IMF Executive Board Concludes 2022 Article IV Consultation with Hungary
IMF News, February 3, 2023
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- Published: February 3, 2023
Overview
- Date of conclusion: February 1, 2023.
- Key shocks and developments:
- Russia’s war in Ukraine contributed to widened economic imbalances.
- Loose fiscal policy in late 2021-early 2022 intensified inflation.
- Inflation noted as "among the highest in Europe at 24.5 percent y/y."
- Current account deficit widened.
- Monetary policy "significantly tightened."
- Government plans a "large fiscal adjustment in 2023."
- Growth in 2022 was strong, led by buoyant domestic demand and a tight labor market.
- Growth is expected to "slow considerably in 2023 as domestic and external demand wane."
- Inflation is expected to "remain elevated but decelerating, as global energy and commodity price pressures ease."
- "Uncertainty remains high, and sizeable risks could significantly worsen the outlook."
Executive Board Assessment and Policy Recommendations
- Overall assessment:
- Hungary faces high inflation, slowing growth, and large economic imbalances after a robust recovery from COVID-19.
- Given elevated downside risks, a "tight and consistent policy mix is needed to reduce economic imbalances and vulnerabilities."
- Structural reforms recommended to sustain medium-term growth, strengthen energy security, and unlock EU funds for digital and green transitions.
- Fiscal policy:
- Directors supported the government's planned "front-loaded fiscal tightening."
- Fiscal tightening seen as complementary to monetary policy to fight inflation, rebuild buffers, and safeguard fiscal sustainability.
- Emphasis on "growth-friendly fiscal adjustments by prioritizing productivity-enhancing expenditures" and avoiding revenue measures that may "discourage investment."
- Recommendation to rely more on direct support to vulnerable households rather than costly and ineffective price caps.
- Direct support to vulnerable groups and refinement of regulated household energy tariffs recommended to "improve price signals, be fairer, and be more cost-effective."
- Contingency measures considered important given significant uncertainty.
- Monetary and financial sector policy:
- Directors welcomed "significant monetary tightening" and emphasized need to maintain "a well-communicated, tight policy stance until inflationary pressures clearly and sustainably ease."
- Interest rate caps "hamper monetary policy transmission" and Directors called for their abolishment.
- Maintaining exchange rate flexibility "remains important as a shock absorber."
- While banking sector buffers are noted as sound, "continued financial supervisory vigilance is needed, as credit risk may rise due to slower growth and higher interest rates."
- Structural and governance recommendations:
- Press ahead with structural reforms and meet requirements for the full and timely receipt of EU funds to finance reforms in energy transition, digitalization, and governance.
- Enhance energy security given near-term risks to energy supply.
- Strengthen governance and transparency, the rule of law, judicial independence, and the anti-corruption and AML/CFT frameworks to improve the business environment, the efficiency of public spending, and medium-term growth.
Hungary: Selected Economic Indicators, 2018–2022
- Output
- Real GDP growth (%): 2018: 5.4; 2019: 4.9; 2020: -4.5; 2021: 7.1; 2022: (Proj.) 5.1
- Employment
- Unemployment rate (average %): 2018: 3.7; 2019: 3.5; 2020: 4.1; 2021: 3.6; 2022: (Proj.) 14.5
- Prices
- Inflation: 2018: 2.8; 2019: 3.4; 2020: 3.3; 2021: 5.1; 2022: 14.5
- (Note in text: inflation "among the highest in Europe at 24.5 percent y/y.")
- General government finances (percent of GDP)
- Revenue: 2018: 44.0; 2019: 43.5; 2020: 41.3; 2021: 43.9; 2022: 50.0
- Expenditure: 2018: 46.2; 2019: 46.1; 2020: 51.1; 2021: 48.4; 2022: 50.0
- Fiscal balance: 2018: -2.1; 2019: -2.0; 2020: -7.5; 2021: -7.1; 2022: -6.1
- Primary structural balance (percent of potential GDP): 2018: -0.7; 2019: -1.1; 2020: -4.7; 2021: -4.0
- Public debt: 2018: 69.1; 2019: 65.3; 2020: 79.3; 2021: 76.8; 2022: 76.4
- Gross financing need: 2018: 21.1; 2019: 23.4; 2020: 24.6; 2021: 21.4; 2022: 17.5
- Money and credit
- Broad money (% change): 2018: 11.8; 2019: 8.1; 2020: 16.3; 2021: 11.5
- Credit to the private sector (flow based, % change): 2018: 10.6; 2019: 15.3; 2020: 12.8; 2021: 10.9
- Government bond yield (5-year, average, %): 2018: 2.2; 2019: 1.6; 2020: 1.5; 2021: 2.4; 2022: 9.5
- 5-year sovereign CDS (average in bps): 2018: 86.6; 2019: 80.4; 2020: 67.2; 2021: 68.2; 2022: 69.2
- External sector
- Current account (% of GDP): 2018: 0.2; 2019: -0.8; 2020: -4.2; 2021: -8.1
- Reserves (percent of short-term debt at remaining maturity): 2018: 162.1; 2019: 160.8; 2020: 150.8; 2021: 139.4; 2022: 98.1
- External debt (% of GDP): 2018: 79.2; 2019: 73.1; 2020: 81.0; 2021: 84.7; 2022: 85.4
- Exchange rate
- Exchange rate, HUF per euro, period average: 2018: 319.3; 2019: 325.2; 2020: 351.2; 2021: 358.5; 2022: 391.1
- REER (% change, "-" = appreciation): 2018: 1.8; 2019: 0.7; 2020: 4.8; 2021: -0.2; 2022: …
Source: IMF Executive Board Concluding Statement, "IMF Executive Board Concludes 2022 Article IV Consultation with Hungary", February 3, 2023.
