Source: IMF – News in Russian

June 20, 2025

Washington, DC: An International Monetary Fund (IMF) mission, led by Anke Weber and comprising Aleksandra Alferova, Jakree Koosakul, Moheb Malak, Augustus Panton, and Atticus Weller, visited Budapest during June 5-17 to conduct discussions on the 2025 Article IV Consultation with the Hungarian authorities. At the end of the visit, the mission issued the following statement:

The Hungarian economy is at a challenging juncture. Output has stagnated over the past 3 years, while inflation remains well above the central bank’s 3 percent target. Regulatory measures—such as price, interest and margin caps, along with windfall taxes and subsidized lending schemes—have distorted market signals and added uncertainty. Despite significant fiscal adjustment in recent years, public debt remains elevated given high financing costs. Timely domestic policy reforms are needed to reinforce resilience amid an unsettled external environment. Key to this will be well-designed fiscal measures to strengthen public finances, a continued tight monetary policy to bring down inflation, and structural reforms to raise productivity and safeguard growth against trade tensions and heightened uncertainty.    

Economic Outlook

High domestic and external uncertainty are expected to continue weighing on the outlook. Modest consumption-driven growth of 0.7 percent is expected in 2025, underpinned by favorable wage dynamics. Growth is projected to increase to 2 percent in 2026—on a recovery in investment and a positive impulse from German fiscal expansion—and to converge to its long-term potential of around 2½ percent by 2030. Inflation is forecast at 4.5 percent in Q4:2025, and to gradually decelerate to the MNB’s 3 percent target by 2027. The current account surplus is expected to fall to around 1¼ percent of GDP in 2025 and to increase gradually over the medium term as battery and electric vehicle production expands. These projections are based on the IMF’s April World Economic Outlook global assumptions.

Risks to growth remain on the downside. Deepening geoeconomic fragmentation and rising trade tensions would affect Hungary’s exports directly, while indirect effects may be even larger, arising from prolonged trade uncertainty undermining private investment and further weakening global economic activity. Geopolitical tensions could lead to commodity price volatility, intensifying inflationary pressures and negatively impacting fiscal and external balances. On the domestic front, a delay in the needed fiscal adjustment could heighten market concerns about debt sustainability, further increase risk premia, and exacerbate sovereign-bank linkages. A lack of progress on governance reforms being discussed with the EC could further delay or result in cancellation of EU funds with negative consequences for growth and market confidence. Inflation could be more persistent than projected, including from larger-than-anticipated effects of minimum wage hikes necessitating tighter monetary policy for longer.

Strengthening Fiscal Sustainability for Future Growth

Staff estimates that currently announced policies fall short of achieving the authorities’ budget targets. The authorities remain committed to reaching their 2025 and 2026 deficit targets of 4.1 and 3.7 percent of GDP, respectively. Their medium-term fiscal structural plan (MTFSP) envisages a further deficit reduction to below 2 percent of GDP by 2028. Under staff’s baseline scenario, which incorporates only legislated or officially endorsed measures, the deficit is projected to decline slightly to 4.8 percent of GDP in 2025 and 4.6 percent of GDP in 2026. In the medium term, the deficit would remain around 4½ percent of GDP, while the debt-to-GDP ratio would rise to about 79 percent in 2030 from 73½ percent in 2024. Debt dynamics have deteriorated since last year, following fiscal slippages and a weaker outlook, and remain sensitive to the real interest and growth path.

Significant additional fiscal efforts are needed to preserve fiscal space and rebuild buffers. Over the medium term, a surplus of around 1¾ percent of GDP excluding debt servicing and adjusting for economic cycles would appropriately balance debt sustainability and output stabilization objectives. The implied cumulative adjustment of around 2 percent of GDP over 2025-2028 would bring the deficit below 3 percent of GDP by 2027 and reduce the public debt ratio below 70 percent by 2029. Any additional defense spending should be accommodated within staff’s recommended path.

Measures underpinning the adjustment should be well-designed and growth-friendly.

• Revenue enhancements: The recent doubling of family tax allowances and expansion of personal income tax exemptions for mothers will significantly reduce revenues. In staff’s view an alternative that would minimize fiscal costs and labor market distortions would be to provide capped tax credits per child for both parents. A more targeted tax regime with fewer exemptions would raise revenue, improve efficiency, and simplify administration. Staff notes that a higher marginal personal income tax rate for high earners would increase revenue and fairness while taxation of corporates could be made more equitable and efficient by rationalizing tax incentives. A reduced reliance on distortionary windfall and financial transactions taxes would be more conducive to investment and growth.
• Expenditure rationalization: A phaseout of distortive retail energy subsidies and their replacement by targeted cash transfers would free up fiscal resources. A review of procurement and government employment would help the authorities to better target a reduction of administrative expenditures, which are high relative to peers, while a strategy is needed to limit transfers to SOEs and other public organizations. The realized savings from these measures could be used to bolster underfunded areas—health, primary education, and social protection. Public financial management reforms and a strengthened expenditure review process could enhance spending efficiency and support better fiscal governance. Relying on capital spending cuts to achieve targets would weaken growth and should be avoided.

Further efforts will be needed to reduce long-term spending pressures. Population aging is expected to add roughly 3.5 percent of GDP in additional pension and healthcare costs by 2050. An increase in the retirement age, adjustment of benefit levels, and a limited increase in the social security contribution rate would help to control pension costs in the long term. mproved digitalization and efficient procurement would help to contain health expenditures.  

