Staff Concluding Statement of the 2022 Article IV Mission

Staff Concluding Statement of the 2022 Article IV Mission

Hungary: Staff Concluding Statement of the 2022 Article IV Mission

November 18, 2022

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

Budapest, Hungary:

While the economy was recovering from the COVID-crisis, a succession of
shocks and loose fiscal policy pushed inflation above 20 percent and
fueled a large external deficit. Appropriately, the central bank
responded by significantly tightening monetary policy since June 2021,
and the government plans an ambitious fiscal adjustment for 2023. A
tight and consistent policy mix is indeed important to drive inflation
towards the central bank’s target, reduce the fiscal and current
account deficits, and lower public debt. Energy-related and other price
caps should be relaxed to foster energy-saving, lower imports, and
reduce associated fiscal costs. At the same time, well-targeted support
is needed to help mitigate the impact of rising costs of living on the
vulnerable. Large uncertainty around the baseline outlook calls for the
needed overall policy tightening to remain flexible and data dependent.

Economic imbalances have widened
. As the recovery from the COVID-crisis was taking hold and the labor
market was tightening, the economy was hit by supply-chain disruptions,
rising energy and commodity prices amplified by Russia’s war in Ukraine,
and a drought. Together with loose fiscal policy in 2021 (with a deficit of
7.1 percent of GDP) and early this year, these shocks intensified
inflation, now among the highest in the European Union (EU), and turned the
current account into a large deficit. The exchange rate depreciated and
funding costs increased, both by more than for peer countries.

After a rapid recovery, economic growth is losing momentum and sizable
risks can significantly worsen the outlook.

Growth remained very strong in the first half of 2022 and is expected close
to 5 percent for the year. However, a sharp deceleration is expected in
2023 as high inflation erodes households’ real income (notwithstanding a
resilient labor market), domestic policy tightens, external demand weakens,
funding costs rise, and uncertainty weighs on investment. Under the
baseline, as international energy prices are anticipated to ease and
domestic demand moderates, the current account deficit is expected to
improve significantly and inflation to decelerate to single digits by the
end of 2023. However, downside domestic and global risks could
significantly worsen the outlook, including untimely or incomplete delivery
of expected EU funds, higher-than-expected global funding costs,
higher-than-expected commodity prices, and an EU-wide shut-off of Russian

Consistent overall policy tightening is needed to restore economic
balances amid large uncertainty.

The central bank has responded to rising inflation by significantly
tightening monetary policy since June 2021. The government took measures to
rein the fiscal deficit in 2022 and plans an ambitious adjustment for 2023.
Maintaining a consistently tight and credible fiscal and monetary policy
mix is crucial to tackle inflation and reduce vulnerabilities from economic
imbalances. At the same time, well-targeted support is needed to alleviate
the impact of rising cost of living on the vulnerable households. In a
volatile global environment in which financing conditions are tightening,
prudent policies are needed to avoid the risk of disorderly market

The planned fiscal adjustment in the 2023 budget is appropriate.

The government expects a deficit of 6.1 percent of GDP this year. The
budget aims to reduce it to 3.5 percent of GDP in 2023. This tighter fiscal
stance is needed to keep debt on a downward path amidst decreasing but
still-sizeable financing needs and rising costs, and to complement monetary
policy in dampening demand and inflation. Rebuilding fiscal buffers is
advisable considering significant risks. Absent new shocks, the planned
adjustment in 2023 appears achievable owing to higher revenues boosted by
inflation and new tax measures, the unwinding of one-off expenses carried
out in 2022, cuts in goods and services spending, and the postponement of
investment projects. Demand shocks that would significantly weaken expected
growth may prompt the pace of the necessary fiscal adjustment to be
slightly more gradual. Conversely, supply shocks or tighter-than-expected
financing conditions may require a sharper fiscal adjustment.

However, the composition of the adjustment could be improved to
minimize its impact on growth.

Temporary windfall taxes on the energy and banking sectors should end upon
expiration as ex-post taxes risk discouraging investment and their
extensions could erode the credibility of tax policy. The
recently-increased financial transaction tax is distortive and may
incentivize informality. Careful prioritization of delayed investment
projects is important to preserve the most productivity-enhancing capital
spending. With one of the highest goods and services spending shares in the
EU, there is indeed scope to reduce operational spending, which should be
achieved through efficiency gains to the extent feasible while preserving
basic public services.

Price caps should be avoided as they have contributed to widening
economic imbalances and are ineffective in fighting inflation.

