(MTI) – The International Monetary Fund (IMF) has appreciated Hungary’s recent economic achievements but called for further efforts to maintain growth, reduce vulnerabilities and improve business environment, in a Staff Report on Hungary published on Friday.
The Hungarian economy is recovering steadily helped by supportive macroeconomic policies and improved market sentiment, the IMF said. There has been a welcome decline in vulnerabilities but debt levels remain elevated, leaving the economy prone to shocks, and medium-term growth prospects appear subdued, the report said.
External and public debt levels remain high and the associated financing needs together with heavy reliance on nonresident financing, large concentration of the investor base, and the economy’s large open forex position continue to pose risks. Hungary’s subdued medium-term growth prospects further exacerbate these vulnerabilities. At the same time, the state’s increased role in the economy along with sectoral taxes weaken the business environment, while state acquisitions in the banking and energy sectors contribute to the buildup of contingent liabilities, the IMF said.
The Hungarian government took steps to address these challenges, but the overall strategy relies on measures that increase the role of the state in the economy and shift the burden of the adjustment to specific sectors. This may deter private domestic and foreign direct investment, the staff report said.
The IMF expects growth in Hungary to decelerate to 2.75 percent this year from 3.6 percent last year, to 2.3 percent next year, and to 2.2 percent in 2017, it said in a Staff Report on Hungary published on Friday.
The IMF also projects the 2015 budget deficit at 2.7 percent of GDP versus a target of 2.4 percent, and 2.5-2.5 percent of GDP both next year and in 2017, with gross debt decreasing to 75.5 percent of GDP this year from 76.9 percent last year. It sees 74.7 percent for next year, and 73.9 percent at the end of 2017.
The IMF attributed slower growth to a smaller domestic-demand impetus due to less supportive fiscal stance and lower investment growth, given he projected decline in EU funds. Private consumption is expected to continue to grow, reflecting lower household indebtedness, accommodative monetary conditions, and higher employment. Over the medium term, output growth is set to stabilize at around 2 percent, IMF staff said, noting that he Hungarian authorities “were more optimistic about Hungary’s medium-term growth prospects.”
Published on Friday, the report was completed on March 11 based on discussions IMF staff ended in Budapest on January 30. Hungary is on a 12-month consultation cycle since it repaid early its obligations to the IMF in 2013 under a stand-by programme started in 2009.
IMF staff’s projections suggest that headline inflation will likely remain below target for an extended period, but further cautious monetary easing would help guard against persistent disinflationary pressures, it said. It now sees headline annual average inflation at zero this year after minus 0.3 percent last year, with the medium-term official target of 3 percent attainable in 2018 only.
Hungary should adopt a growth-friendly fiscal consolidation strategy to rebuild room for policy manoeuvre and sustainably reduce the public debt ratio, the IMF said, welcoming the authorities’ commitment to fiscal consolidation, but noting that their current strategy falls short of reducing public debt significantly over the medium term. It noted, however, that the external debt remains sustainable under a range of shocks.
The IMF recommended a simplification of Hungary’s tax system, including a gradual elimination of distortionary sectoral taxes.
It also advised to strengthen efforts and follow up on recently-announced commitments to repair financial intermediation by improving the operating environment for banks. Steps should include facilitating faster cleanup of bank portfolios and reducing the tax burden on banks. The Funding for Growth Scheme of the National Bank of Hungary (NBH) aimed at SMEs should remain targeted and time bound, while the role of the state in the banking sector should be contained, the IMF said.
The international lender also recommended structural reforms that increase policy predictability and reduce state interference in the economy to help strengthen confidence and support private investment.