Fiscal risk monitoring and mitigation could be improved. A comprehensive, consolidated and regular risk assessment of SOEs would provide early warning of potential vulnerabilities. The issuance of new guarantees should be capped by ceilings, and the stock of guarantees, risk of their activation, and performance of underlying liabilities assessed on an annual basis. Channeling public resources into fund management structures or private equity undermines budgetary transparency, risks resource misallocation and could result in unforeseen contingent liabilities. Finally, to mitigate distortions, it would be beneficial to limit the use of subsidized lending by state-owned banks to addressing market failures.

Bringing Inflation Durably Back to Target

The monetary policy stance will need to remain tight into next year to durably return inflation to target. Monetary policy has been appropriately cautious, with the MNB signaling that maintaining tight monetary conditions is warranted. With average inflation expected to remain above the tolerance band in 2025, staff sees limited scope for rate cuts this year. However, the balance of risks to growth and inflation is evolving. Given exceptional uncertainty, the MNB should thus maintain a data-driven approach. The flexible exchange rate regime and adequate reserve coverage can continue to help reduce Hungary’s vulnerability to external shocks. Price, fee, and margin controls are not a sustainable path to lasting disinflation and should be phased out.

Staff welcomes ongoing efforts to refine the MNB’s focus on the core objectives of price and financial stability. The proposed change to the MNB Act—prohibiting foundations from engaging in asset management activities—is a step in the right direction. In this context, a broader review of the MNB’s non-core functions is warranted, including measures relating to its secondary goal of environmental sustainability. While the MNB should play an active role in climate-risk supervision, prudential regulation should remain risk focused, and all climate-related initiatives be consistent with the MNB’s price and financial stability mandates.

Safeguarding Financial Sector Stability

Systemic risks in the financial sector are assessed as broadly contained. Overall, the banking system remains well-capitalized, liquid, profitable, and resilient to external shocks. But emerging pockets of vulnerability merit continued vigilance, including an increase in the share of FX corporate loans, banks’ growing sovereign exposure and significant FX positions, elevated commercial real estate (CRE) vacancies, and buoyant house prices.

The capital-based macroprudential toolkit is broadly appropriate, though further refinements may be warranted. The planned introduction of a one percent positive neutral countercyclical capital buffer (CCyB) in July 2025 amid heightened uncertainty is welcome, as was the reactivation of the systemic risk buffer (SyRB) for banks’ CRE exposures in 2024. While risks arising from banks’ growing sovereign exposures are partially mitigated by their high leverage ratio (capital-to-total exposure), consideration could be given to incorporating appropriate sovereign-bank nexus stress scenarios into regular supervisory stress testing.

Differentiation in borrower-based macroprudential limits should be introduced only on financial stability grounds. Recent relaxations of loan-to-value (LTV) and debt-service-to-income (DSTI) limits for first-time buyers and green homes appear to be partly driven by housing affordability and energy efficiency concerns. Such considerations should instead be tackled through appropriate structural and fiscal policies. Moreover, DSTI limits of 60 percent for first-time home buyers and for energy-efficient homes appear high relative to the overall limits in some peers. The reintroduction of voluntary APR ceilings for housing loans, while more restricted in scope, distorts risk pricing and should be reversed. Scaling back housing-related fiscal incentives would help contain future price pressures and safeguard financial stability.

Boosting Productivity Through Reforms

Boosting productivity growth will require comprehensive reforms that foster firm dynamism. Firm entry and exit rates remain low amid high regulatory barriers and an insolvency framework that impedes the timely exit of non-viable firms. Streamlining licensing and overlapping permits and enabling creditor-initiated and out-of-court restructuring would enhance capital and labor mobility toward more productive business ventures. Public R&D support should be performance-based and policy efforts aimed at promoting entrepreneurship and technology adoption better targeted, especially toward young, high-growth firms.

Productivity gains from industrial policy interventions remain elusive, underscoring the need for more effective horizontal reforms. Hungary has implemented repeated waves of industrial policies (IP) to boost competitiveness and productivity in targeted sectors. Yet, their impact on sustained productivity growth remains elusive. Given their high fiscal cost, IP should not substitute for broader structural reforms. Where used, such measures must be appropriately targeted to address market failures and be time-bound and transparent. As a small, open economy, Hungary would benefit most from a coordinated approach to state aid and IP at the EU-level.

Strengthening energy security can enhance competitiveness and facilitate the green transition. Ongoing efforts to diversify energy supply and increase renewable energy generation are commendable. Still, the Hungarian economy remains energy-intensive with high corporate energy prices weighing on cost competitiveness. EU-wide policy measures—including regional electricity market integration—should be complemented with domestic reforms such as targeted phaseout of household fossil fuel subsidies, enhanced energy efficiency standards, and accelerated permitting procedures for renewable energy investment.

Governance reforms are foundational for fostering a predictable business environment and boosting potential growth. Hungary has taken some important steps, including the 2023 judicial reforms aimed at strengthening the National Judicial Council. Further governance reforms and their effective enforcement—including related to public procurement, scope of the asset declaration system, conflict-of-interest rules, regulatory oversight, and functioning of the Integrity Authority—could unlock EU funds and amplify the growth dividends of other reforms.

The mission thanks the Hungarian authorities and our other interlocutors in Hungary for the productive collaboration, constructive policy dialogue, and warm hospitality.

https://www.imf.org/en/News/Articles/2025/06/20/hungary-staff-concluding-statement-of-the-2025-article-iv-mission

MIL OSI