Abstract
IMF Country Report No. 23/70
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IMF Country Report No. 23/70
HUNGARY
2022 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR HUNGARY
February 2023
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2022 Article IV consultation with Hungary, the following documents have been released and are included in this package:
A Press Release summarizing the views of the Executive Board as expressed during its February 1, 2023 consideration of the staff report that concluded the Article IV consultation with Hungary.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on February 1, 2023, following discussions that ended on November 18, 2022, with the officials of Hungary on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on January 17, 2023.
An Informational Annex prepared by the IMF staff.
A Statement by the Executive Director for Hungary.
The documents listed below have been or will be separately released.
Selected Issues
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
Copies of this report are available to the public from
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© 2023 International Monetary Fund
Press Release
PR23/30
IMF Executive Board Concludes 2022 Article IV Consultation with Hungary
FOR IMMEDIATE RELEASE
Washington, DC – February 3, 2023: On February 1, 2023, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 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 Assessment2
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
Hungary: Selected Economic Indicators, 2018–2022
| 2018 | 2019 | 2020 | 2021 | 2022 | ||
|---|---|---|---|---|---|---|
| Proj. | ||||||
| Output | ||||||
| Real GDP growth (%) | 5.4 | 4.9 | -4.5 | 7.1 | 4.9 | |
| Employment | ||||||
| Unemployment rate (average %) | 3.7 | 3.5 | 4.1 | 4.1 | 3.6 | |
| Prices | ||||||
| Inflation | 2.8 | 3.4 | 3.3 | 5.1 | 14.5 | |
| General government finances (% of GDP) | ||||||
| Revenue | 44.0 | 44.0 | 43.5 | 41.3 | 43.9 | |
| Expenditure | 46.2 | 46.1 | 51.1 | 48.4 | 50.0 | |
| Fiscal balance | -2.1 | -2.0 | -7.5 | -7.1 | -6.1 | |
| Primary structural balance (percent of potential GDP) | -0.7 | -1.1 | -4.7 | -4.0 | -2.1 | |
| Public debt | 69.1 | 65.3 | 79.3 | 76.8 | 76.4 | |
| Gross financing need | 21.1 | 23.4 | 24.6 | 21.4 | 17.5 | |
| Money and credit | ||||||
| Broad money (% change) | 11.8 | 8.1 | 21.1 | 16.3 | 11.5 | |
| Credit to the private sector (flow based, % change) | 10.6 | 15.3 | 11.8 | 12.8 | 10.9 | |
| Government bond yield (5-year, average, %) | 2.2 | 1.6 | 1.5 | 2.4 | 9.5 | |
| 5-year sovereign CDS (average in bps) | 86.6 | 80.4 | 67.2 | 68.2 | 69.2 | |
| External sector | ||||||
| Current account (% of GDP) | 0.2 | -0.8 | -1.1 | -4.2 | -8.1 | |
| Reserves (percent of short-term debt at remaining maturity) | 162.1 | 160.8 | 150.8 | 139.4 | 98.1 | |
| External debt (% of GDP) | 79.2 | 73.1 | 81.0 | 84.7 | 85.4 | |
| Exchange rate | ||||||
| Exchange rate, HUF per euro, period average | 319.3 | 325.2 | 351.2 | 358.5 | 391.1 | |
| REER (% change, “-” = appreciation) | 1.8 | 0.7 | 4.8 | -0.2 | … | |
Hungary: Selected Economic Indicators, 2018–2022
| 2018 | 2019 | 2020 | 2021 | 2022 | ||
|---|---|---|---|---|---|---|
| Proj. | ||||||
| Output | ||||||
| Real GDP growth (%) | 5.4 | 4.9 | -4.5 | 7.1 | 4.9 | |
| Employment | ||||||
| Unemployment rate (average %) | 3.7 | 3.5 | 4.1 | 4.1 | 3.6 | |
| Prices | ||||||
| Inflation | 2.8 | 3.4 | 3.3 | 5.1 | 14.5 | |
| General government finances (% of GDP) | ||||||
| Revenue | 44.0 | 44.0 | 43.5 | 41.3 | 43.9 | |
| Expenditure | 46.2 | 46.1 | 51.1 | 48.4 | 50.0 | |
| Fiscal balance | -2.1 | -2.0 | -7.5 | -7.1 | -6.1 | |
| Primary structural balance (percent of potential GDP) | -0.7 | -1.1 | -4.7 | -4.0 | -2.1 | |
| Public debt | 69.1 | 65.3 | 79.3 | 76.8 | 76.4 | |
| Gross financing need | 21.1 | 23.4 | 24.6 | 21.4 | 17.5 | |
| Money and credit | ||||||
| Broad money (% change) | 11.8 | 8.1 | 21.1 | 16.3 | 11.5 | |
| Credit to the private sector (flow based, % change) | 10.6 | 15.3 | 11.8 | 12.8 | 10.9 | |
| Government bond yield (5-year, average, %) | 2.2 | 1.6 | 1.5 | 2.4 | 9.5 | |
| 5-year sovereign CDS (average in bps) | 86.6 | 80.4 | 67.2 | 68.2 | 69.2 | |
| External sector | ||||||
| Current account (% of GDP) | 0.2 | -0.8 | -1.1 | -4.2 | -8.1 | |
| Reserves (percent of short-term debt at remaining maturity) | 162.1 | 160.8 | 150.8 | 139.4 | 98.1 | |
| External debt (% of GDP) | 79.2 | 73.1 | 81.0 | 84.7 | 85.4 | |
| Exchange rate | ||||||
| Exchange rate, HUF per euro, period average | 319.3 | 325.2 | 351.2 | 358.5 | 391.1 | |
| REER (% change, “-” = appreciation) | 1.8 | 0.7 | 4.8 | -0.2 | … | |
Title page
HUNGARY
STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION
January 17, 2023
KEY ISSUES
Context and outlook: While the economy was recovering from the COVID-crisis, a succession of shocks and loose fiscal policy intensified inflation and fueled a large external deficit. Appropriately, the central bank significantly tightened monetary policy and the government plans a large fiscal adjustment. However, regulatory measures undermine the tighter fiscal and monetary policy mix. Growth is expected to slow sharply with still-elevated inflation and sizable risks can worsen the outlook.
