IMF Executive Board Concludes 2021 Article IV Consultation with Hungary

Washington, DC: 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 3.3 percent but, with continued strong wage growth, core inflation was 4.1 percent (old definition), just above the central bank (MNB)’s tolerance band. Partly owing to support measures, the unemployment rate rose only modestly to 4.1 percent, remaining the lowest in the region. Tourism flows dropped sharply, and exports declined, but this was counterbalanced by lower imports and profit remittances by large multinationals. As a result, the current account remained broadly balanced in 2020. The fiscal deficit increased to an unprecedented 8.1 percent of GDP as a result of tax deferrals and increased spending. The banking sector buffers remained, on average, comfortable. While Hungary has been among the countries with the highest COVID-related death rates, vaccination has been faster than the EU average.

Following first quarter outcome, a strong recovery is expected to take hold in 2021. Growth is projected around 6 percent, driven by net exports, as external demand improves, and 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 while unemployment is expected to gradually return close to pre-crisis levels. Yet, uncertainty remains significant.

Executive Board Assessment[2]

In concluding the Article IV consultation with Hungary, Executive Directors endorsed the staff’s appraisal as follows:

The authorities’ policy response to the crisis was appropriately strong. The fiscal policy response was large and timely. Consequently, the deficit increased to 8.1 percent of GDP and public debt rose above 80 percent of GDP. The MNB swiftly reacted to market pressures by providing ample liquidity through a variety of policy tools. Like other EU banking regulators, the MNB allowed temporary easing and deferment of some capital requirements and took other micro and macro prudential measures.

Fiscal policy needs to flexibly balance supporting the economy and preserving medium-term sustainability. The continued, significant economic support embedded in the revised 2021 and 2022 budgets appeared justified when they were prepared, considering significant uncertainty, the severity of the pandemic’s third wave, and the need to avoid abrupt adjustments that could jeopardize the recovery. However, with growth prospects having improved, buffers can be rebuilt more rapidly by saving the windfall from higher revenues and, possibly, under-spending if less support is needed to entrench the recovery. Conversely, a setback in the recovery may warrant additional support for households and firms. Given high gross financing needs, debt management policy should continue to aim at lengthening public debt maturity. Considering the magnitude of fiscal spending, transparency in the use of public fund is crucial.

Minimizing scarring from the crisis and enabling economic transformation should be priorities going forward. Targeted support to viable firms, especially SMEs, can help support those objectives, together with strengthened social safety nets and investment in infrastructure and human capital. Fiscal space can be created by continuing to enhance revenue and lowering current spending, such as further reducing the public wage bill as a share of GDP through a rationalization of public employment. While efforts should made to further improve tax collection and reduce exemptions and preferential regimes, the recent reintroduction of a temporary low preferential VAT rate on new home purchases should be reconsidered. Also, increasing labor market participation of the youth under 25 would better be achieved through other means than the planned blanket income tax exemption.

The monetary policy response to the crisis was appropriate. Monetary policy going forward should continue to be data-driven to ensure that inflation stays within the target range, as risks are now mostly on the upside. Some overshooting of the inflation band due to temporary shocks is acceptable. Looking ahead, at this stage, no more than a modest tightening of monetary conditions will be necessary as long as inflation expectations remain well-anchored, but upward risks to inflation will need to be monitored closely. Conversely, monetary policy might need to be further eased should the recovery falter. Thus far, the adaption of monetary instruments has effectively provided needed liquidity and addressed market dysfunction. 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 policies should continue to focus on mitigating immediate vulnerabilities. As the recovery takes hold, withdrawal of support measures will need to be gradual. Aggregate buffers of the banking system are comfortable but continued supervisory vigilance is warranted. Recent measures aimed at strengthening the anti-money laundering framework are welcome.

The structural reform agenda should facilitate the transformation toward a more resilient economy post-pandemic. Over the medium term, some pre-existing trends in the global economy were accelerated by the pandemic and will likely require economic transformation and labor reskilling. The recently proposed revisions to the bankruptcy framework aim to support more orderly and efficient corporate restructuring. Labor reallocation across sectors needs to be supported by a strengthened social safety net, including unemployment benefits, and higher investment in human capital, including healthcare and life-long (re)training, as spending in these categories is below the EU average.

Greening the economy, to which the authorities are strongly committed, is necessary for sustainable growth and should be supported by higher carbon pricing. Hungary aims to reach climate neutrality by 2050, relying on renewable and nuclear energy production, recycling, and energy conservation. 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.

The EU Recovery and Resilience Funds can help leverage the authorities’ efforts. The timely implementation of reforms, within strengthened competition, governance and transparency frameworks, is key to putting the economy post crisis on a more sustainable and resilient path.

Hungary: Selected Economic Indicators

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 (%)






Unemployment rate (average, %)






Inflation (average, %)





General government finances (% of GDP)











Fiscal balance





Primary structural balance (percent of potential GDP)





Public debt





Gross financing need





Money and credit

Broad money (% change)




Credit to the private sector (flow based, % change)




Government bond yield (5-year, average, %)




5-year sovereign CDS (average in bps)




External sector

Current account (% of GDP)





Reserves (percent of short-term debt at remaining maturity)





External debt (% of GDP)





Exchange rate

Exchange rate, HUF per euro, period average




REER (% change, “-” = appreciation)




Sources: Hungarian authorities, OECD, and staff projections.

[1]Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team normally 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. In this case, discussions were held from headquarters through videoconferencing.

[2]The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.

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