{
  "title": "IMF Executive Board Concludes 2021 Article IV Consultation with Hungary",
  "publication": "IMF News, June 29, 2021",
  "sourceUrl": "https://www.imf.org/en/news/articles/2021/06/22/pr21192-hungary-imf-executive-board-concludes-2021-article-iv-consultation",
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  "summary": "On June 18, 2021, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Hungary and endorsed the staff appraisal without a meeting. [1] The economy has been hit hard by the pandemic. GDP declined by 5 percent in 2020. Average inflation was 3.",
  "publishDate": "2021-06-29",
  "sections": [
    {
      "heading": "Economic impact of the pandemic (2020)",
      "content": "- GDP declined by 5 percent in 2020.\n- Average inflation was 3.3 percent; core inflation was 4.1 percent (old definition), just above the central bank (MNB)’s tolerance band.\n- Unemployment rate rose to 4.1 percent, remaining the lowest in the region.\n- Tourism flows dropped sharply, and exports declined, offset by lower imports and profit remittances by large multinationals.\n- Current account remained broadly balanced in 2020.\n- Fiscal deficit increased to an unprecedented 8.1 percent of GDP as a result of tax deferrals and increased spending.\n- Banking sector buffers remained, on average, comfortable.\n- Hungary experienced among the highest COVID-related death rates, but vaccination proceeded faster than the EU average."
    },
    {
      "heading": "Near-term outlook and projections (2021)",
      "content": "- 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.\n- Headline inflation is projected to temporarily increase in the short run before returning toward 3½ percent.\n- Unemployment is expected to gradually return close to pre-crisis levels.\n- Uncertainty remains significant."
    },
    {
      "heading": "Executive Board assessment — overall",
      "content": "- The Executive Board endorsed the staff appraisal and concluded the Article IV consultation (endorsed without a meeting)."
    },
    {
      "heading": "Fiscal policy (assessment and recommendations)",
      "content": "- Assessment:\n  - 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.\n- Recommendations:\n  - Fiscal policy needs to flexibly balance supporting the economy and preserving medium-term sustainability.\n  - With improved growth prospects, rebuild buffers by saving the windfall from higher revenues and possibly under-spending if less support is needed.\n  - A setback may warrant additional support for households and firms.\n  - Given high gross financing needs, debt management policy should aim at lengthening public debt maturity.\n  - Considering the magnitude of fiscal spending, transparency in the use of public funds is crucial.\n  - 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.\n  - Reconsider the recent reintroduction of a temporary low preferential VAT rate on new home purchases.\n  - 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."
    },
    {
      "heading": "Monetary policy (assessment and guidance)",
      "content": "- Assessment:\n  - 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.\n- Guidance:\n  - Monetary policy going forward should continue to be data-driven to ensure inflation stays within the target range; risks are mostly on the upside.\n  - Some overshooting of the inflation band due to temporary shocks is acceptable.\n  - 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.\n  - Monetary policy might need to be further eased should the recovery falter.\n  - As conditions normalize, the MNB should continue to review the effectiveness and necessity of its unconventional tools and consider tapering its still-growing APP."
    },
    {
      "heading": "Prudential and financial sector policies",
      "content": "- Assessment:\n  - Like other EU banking regulators, the MNB allowed temporary easing and deferment of some capital requirements and took other micro and macro prudential measures.\n  - Aggregate buffers of the banking system are comfortable.\n- Recommendations:\n  - Withdrawal of support measures should be gradual as the recovery takes hold.\n  - Continued supervisory vigilance is warranted.\n  - Recent measures aimed at strengthening the anti-money laundering framework are welcome."
    },
    {
      "heading": "Structural reforms, labor market, and social safety nets",
      "content": "- Priorities:\n  - Minimize scarring from the crisis and enable economic transformation.\n  - Targeted support to viable firms, especially SMEs, alongside strengthened social safety nets and investment in infrastructure and human capital.\n- Recommendations:\n  - Strengthen social safety nets, including unemployment benefits.\n  - Increase investment in human capital, including healthcare and life-long (re)training, noting spending in these categories is below the EU average.\n  - The recently proposed revisions to the bankruptcy framework aim to support more orderly and efficient corporate restructuring.\n  - Labor reallocation across sectors needs support through policies above."
