IMF Executive Board Concludes 2024 Article IV Consultation with Hungary
IMF News, August 2, 2024
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- Published: August 2, 2024
Overview
- The Executive Board of the International Monetary Fund concluded the Article IV Consultation with Hungary and considered and endorsed the staff appraisal on a lapse-of-time basis without a meeting.
- Press Release No. 24/300; dated August 2, 2024.
Macroeconomic Outlook and Projections
- Real GDP: contraction of 0.9 percent in 2023; projected at 2.3 percent in 2024; 3.3 percent in 2025; converging to potential of around 3 percent over the medium term.
- Drivers:
- 2024 growth driven by domestic consumption.
- Investment expected to gradually pick up in 2025.
- Modest current account surplus expected in 2024 with gradual improvement over the medium term driven by battery and electric vehicle exports.
- Inflation:
- Headline inflation fell to 3.7 percent in June 2024.
- Projected to increase to 4.2 percent year on year in Q4 2024 before durably converging to 3 percent in 2026.
- CPI inflation (average) series in Table 1: 3.4 (2019), 5.1 (2020), 14.6 (2021), 17.1 (2022), 3.8 (2023), 3.5 (2024).
- CPI inflation (end year) series in Table 1: 7.4 (2019), 24.5 (2020), 5.5 (2021), 4.2 (2022).
- Core CPI inflation (average) series in Table 1: 3.7 (2019), 3.9 (2020), 15.8 (2021), 17.7 (2022), 4.7 (2023), 3.6 (2024).
- Labor markets and financial sector have remained resilient; output is starting to recover.
Public Finances and Fiscal Projections
- 2023 headline deficit: 6.7 percent of GDP.
- Drivers of 2023 deterioration: recession reduced revenues; increased spending on interest and energy subsidies.
- Public debt:
- Declined slightly in 2023 but remained well above pre-pandemic levels.
- Public debt ratio projections: 73.5 (2023), 73.9 (2024), 72.5 (2025), 71.3 (2026), 70.0 (2027), 68.6 (2028), with earlier years: 65.3 (2019), 79.3 (2020), 76.7 (2021), 74.1 (2022).
- Fiscal path risks:
- In absence of additional measures, deficit will reach 5 percent in 2024 (above authorities’ 4.5 percent revised budget target).
- Deficit expected to exceed the Maastricht limit of 3 percent of GDP through 2026.
- Public debt ratio will remain above 70 percent of GDP through 2028.
- Table 1 general government overall balance (percent of GDP): -2.0 (2019), -7.6 (2020), -7.2 (2021), -6.2 (2022), -6.7 (2023), -5.0 (2024), -3.3 (2025), -2.9 (2026), -2.8 (2027), -2.6 (2028), with primary balance and structural balances shown in Table 1.
Risks and Uncertainties
- Downside risks to growth and upside risks to inflation.
- Key risk channels:
- Absence of measures to address fiscal imbalances and structural policy challenges could weaken investor confidence and deter private investment.
- Lack of progress in governance reforms could result in prolonged suspension of important EU funds.
- Resulting increase in risk premia and forint depreciation could prolong tight monetary policy and weaken growth.
- Inflation could increase again from disruptions to energy supply due to geopolitical escalation or if Hungarian wages grow faster than expected.
- Monetary policy miscalibration by major economies could impact Hungary’s macroeconomic and financial stability.
Executive Board Assessment — Main Findings
- Hungary is emerging from a period of shocks: pandemic, Russia’s war in Ukraine, and crisis-related stimulus widened fiscal and external imbalances and triggered double-digit inflation in 2022.
- Monetary and fiscal responses: effective monetary policy response aided by falling commodity prices and a tighter fiscal stance in 2023 led to rapid inflation decline.
- External position: a large current account deficit in 2022 turned into a surplus in 2023.
- Challenges remain:
- Fiscal imbalances, windfall taxes, interest rate caps and subsidized lending, and delays in EU funds disbursement create investor uncertainty.
- Structural constraints: strong presence of state-owned enterprises in some key sectors; inequalities of opportunities; lagging digitalization.
- Policy uncertainty has constrained investment, contributing to an external position stronger than implied by fundamentals.
Policy Recommendations
- Fiscal policy:
- Implement a credible fiscal adjustment to safeguard fiscal sustainability.
- Measures should aim at achieving a deficit of below 3 percent of GDP by 2026.
- Bring structural deficit to 1.5 percent of GDP by 2029, in line with the preliminary assessment of the new EU fiscal framework.
- Anchor fiscal path in a credible medium-term framework.
- Tax policy:
- Focus on improving efficiency and equity.
- Consider a universal VAT rate with fewer exemptions to simplify administration.
- Increase progressivity via higher marginal personal income tax rates for high earners.
