Lack of Growth Hampers Hungary’s Economy

Government should improve policies to support investment, growth

Banking system stable, lack of credit undercuts recovery

High external and public debt, low growth leave country vulnerable to shifts in markets

In its latest annual check-up of the Hungarian economy, the International Monetary Fund said it expects real GDP to remain broadly flat in 2013 due to weak domestic demand moderated by net exports which remain the only source of growth.

In the medium term, the IMF cautions that weak business environment, poor investment climate, and low labor participation are likely to keep growth subdued.

“Hungary has been plagued by low growth and high debt for much of the last decade,” said Thanos Arvanitis, an Assistant Director in the IMF’s European Department and mission chief for Hungary. “Weak growth in recent years has been due to an adverse external environment, structural factors, such as the ongoing balance sheet adjustment in the economy, and policy missteps by the government. Hungary needs a different mix of policies to jump start growth and increase employment.”

Government policies have attempted to cushion the impact of the global crisis on households and rein in fiscal deficits and boost employment. However, the state has also increased its interference in the economy through frequent and unpredictable policy changes. Together with a weakening of domestic institutions, this has hurt the investment climate.

Investment in the country has dropped to a 10 year low. A more business friendly set of policies is key to revive the economy, according to the IMF. Higher growth would also help with the orderly reduction of public debt.

Hungary's high level of government debt, close to 80 percent of GDP, and its corresponding large financing needs make the country vulnerable to financial market volatility.

Fiscal policy must refocus on quality

The government’s commitment to keep deficits below 3 percent of GDP is welcome, but recent fiscal consolidation has relied excessively on controversial tax measures. Rebalancing the adjustment toward durable spending consolidation, while better protecting low income groups, will open the way to rationalize the tax system. This will improve investment, employment, and growth prospects, according...