Hungary: Staff Concluding Statement of the 2025 Article IV Mission
IMF News, June 20, 2025
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- Published: June 20, 2025
Mission summary
- IMF mission led by Anke Weber visited Budapest during June 5-17 to conduct discussions on the 2025 Article IV Consultation.
- Core assessment: the Hungarian economy is at a challenging juncture — output has stagnated over the past 3 years, inflation remains well above the central bank’s 3 percent target, and regulatory measures (price, interest and margin caps, windfall taxes, subsidized lending schemes) have distorted market signals and added uncertainty.
- Policy priority: timely domestic reforms are needed to reinforce resilience amid an unsettled external environment, focusing on well-designed fiscal measures, a continued tight monetary policy, and structural reforms to raise productivity and safeguard growth.
Economic outlook and projections
- Growth:
- 2025: modest consumption-driven growth of 0.7 percent, underpinned by favorable wage dynamics.
- 2026: growth projected to increase to 2 percent on a recovery in investment and positive impulse from German fiscal expansion.
- By 2030: growth projected to converge to long-term potential of around 2½ percent.
- Inflation:
- Q4:2025: forecast at 4.5 percent.
- By 2027: forecast to gradually decelerate to the MNB’s 3 percent target.
- External balances:
- Current account surplus expected to fall to around 1¼ percent of GDP in 2025 and to increase gradually over the medium term as battery and electric vehicle production expands.
- Projections are based on the IMF’s April World Economic Outlook global assumptions.
Risks to the outlook
- Downside risks predominate:
- Deepening geoeconomic fragmentation and rising trade tensions could reduce exports and undermine private investment.
- Geopolitical tensions could lead to commodity price volatility, intensifying inflationary pressures and negatively impacting fiscal and external balances.
- Domestic risks: delayed fiscal adjustment could heighten market concerns about debt sustainability, increase risk premia, and exacerbate sovereign-bank linkages.
- Lack of governance reform progress could delay or cancel EU funds, harming growth and market confidence.
- Inflation could be more persistent than projected, including from larger-than-anticipated effects of minimum wage hikes necessitating tighter monetary policy for longer.
Strengthening fiscal sustainability
- Authorities’ targets:
- Commitments to reach 2025 and 2026 deficit targets of 4.1 and 3.7 percent of GDP, respectively.
- Medium-term fiscal structural plan (MTFSP) envisages deficit reduction to below 2 percent of GDP by 2028.
- Staff baseline projections (only legislated or officially endorsed measures):
- Deficit: decline slightly to 4.8 percent of GDP in 2025 and 4.6 percent of GDP in 2026.
- Medium term: deficit would remain around 4½ percent of GDP.
- Debt-to-GDP ratio: rise to about 79 percent in 2030 from 73½ percent in 2024.
- Staff recommendation for adjustment:
- Over the medium term, a surplus of around 1¾ percent of GDP excluding debt servicing and adjusting for economic cycles is appropriate.
- Implied cumulative adjustment of around 2 percent of GDP over 2025-2028 would bring the deficit below 3 percent of GDP by 2027 and reduce the public debt ratio below 70 percent by 2029.
- Any additional defense spending should be accommodated within staff’s recommended path.
Fiscal policy measures — design and priorities
- Revenue enhancements:
- Recent doubling of family tax allowances and expansion of personal income tax exemptions for mothers will significantly reduce revenues.
- Staff view: an alternative to minimize fiscal costs and labor market distortions is capped tax credits per child for both parents.
- Recommendations: implement a more targeted tax regime with fewer exemptions; consider a higher marginal personal income tax rate for high earners; rationalize corporate tax incentives; reduce reliance on distortionary windfall and financial transactions taxes.
- Expenditure rationalization:
- Phase out distortive retail energy subsidies and replace them with targeted cash transfers.
- Review procurement and government employment to better target reduction of administrative expenditures.
- Limit transfers to SOEs and other public organizations.
- Reallocate realized savings to underfunded areas—health, primary education, and social protection.
- Strengthen public financial management and expenditure review processes.
- Avoid relying on capital spending cuts to achieve targets as this would weaken growth.
- Long-term spending pressures:
- Population aging expected to add roughly 3.5 percent of GDP in additional pension and healthcare costs by 2050.