Artificially low prices due to price caps on some products may lead to
shortages, divert inflation to other goods, erode suppliers’ margins, and
disproportionately benefit higher income groups. The motor fuels price cap
led to a surge in demand for fuels that increased imports. The price cap on
selected food products has been ineffective in controlling food
inflation—currently the highest in the EU—as distributors raised prices on
other foods. While the longstanding household utility price cap has
shielded households from surges in energy costs, it also benefits the
richer more, disincentivizes energy savings, and contributes to
deteriorating the trade balance. In turn, this put pressure on the exchange
rate and domestic inflation. The relaxation in August of the household
utility price cap for above-average consumption was one step in the right
direction, but more is needed to foster energy saving as domestic prices
remain among the lowest in the EU, costs are still high, and pressures on
energy supply may last long.

Direct support to the vulnerable would be more effective in mitigating
the impact of high inflation.

Refining the new block utility tariffs for households by lowering the
threshold for the subsidized rate to a basic consumption amount per
household would improve the targeting of the system and improve price
signals. A more effective approach would be to provide targeted transfers
through existing social safety nets or lump-sum payments to vulnerable
households. This would help shield them from the cost-of-living crisis
while containing the fiscal cost of the measures. Furthermore, it would
maintain price signals that are needed for demand to adjust and reduce
pressures on the current account and exchange rate.

Tight monetary policy remains needed until inflationary pressures
clearly and sustainably ease.

The recently introduced overnight one-day deposit tender has become the de
facto policy rate. At 18 percent, it amounted to a significant tightening
in monetary policy on top of large cumulative increases in the base rate
and recent liquidity measures. Considering the still-rapid pace of
increases in core inflation, which is among the highest in Europe, and the
risks of a wage-inflation spiral in a still-tight labor market, such
tightening remains appropriate. Indeed, in weighing policy trade-offs under
high uncertainty, the potential costs of under-tightening (including
entrenched high inflation, a higher eventual cost of controlling it, and
the risk of de-anchoring inflation expectations) outweigh those of
over-tightening (lower output). Monetary policy ahead should remain data
dependent and focused on driving inflation towards the target. In a period
of high uncertainty, continued exchange rate flexibility serves as a shock
absorber in the face of numerous external risks.

The significant monetary policy tightening to date should be allowed to
work its way through the system.

The MNB’s shift toward more conventional liquidity-absorbing tools is
welcome as it should help strengthen monetary policy transmission. However,
the caps on mortgage and SMEs interest rates should not be extended beyond
their current expiration as they hamper the transmission of monetary
tightening, in addition to discouraging prudent credit demand and being an
untargeted way to support borrowers.

The overall banking sector buffers appear adequate but supervisory
vigilance and timely provisioning remain warranted in a deteriorating

Credit risks are expected to rise as growth slows, costs rise—particularly
for energy-intensive industries—and higher interest rates test imbalances
in the real estate market. Bank profitability may come under pressure if
higher net-interest margins do not fully offset costs of additional
windfall and indirect taxes, and caps on variable interest rates.
Furthermore, the impact of rising interest rates on nonbank financial
institutions also requires close monitoring.

Strengthening the security of energy supply is critical but will take

Hungary has taken emergency measures to avoid gas shortages this coming
winter. These include filling gas storages to a high level, which now
covers more than half of annual consumption, and contracting additional
imports from Gazprom. Hungary’s ability to diversify away from Russian gas
and oil is limited by its geography as a landlocked country, and its
capacity to significantly reduce the share of gas in the total energy mix.
This creates risks for the 2023-24 winter and puts a premium on measures to
foster demand adjustment. Diversification away from gas will require
significant investment over several years, primarily in projects that shift
households from gas-powered to electricity-powered heating, reduce the
share of gas in power production, and strengthen the electricity grid to
handle alternative energy sources, including solar. Securing the financing
for these large-scale investments is critical.

Strengthening transparency and the anticorruption framework will
improve the business environment and the efficiency of public spending.

In consultation with the EU, the government has launched regulatory and
institutional reforms aiming to strengthen the rule of law, judicial
independence, and the anti-corruption framework, areas where perception
indicators have lagged EU peers in recent years. The central bank is also
continuing to strengthen the anti-money laundering framework in line
international FATF standards. Continued progress in these areas will help
strengthen the business environment, long-term growth prospects, and
efficiency in public spending.

The mission would like to thank its counterparts for their hospitality
and the quality of the discussions.

IMF Communications Department


Phone: +1 202 623-7100Email:


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