An International Monetary Fund (IMF) mission visited Budapest during July 17-25 to start discussions on an IMF/EU-supported program following a request by the Hungarian authorities. The IMF mission worked in close cooperation with a mission from the European Commission and observers from the European Central Bank. At the conclusion of the visit, Thanos Arvanitis, IMF mission chief for Hungary, issued the following statement:
“The Hungarian economy continues to face a series of interconnected challenges related to high public and external indebtedness, strained bank balance sheets, weak confidence, and elevated risk perceptions. Amid a difficult external and domestic environment, real GDP is expected to contract in 2012 and recover modestly in 2013. Beyond the current cycle, historically low levels of private investment and labor participation cloud the growth outlook.
“The key near term challenge is to maintain macroeconomic and financial stability, while building the foundations for a more robust recovery which is necessary to raise living standards. Policies should therefore aim to advance the needed fiscal consolidation in a sustainable manner, restore the soundness of the financial sector, and set in place a more business friendly environment and promote structural reforms, building on the objectives of the original Széll Kálmán plan.
“The authorities’ commitment to the fiscal targets under the revised Convergence Plan in 2012-13 is welcome. However, greater focus should be placed on achieving a more balanced fiscal consolidation, shifting away from ad hoc tax measures towards streamlining public expenditures, while ensuring adequate support to vulnerable groups. A smaller and more efficient state with strong and predictable policies would create better conditions for private-sector led growth, and reduce the tax burden over time. For 2013, additional measures will be necessary to secure the government’s deficit target, and put public debt firmly on a downward path.
“The monetary policy stance remains appropriate, reflecting the recent uptick in headline and core inflation and persistently elevated risk premia. The contracting credit reflects mostly structural challenges confronting the banking, household, and corporate sectors as well as recent policy actions. Reforms to restore banking system soundness in a more business-friendly environment are critically important so that banks can contribute to economic recovery.
“Generating higher and more inclusive growth will require more emphasis on structural reforms. The focus should be on measures to encourage labor participation, advance competition, reform loss making state-owned enterprises, notably in the area of transport, and put in place a regulatory level-playing field for all companies.
“The IMF mission, jointly with its European partners, has had constructive discussions with the authorities on these issues. The dialogue will continue in the period ahead.”
Press Release No. 12/276
July 26, 2012