    },
    {
      "heading": "Green transition and climate policy",
      "content": "- Hungary aims to reach climate neutrality by 2050, relying on renewable and nuclear energy production, recycling, and energy conservation.\n- Recommendations:\n  - 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.\n  - 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."
    },
    {
      "heading": "Use of EU Recovery and Resilience Funds",
      "content": "- The EU Recovery and Resilience Funds can help leverage the authorities’ efforts.\n- 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."
    },
    {
      "heading": "Key selected economic indicators (exact values)",
      "content": "- Adult literacy rate (%, 2016): 99.4\n- Main exports: transport and electrical equipment\n- Key export markets: Germany (28%), Romania, Austria, Slovakia, Italy, and France\n\n- Real GDP growth (%): 2018: 5.4; 2019: 4.6; 2020: -4.9; 2021: 6.2\n- Unemployment rate (average, %): 2018: 3.7; 2019: 3.5; 2020: 4.1; 2021: …\n- Inflation (average, %): 2018: 2.8; 2019: 3.4; 2020: 3.3; 2021: …\n- General government revenue (% of GDP): 2018: 43.8; 2019: 43.6; 2020: 43.5; 2021: 42.6\n- General government expenditure (% of GDP): 2018: 45.9; 2019: 45.7; 2020: 51.6; 2021: 49.8\n- Fiscal balance (% of GDP): 2018: -2.1; 2019: -8.1; 2020: -7.1; 2021: …\n- Primary structural balance (percent of potential GDP): 2018: -0.7; 2019: -1.1; 2020: -5.0; 2021: -5.1\n- Public debt (% of GDP): 2018: 69.1; 2019: 65.5; 2020: 80.4; 2021: 78.3\n- Gross financing need: 2018: 21.1; 2019: 23.5; 2020: 25.3; 2021: 20.5\n- Broad money (% change): 2018: 11.8; 2019: 8.1; 2020: 20.9; 2021: …\n- Credit to the private sector (flow based, % change): 2018: 10.6; 2019: 15.3; 2020: …\n- Government bond yield (5-year, average, %): 2018: 2.2; 2019: 1.6; 2020: 1.5\n- 5-year sovereign CDS (average in bps): 2018: 86.6; 2019: 67.2; 2020: …\n- Current account (% of GDP): 2018: 0.3; 2019: -0.5; 2020: 0.1; 2021: 0.5\n- Reserves (percent of short-term debt at remaining maturity): 2018: 162.1; 2019: 163.6; 2020: 156.4; 2021: 152.6\n- External debt (% of GDP): 2018: 78.9; 2019: 71.6; 2020: 78.6; 2021: 69.9\n- Exchange rate, HUF per euro, period average: 2018: 319.3; 2019: 325.2; 2020: 351.2; 2021: …\n- REER (% change, \"-\" = appreciation): 2018: 1.8; 2019: 0.7; 2020: 4.8\n\nSource: IMF Executive Board conclusion of the 2021 Article IV consultation with Hungary.\n\n---\n\n\n References\n\n- https://www.imf.org/-/media/images/imf/bios/imfboard.jpg\n- The Executive Board\n- Hungary and the IMF\n- IMF Policy Advice -- A Factsheet\n- Press Releases\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2021/06/22/pr21192-hungary-imf-executive-board-concludes-2021-article-iv-consultation"
    }
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    "Published: June 29, 2021",
    "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.",
    "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.",
    "The Executive Board endorsed the staff appraisal and concluded the Article IV consultation (endorsed without a meeting).",
    "Assessment:",
    "Recommendations:",
    "Assessment:",
    "Guidance:",
    "Assessment:",
    "Recommendations:",
    "Priorities:",
    "Recommendations:",
    "Hungary aims to reach climate neutrality by 2050, relying on renewable and nuclear energy production, recycling, and energy conservation.",
    "Recommendations:",
    "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.",
    "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",
    "[https://www.imf.org/-/media/images/imf/bios/imfboard.jpg](https://www.imf.org/-/media/images/imf/bios/imfboard.jpg)",
    "[The Executive Board](https://www.imf.org/external/np/sec/memdir/eds.aspx)",
    "[Hungary and the IMF](http://www.imf.org/external/country/HUN/index.htm)",
    "[IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)",
    "[Press Releases](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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