## IMF Executive Board Concludes 2021 Article IV Consultation with Hungary _IMF News, June 29, 2021_ ## Source details **Canonical URL:** [IMF Executive Board Concludes 2021 Article IV Consultation with Hungary](https://www.imf.org/en/news/articles/2021/06/22/pr21192-hungary-imf-executive-board-concludes-2021-article-iv-consultation) ## Other formats - [Markdown version](/en/news/articles/2021/06/22/pr21192-hungary-imf-executive-board-concludes-2021-article-iv-consultation/index.md) - [Structured JSON version](/en/news/articles/2021/06/22/pr21192-hungary-imf-executive-board-concludes-2021-article-iv-consultation/index.json) - [Bundle manifest](/en/news/articles/2021/06/22/pr21192-hungary-imf-executive-board-concludes-2021-article-iv-consultation/bundle-manifest.json) ## Bibliographic details - 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.* --- ## References - [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) _Source: https://www.imf.org/en/news/articles/2021/06/22/pr21192-hungary-imf-executive-board-concludes-2021-article-iv-consultation_