05/03/2021 | Press release | Distributed by Public on 05/03/2021 07:14
May 3, 2021
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.
Washington, DC: Hungary's economy entered the COVID-19 pandemic on a strong footing and the authorities responded swiftly and strongly to the crisis it triggered. While the lockdowns have been weighing heavily on activity, the fast vaccination pace may allow for an earlier reopening than in most other EU countries. Continued fiscal support, well targeted, will be needed as long as the recovery is not well entrenched, while any revenue windfall from a faster-than-expected rebound should be saved. Monetary policy should stay tuned to the inflationary pressures, which could increase as the recovery develops. Over the medium term, improvements in competitiveness are now more necessary than before the crisis, as the economy needs to make up the lost ground, face potential structural transformation, and address demographic and climate challenges.
The economy suffered a deep shock in 2020 but is expected to rebound this year. After an output contraction of 5 percent, significant policy support, rapid vaccinations, trade recovery, and the disbursement of the EU funds are expected to lift activity. Staff expects growth to exceed 4 percent in 2021 and accelerate further in 2022. Yet, the uncertainty is significant. Downward risks remain important, as the recovery depends on the race between the virus and vaccination, domestically and globally.
The authorities' policy response was large and timely. They sought to contain the pandemic and support the economy through a loan moratorium, tax holidays, increase and reprioritization of spending, and EU-financed programs. Fiscal spending focused on purchases of medical supplies, bonuses and wage increases to healthcare staff, wage support for reduced working hours, investment support, and direct transfers to affected sectors. As a result, the fiscal deficit increased to 8.1 percent of GDP and public debt, which had been on a declining path for a decade, rose above 80 percent of GDP. The MNB also swiftly reacted to market pressures. It provided ample liquidity through a variety of policy tools, including FX liquidity swaps, enhanced lending facility, the expansion of its asset purchase programs (APPs), which includes government, corporate and mortgage bonds, and the adjustment of the policy rate. 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 balance providing sufficient support for the recovery in the short run and gradually rebuilding room for fiscal policy maneuver in the medium run. If the recovery turns out faster than expected, buffers should be rebuilt more rapidly by saving the tax windfall from higher growth. Conversely, a further setback to the recovery may warrant additional support for households and firms. Accordingly, fiscal targets and budget composition beyond this year will need to be regularly reassessed and flexibly adjusted. Given high gross financing needs, it would also be important to continue lengthening public debt maturity, as started in 2020. Considering the magnitude of the fiscal response, it will be even more important ensure the transparency of spending. Information on related procurement contracts, including beneficial ownerships, should be publicly available.
The monetary policy response to the crisis was appropriate and no significant policy action appears necessary in the short term. The MNB successfully kept inflation broadly within its 2-4 percent tolerance band. Some overshooting of the inflation band due to temporary shocks-as expected in the near term-should be acceptable. Looking ahead, there are upward and downward risks to inflation that monetary policy will need to consider. Thus far, the adaption of monetary operations has effectively provided needed liquidity and addressed market dysfunction. As conditions normalize, the MNB should continue to review the effectiveness of its unconventional tools, including the size of 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 since they are somewhat unevenly distributed, continued supervisory vigilance is warranted. The anti-money laundering framework should continue to follow the latest international standards; thus, the recent revisions of the legislative framework, creation of databases on beneficial owners and bank accounts, are welcome.
The structural reform agenda should support the recovery and facilitate the transformation toward a more resilient economy post-pandemic. Over the medium term, accelerated shift to e-commerce, teleworking, the likely reshaping of global value chains and, possibly, less travel will likely require economic transformation and labor reskilling. Managing these changes successfully, together with other measures to green the economy, could greatly limit output losses relative to pre-pandemic medium-term projections.
The EU Recovery and Resilience Funds can play a key role in supporting the recovery and economic transformation. The timely implementation of the above reform package, with a focus on leveling the playing field for SMEs and improving governance and transparency, will be crucial for a strong recovery and to set the economy on a more sustainable path. A judicious, transparent use of EU funds, supported by a strong recovery and resilience plan, could greatly help progress on all these fronts.
An IMF team led by Jean-François Dauphin conducted virtual meetings during April 20-30, 2021. The mission met with State Secretaries Banai and Gion, Deputy MNB Governors Kandrács, Patai and Virág, various other government officials, and representatives from banks, trade chambers, unions, and academia. The mission thanks its counterparts for the close collaboration and the candid and insightful discussions.
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