- Make corporate taxation more equitable by rationalizing tax incentives and increasing the tax rate, using additional revenues to eliminate distortive windfall taxes.
- Increase revenue from property taxes; reduce reliance on financial transaction taxes and windfall taxes.
- Expenditure and subsidies:
- Reduce subsidies and rationalize current spending to create room for growth-friendly spending.
- Limit retail utility subsidies to a basic subsistence amount to protect vulnerable households.
- Rationalize the public wage bill and goods and services spending; reallocate savings to investment and education.
- Contain long-term spending pressures; improve monitoring of contingent liabilities from rapid expansion of SOE assets and government guarantees.
- Monetary policy and exchange rate:
- Maintain policy rates in restrictive territory into next year to deliver a sustainable return of inflation to target.
- Limited scope for further rate cuts this year as underlying inflation pressures remain elevated, particularly services.
- Flexible exchange rate regime and maintaining adequate reserves can help manage external shocks.
- Protect central bank autonomy by appropriate legal frameworks.
- Financial sector resilience:
- Introduce a positive neutral countercyclical capital buffer of 1 percent from July 2025.
- MNB to play an active role in climate-risk supervision, consistent with core mandate of price and financial stability.
- Prioritize implementing the EU's AML/CFT 2024 legislative package and enhance risk-based measures for non-profit organizations.
- Better target state-owned banks' subsidized lending; phase out remaining interest rate caps.
- Scale back various fiscal incentives for house ownership to moderate future house price growth and safeguard financial stability.
- Structural reforms to boost balanced growth:
- Invest in STEM education.
- Implement the new EU AI Act.
- Reduce fossil fuel subsidization coupled with transfers for the vulnerable.
- Use targeted incentives for investment in disadvantaged areas.
- Advance governance reforms to foster a growth-friendly environment and unlock EU financing.
- Ensure the state’s strong presence in some sectors is guided by legal, regulatory and policy frameworks that ensure fair competition.
Key Statistics (selected from Table 1)
- Real GDP (percentage change): 4.9 (2019); -4.5 (2020); 7.1 (2021); 4.6 (2022); -0.9 (2023); 2.3 (2024); 3.3 (2025); 3.0 (2026); 3.2 (2027).
- Total domestic demand (contribution to growth): 6.8 (2019); -2.5 (2020); 6.2 (2021); 4.0 (2022); -5.4 (2023); 1.4 (2024); 2.7 (2025); 2.5 (2026); 2.8 (2027).
- Gross fixed capital formation (percent of GDP): 27.0 (2019); 26.5 (2020); 27.2 (2021); 27.9 (2022); 26.3 (2023); 25.0 (2024); 25.8 (2025); 26.1 (2026); 26.9 (2027).
- Gross national saving (percent of GDP, from BOP): 26.2 (2019); 25.4 (2020); 23.0 (2021); 19.5 (2022); 25.9 (2023); 27.3 (2024); 28.0 (2025); 28.6 (2026).
- Money and credit: Broad money growth (end-of-period) 8.1 (2019); 21.1 (2020); 16.3 (2021); 7.2 (2022); 6.6 (2023); 6.7 (2024); 7.3 (2025).
- Reserves (billions of Euros): 28.4 (2019); 33.7 (2020); 38.4 (2021); 38.7 (2022); 41.3 (2023); 50.8 (2024); 57.6 (2025); 65.9 (2026); 70.5 (2027); 77.6 (2028); 84.9 (2029).
- Gross external debt (percent of GDP): 73.1 (2019); 81.3 (2020); 87.0 (2021); 91.8 (2022); 85.5 (2023); 79.9 (2024); 76.9 (2025); 74.9 (2026); 72.4 (2027); 70.3 (2028); 68.1 (2029).
- Gross official reserves in percent of the IMF ARA metric: 104.5 (2019); 120.2 (2020); 117.4 (2021); 107.0 (2022); 104.8 (2023); 113.2 (2024); 126.8 (2025); 135.2 (2026); 138.6 (2027); 145.7 (2028); 151.3 (2029).
- Memorandum: Nominal GDP (billions of Forints): 47,674 (2019); 48,444 (2020); 55,205 (2021); 65,952 (2022); 74,992 (2023); 79,770 (2024); 85,411 (2025); 90,658 (2026); 96,032 (2027); 101,921 (2028); 108,157 (2029).
- Per capita GDP (EUR): 14,999 (2019); 14,119 (2020); 15,827 (2021); 17,411 (2022); 20,463 (2023); 21,809 (2024); 23,413 (2025); 24,913 (2026); 26,454 (2027); 28,147 (2028); 29,942 (2029).
International Monetary Fund — Executive Board conclusion of the 2024 Article IV Consultation with Hungary, Press Release No. 24/300 (August 2, 2024).