- Suggested measures: increase retirement age, adjust benefit levels, limited increase in social security contribution rate, improved digitalization, and efficient procurement to contain health expenditures.
- Fiscal risk monitoring and mitigation:
- Implement comprehensive, consolidated and regular risk assessment of SOEs.
- Cap issuance of new guarantees by ceilings and assess stock of guarantees, activation risk, and liabilities annually.
- Avoid channeling public resources into fund management structures or private equity that undermine budgetary transparency and risk unforeseen contingent liabilities.
- Limit subsidized lending by state-owned banks to addressing market failures.
Monetary policy and inflation control
- Stance:
- Monetary policy needs to remain tight into next year to durably return inflation to target.
- With average inflation expected to remain above the tolerance band in 2025, staff sees limited scope for rate cuts this year and recommends a data-driven approach given exceptional uncertainty.
- The flexible exchange rate regime and adequate reserve coverage help reduce vulnerability to external shocks.
- Structural measures:
- Price, fee, and margin controls are not sustainable for lasting disinflation and should be phased out.
- Staff welcomes the proposed change to the MNB Act prohibiting foundations from engaging in asset management activities and calls for a broader review of the MNB’s non-core functions, including measures related to its secondary goal of environmental sustainability.
- Recommendation: MNB should focus on price and financial stability; climate-risk supervision can be active but prudential regulation should remain risk focused and consistent with price and financial stability mandates.
Financial sector stability
- Overall assessment:
- Systemic risks broadly contained; banking system remains well-capitalized, liquid, profitable, and resilient to external shocks.
- Emerging vulnerabilities: increase in share of FX corporate loans, banks’ growing sovereign exposure and significant FX positions, elevated commercial real estate (CRE) vacancies, and buoyant house prices.
- Macroprudential framework:
- Capital-based toolkit broadly appropriate; planned introduction of a one percent positive neutral countercyclical capital buffer (CCyB) in July 2025 is welcome.
- Reactivation of the systemic risk buffer (SyRB) for banks’ CRE exposures in 2024 is noted.
- Consider incorporating sovereign-bank nexus stress scenarios into regular supervisory stress testing.
- Borrower-based measures and housing:
- Differentiation in borrower-based macroprudential limits should be only on financial stability grounds.
- Recent relaxations of LTV and DSTI limits for first-time buyers and green homes appear partly driven by housing affordability and energy efficiency concerns; such concerns are better addressed through structural and fiscal policies.
- DSTI limits of 60 percent for first-time home buyers and for energy-efficient homes appear high relative to overall limits in some peers.
- Reintroduction of voluntary APR ceilings for housing loans distorts risk pricing and should be reversed.
- Scaling back housing-related fiscal incentives would help contain future price pressures and safeguard financial stability.
Boosting productivity and structural reforms
- Firm dynamics:
- Low firm entry and exit rates amid high regulatory barriers and an insolvency framework that impedes timely exit of non-viable firms.
- Recommendations: streamline licensing and overlapping permits; enable creditor-initiated and out-of-court restructuring to enhance capital and labor mobility.
- R&D and industrial policy:
- Public R&D support should be performance-based and better targeted, especially toward young, high-growth firms.
- Repeated waves of industrial policies have had elusive impact on sustained productivity growth; given high fiscal cost, IP should not substitute for broader structural reforms.
- When used, IP must be targeted to address market failures, time-bound, and transparent; coordinated EU-level approach to state aid and IP recommended.
- Energy security and the green transition:
- Ongoing diversification and renewable generation efforts are commendable, but the economy remains energy-intensive with high corporate energy prices reducing competitiveness.
- Recommendations: complement EU-wide measures with domestic reforms—targeted phaseout of household fossil fuel subsidies, enhanced energy efficiency standards, accelerated permitting for renewable investment.
- Governance reforms:
- Foundational for a predictable business environment and higher potential growth.
- Steps taken include 2023 judicial reforms aimed at strengthening the National Judicial Council.
- Further governance reforms and effective enforcement—public procurement, asset declaration scope, conflict-of-interest rules, regulatory oversight, functioning of the Integrity Authority—could unlock EU funds and amplify growth dividends.
Closing
- The mission thanks the Hungarian authorities and interlocutors for productive collaboration, constructive policy dialogue, and hospitality.
Source: IMF staff concluding statement of the 2025 Article IV mission to Hungary (June 20, 2025).