Policy recommendations: Consistent overall policy tightening is needed to address imbalances amid large uncertainty. Shocks that significantly weaken growth and inflation may prompt a more gradual tightening, while shocks that intensify inflation would require a faster tightening.
Fiscal policy. The government’s front-loaded adjustment is broadly appropriate and needed to complement monetary policy in dampening demand and inflation and to rebuild fiscal buffers considering significant risks, although keeping the original 2023 deficit target of 3.5 percent of GDP would have been preferable to the revised target of 3.9 percent of GDP. The composition of the adjustment can be improved to minimize its impact on growth while providing well-targeted support to mitigate the impact of rising costs of living on the vulnerable.
Monetary and financial policies. Significant monetary policy tightening to date has been appropriate considering rapid increases in core inflation. Though inflation is expected to recede, it may not return to target before 2025 and uncertainty is high. Tight monetary policy remains needed until inflationary pressures clearly and sustainably ease. Overall banking sector buffers appear adequate, but supervisory vigilance and timely provisioning remain warranted in a deteriorating environment.
Regulatory policies. Caps on energy and food prices and on interest rates are costly, ineffective in fighting inflation, and undermine monetary policy transmission. Direct support to the vulnerable would be more effective in mitigating the impact of high inflation while maintaining price signals and allowing demand to adjust.
Structural policies. Strengthening energy security will help meet climate objectives and reduce vulnerabilities to supply shocks. Strengthening governance is needed to improve the business environment and the efficiency of spending.
Approved By
Laura Papi (EUR) and Eugenio Cerutti (SPR)
The meetings took place in Budapest from November 8–18, 2022. The staff team comprised Messrs. Jean-François Dauphin (head), Karim Foda, Tonny Lybek, Agustin Roitman and Ms. Xuege Zhang (all EUR). Mr. Dániel Palotai and Mr. Gábor Meizer (both OED) also attended meetings. Mses. Estefania Cohn Bech and Ninfa Gonzales (both EUR) assisted in the preparation of the report. Staff met with State Secretaries Banai and Tóth (Ministry of Finance), Máté Lóga and Anikó Túri (Ministry of Economic Development), János Bóka (Ministry of Justice), Szabolcs Ágostházy (Ministry of Regional Development), Attila Steiner (Ministry of Technology and Industry), Deputy Central Bank Governors Patai and Virág, Deputy State Secretary Adorján, and other officials, representatives from banks, companies in energy, pharmaceutical and agricultural sectors, trade chambers, employer and employee associations and research institutions.
Contents
RECENT DEVELOPMENTS: GROWING IMBALANCES
CHALLENGING OUTLOOK, SIGNIFICANT RISKS
POLICY DISCUSSION: CONSISTENTLY ADDRESSING IMBALANCES
A. Fiscal Policy: Consolidating While Protecting the Vulnerable
B. Monetary and Financial Policies: Reducing Inflation and Preserving Financial Stability
C. Structural Reforms: Achieving Energy Security, Driving Convergence
STAFF APPRAISAL
FIGURES
1. Fiscal Indicators
2. Real Activity Indicators
3. Trade Balance and Terms of Trade
4. Inflation
5. Inflation Expectations, Exchange Rate, and Monetary Policy
6. Financial Sector and Housing Market Indicators
7. Government Expenditure on Goods and Services
8. Household Gas Prices and Demand
9. AML/CFT Indicators
10. Governance Indicators
BOXES
1. Hungary’s Recovery and Resilience Plan
2. Energy Security
TABLES
1. Price and Interest Rate Caps
2. Selected Economic Indicators, 2018–24
3. Medium-Term Scenario, 2018–28
4. Consolidated General Government, 2018–28
5. Central Bank Survey, 2018–24
6. Monetary Survey, 2018–24
7. Balance of Payments, 2018–28
8. Financial Soundness Indicators for the Banking Sector, 2018–22
ANNEXES
I. Debt Sustainability Analysis
II. External Sector Assessment
III. Risk Assessment Matrix
IV. Authorities’ Response to Past IMF Policy Recommendations
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.
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://www.IMF.org/external/np/sec/misc/qualifiers.htm.
