hungary’s IIP has improved in recent years and international reserves are adequate according to the Fund’s metric.
- Non-price indicators point to the need to improve productivity and competitiveness.
- Structural priorities:
- Continue reforms to improve the business environment, including addressing challenges in obtaining construction permits and electricity connection, ease of paying taxes, and perceived corruption.
- Level the playing field for all investors, including SMEs and FDI, by reducing red tape and simplifying the regulatory environment to broaden the growth and export base.
- Urgently improve education and vocational training to address skills mismatches.
- Continue to reduce the number of participants in public works schemes to release them to the primary labor market.
- Increase availability of child-care facilities to improve labor market participation, especially among women.
- Establishment of the Competitiveness Council and implementation of some of its recommendations are welcomed.
Selected economic indicators (2013–19, exact figures as reported)
- Real GDP (percentage change):
- 2013: 2.1
- 2014: 4.2
- 2015: 3.4
- 2016: 2.2
- 2017: 4.0
- 2018 (Prelim./Proj.): 3.3
- 2019 (Proj.): [value not provided in table]
- Total domestic demand (contribution to growth):
- 2013: 5.1
- 2014: 1.1
- 2015: 1.5
- 2016: 5.4
- 2017: 3.2
- Private consumption (contribution to growth):
- 2013: 0.3
- 2014: 2.0
- 2015: 2.3
- 2016: 2.5
- 2017: 2.4
- Gross fixed capital formation (percent of GDP):
- 2013: 20.9
- 2014: 22.2
- 2015: 21.9
- 2016: 19.2
- 2017: 21.5
- 2018 (Prelim./Proj.): 23.1
- 2019 (Proj.): 23.3
- Gross national saving (percent of GDP, from BOP):
- 2013: 24.7
- 2014: 23.7
- 2015: 25.4
- 2016: 25.3
- 2017: 25.2
- General government overall balance (percent of GDP):
- 2013: -2.6
- 2014: -1.9
- 2015: -1.7
- 2016: -2.0
- 2017: -2.4
- 2018 (Proj.): [about] 2.4 percent of GDP (staff projection)
- Primary balance:
- 2013: 1.6
- 2014: 0.8
- Primary structural balance (percent of potential GDP):
- 2013: 3.6
- 2014: -0.3
- 2015: -0.5
- Public debt (percent of GDP):
- 2013: 77.1
- 2014: 76.6
- 2015: 76.7
- 2016: 76.0
- 2017: 73.6
- 2018 (Prelim./Proj.): 71.3
- 2019 (Proj.): 69.1
- Broad money (end-of-period growth):
- 2014: 5.5
- 2015: 6.3
- 2016: 7.0
- 2017: 6.2
- Lending to the private sector, flow-based 2/:
- 2015: -3.3
- 2016: -11.0
- 2017: 6.4
- 2018 (end-of-period/data at end-June): 7.2 (note: table shows 7.2 then 6.5 in sequence)
- T-bill (90-day, average) and Government bond yield (5-year, average):
- Government bond yield (5-year, average): 5.2 (2013), 3.9 (2014), 2.7 (2015)
- Current account (percent of GDP):
- 2013: 3.8
- 2014: 3.5
- 2015: 6.0
- Reserves (billions of Euros):
- 2013: 33.8
- 2014: 34.6
- 2015: 30.3
- 2016: 24.4
- 2017: 23.4
- 2018 (Prelim./Proj.): 26.9
- 2019 (Proj.): 30.1
- Gross external debt (percent of GDP):
- 2013: 117.8
- 2014: 114.7
- 2015: 107.7
- 2016: 97.2
- 2017: 84.6
- 2018 (Prelim./Proj.): 76.2
- 2019 (Proj.): 70.7
- Gross official reserves (percent of short-term debt at remaining maturity):
- 2013: 119.4
- 2014: 160.6
- 2015: 139.5
- 2016: 131.1
- 2017: 139.9
- 2018 (Prelim./Proj.): 165.3
- 2019 (Proj.): 174.0
- Exchange regime: Floating
- Exchange rate, HUF per euro, period average:
- 2013: 297
- 2014: 309
- 2015: 310
- 2016: 311
- 2017: 329
- Nominal effective rate (2000=100, average):
- 2013: 110.3
- 2014: 114.2
- 2015: 116.5
- 2016: 116.7
- 2017: 115.5
- 2018 (Prelim./Proj.): 117.9
- Real effective rate, CPI basis (2000=100, average):
- 2013: 74.3
- 2014: 77.7
- 2015: 79.5
- 2016: 79.6
- 2017: 78.2
- 2018 (Prelim./Proj.): 78.7
- Quota at the Fund: SDR 1,940 million
- Memorandum items:
- Nominal GDP (billions of Forints): 2013: 30,247; 2014: 32,592; 2015: 34,324; 2016: 35,420; 2017: 38,183; 2018 (Prelim./Proj.): 40,823; 2019 (Proj.): 43,435
- Per capita GDP (EUR): 2013: 10,277; 2014: 10,691; 2015: 11,238; 2016: 11,568; 2017: 12,600; 2018 (Prelim./Proj.): 13,449; 2019 (Proj.): 14,286
IMF Press Release No. 18/328 — August 3, 2018