IMF Executive Board Concludes 2022 Article IV Consultation with Hungary
February 3, 2023
Washington, DC: On February 1, 2023, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Hungary. A succession of shocks, including Russia’s war in Ukraine, widened economic imbalances which, together with loose fiscal policy in late 2021-early 2022, intensified inflation, now among the highest in Europe at 24.5 percent y/y, and widened the current account deficit. Appropriately, monetary policy significantly tightened, and the government plans a large fiscal adjustment in 2023. Strong growth in 2022 led by buoyant domestic demand and a tight labor market 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 [2]
Executive Directors noted that, following a robust recovery from the COVID-19 crisis, Hungary is now facing high inflation, slowing growth, and large economic imbalances. Against this backdrop and given elevated downside risks to the outlook, Directors stressed that a tight and consistent policy mix is needed to reduce economic imbalances and vulnerabilities. They also recommended structural reforms to sustain medium-term growth, strengthen energy security, and unlock EU funds to support the country’s digital and green transitions.
Directors supported the government’s planned front-loaded fiscal tightening, which will complement monetary policy in fighting inflation, help rebuild buffers, and safeguard fiscal sustainability. They emphasized the importance of growth-friendly fiscal adjustments by prioritizing productivity-enhancing expenditures and avoiding revenue measures that may discourage investment. Directors recommended relying more on direct support to vulnerable households rather than on costly and ineffective price caps. In that context, they considered that direct support to vulnerable groups and further refinement of regulated household energy tariffs would improve price signals, be fairer, and be more cost-effective. Directors considered that contingency measures would also be important given the significant uncertainty.
Directors welcomed the significant monetary tightening and emphasized the need to maintain a well-communicated, tight policy stance until inflationary pressures clearly and sustainably ease. They noted that interest rate caps hamper monetary policy transmission and called for their abolishment. Directors agreed that maintaining exchange rate flexibility remains important as a shock absorber. While noting the soundness of overall banking sector buffers, Directors agreed that continued financial supervisory vigilance is needed, as credit risk may rise due to slower growth and higher interest rates.
Directors emphasized the importance of pressing ahead with structural reforms and of meeting the requirements needed for the full and timely receipt of EU funds that will help finance reforms in critical areas such as energy transition, digitalization, and governance. They generally agreed on the importance of enhancing energy security given near-term risks to energy supply. Directors also stressed that strengthening governance and transparency, the rule of law, judicial independence, and the anti-corruption and AML/CFT frameworks will help improve the business environment, the efficiency of public spending, and medium-term growth.
|
Hungary: Selected Economic Indicators, 2018–2022 |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://0-www-IMF-org.library.svsu.edu/external/np/sec/misc/qualifiers.htm .
IMF Communications Department
MEDIA RELATIONS
PRESS OFFICER: Meera Louis
Phone: +1 202 623-7100Email: MEDIA@IMF.org