IMF Executive Board Concludes 2021 Article IV Consultation with Hungary
IMF News, June 29, 2021
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- Published: June 29, 2021
Economic impact of the pandemic (2020)
- GDP declined by 5 percent in 2020.
- Average inflation was 3.3 percent; core inflation was 4.1 percent (old definition), just above the central bank (MNB)’s tolerance band.
- Unemployment rate rose to 4.1 percent, remaining the lowest in the region.
- Tourism flows dropped sharply, and exports declined, offset by lower imports and profit remittances by large multinationals.
- Current account remained broadly balanced in 2020.
- Fiscal deficit increased to an unprecedented 8.1 percent of GDP as a result of tax deferrals and increased spending.
- Banking sector buffers remained, on average, comfortable.
- Hungary experienced among the highest COVID-related death rates, but vaccination proceeded faster than the EU average.
Near-term outlook and projections (2021)
- Following first quarter outcome, growth is projected around 6 percent in 2021, driven by net exports, recovering consumption supported by fiscal outlays, still fast-growing private wages, and accumulated households’ savings.
- Headline inflation is projected to temporarily increase in the short run before returning toward 3½ percent.
- Unemployment is expected to gradually return close to pre-crisis levels.
- Uncertainty remains significant.
Executive Board assessment — overall
- The Executive Board endorsed the staff appraisal and concluded the Article IV consultation (endorsed without a meeting).
Fiscal policy (assessment and recommendations)
- Assessment:
- The fiscal policy response was large and timely; deficit increased to 8.1 percent of GDP and public debt rose above 80 percent of GDP.
- Recommendations:
- Fiscal policy needs to flexibly balance supporting the economy and preserving medium-term sustainability.
- With improved growth prospects, rebuild buffers by saving the windfall from higher revenues and possibly under-spending if less support is needed.
- A setback may warrant additional support for households and firms.
- Given high gross financing needs, debt management policy should aim at lengthening public debt maturity.
- Considering the magnitude of fiscal spending, transparency in the use of public funds is crucial.
- Create fiscal space by continuing to enhance revenue and lowering current spending, such as further reducing the public wage bill as a share of GDP through rationalization of public employment.
- Reconsider the recent reintroduction of a temporary low preferential VAT rate on new home purchases.
- The planned blanket income tax exemption for youth under 25 is discouraged; recommend other means to increase labor market participation of the youth under 25.
Monetary policy (assessment and guidance)
- Assessment:
- The MNB swiftly reacted to market pressures by providing ample liquidity through a variety of policy tools; adaptation of monetary instruments effectively provided needed liquidity and addressed market dysfunction.
- Guidance:
- Monetary policy going forward should continue to be data-driven to ensure inflation stays within the target range; risks are mostly on the upside.
- Some overshooting of the inflation band due to temporary shocks is acceptable.
- No more than a modest tightening of monetary conditions will be necessary as long as inflation expectations remain well-anchored, but upward risks need close monitoring.
- Monetary policy might need to be further eased should the recovery falter.
- As conditions normalize, the MNB should continue to review the effectiveness and necessity of its unconventional tools and consider tapering its still-growing APP.
Prudential and financial sector policies
- Assessment:
- Like other EU banking regulators, the MNB allowed temporary easing and deferment of some capital requirements and took other micro and macro prudential measures.
- Aggregate buffers of the banking system are comfortable.
- Recommendations:
- Withdrawal of support measures should be gradual as the recovery takes hold.
- Continued supervisory vigilance is warranted.
- Recent measures aimed at strengthening the anti-money laundering framework are welcome.
Structural reforms, labor market, and social safety nets
- Priorities:
- Minimize scarring from the crisis and enable economic transformation.
- Targeted support to viable firms, especially SMEs, alongside strengthened social safety nets and investment in infrastructure and human capital.
- Recommendations:
- Strengthen social safety nets, including unemployment benefits.
- Increase investment in human capital, including healthcare and life-long (re)training, noting spending in these categories is below the EU average.
- The recently proposed revisions to the bankruptcy framework aim to support more orderly and efficient corporate restructuring.
- Labor reallocation across sectors needs support through policies above.
Green transition and climate policy
- Hungary aims to reach climate neutrality by 2050, relying on renewable and nuclear energy production, recycling, and energy conservation.
- Recommendations:
- Higher carbon pricing would foster energy efficiency and innovation and bring revenue that could help finance green investment and compensate the most vulnerable users for higher energy costs.
- Given the evolving EU framework, it may be preferable at this stage to incentivize green investment through transparent fiscal subsidies, applying equally to self- and credit-financed investment, rather than prudential measures.
Use of EU Recovery and Resilience Funds
- The EU Recovery and Resilience Funds can help leverage the authorities’ efforts.
- Timely implementation of reforms, within strengthened competition, governance and transparency frameworks, is key to putting the post-crisis economy on a more sustainable and resilient path.
Key selected economic indicators (exact values)
- Adult literacy rate (%, 2016): 99.4
- Main exports: transport and electrical equipment
- Key export markets: Germany (28%), Romania, Austria, Slovakia, Italy, and France
- Real GDP growth (%): 2018: 5.4; 2019: 4.6; 2020: -4.9; 2021: 6.2
- Unemployment rate (average, %): 2018: 3.7; 2019: 3.5; 2020: 4.1; 2021: …
- Inflation (average, %): 2018: 2.8; 2019: 3.4; 2020: 3.3; 2021: …
- General government revenue (% of GDP): 2018: 43.8; 2019: 43.6; 2020: 43.5; 2021: 42.6
- General government expenditure (% of GDP): 2018: 45.9; 2019: 45.7; 2020: 51.6; 2021: 49.8
- Fiscal balance (% of GDP): 2018: -2.1; 2019: -8.1; 2020: -7.1; 2021: …
- Primary structural balance (percent of potential GDP): 2018: -0.7; 2019: -1.1; 2020: -5.0; 2021: -5.1
- Public debt (% of GDP): 2018: 69.1; 2019: 65.5; 2020: 80.4; 2021: 78.3
- Gross financing need: 2018: 21.1; 2019: 23.5; 2020: 25.3; 2021: 20.5
- Broad money (% change): 2018: 11.8; 2019: 8.1; 2020: 20.9; 2021: …
- Credit to the private sector (flow based, % change): 2018: 10.6; 2019: 15.3; 2020: …
- Government bond yield (5-year, average, %): 2018: 2.2; 2019: 1.6; 2020: 1.5
- 5-year sovereign CDS (average in bps): 2018: 86.6; 2019: 67.2; 2020: …
- Current account (% of GDP): 2018: 0.3; 2019: -0.5; 2020: 0.1; 2021: 0.5
- Reserves (percent of short-term debt at remaining maturity): 2018: 162.1; 2019: 163.6; 2020: 156.4; 2021: 152.6
- External debt (% of GDP): 2018: 78.9; 2019: 71.6; 2020: 78.6; 2021: 69.9
- Exchange rate, HUF per euro, period average: 2018: 319.3; 2019: 325.2; 2020: 351.2; 2021: …
- REER (% change, "-" = appreciation): 2018: 1.8; 2019: 0.7; 2020: 4.8
Source: IMF Executive Board conclusion of the 2021 Article IV consultation with Hungary.
