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.
Budapest, Hungary – October 8, 2026: An International Monetary Fund (IMF) mission, led by Srikant Seshadri and comprising Maria Gelrud, Nora Neuteboom, Augustus Panton, and Atticus Weller, visited Budapest from September 23 to October 6 to conduct discussions on the 2026 Article IV Consultation with the Hungarian authorities. Jerome Vandenbussche, the IMF 2026 Financial Sector Assessment Program (FSAP) mission chief, joined the mission. At the end of the visit, the IMF team issued the following statement:
- Hungary’s economy is under simultaneous strain from several factors: weak investment, a growing gap between wages and productivity, a persistently challenging global environment, and an aging population. The budget deficit for this year is likely to be between 7-7.5 percent of GDP, and public debt is rising. These challenges call for a comprehensive set of reforms—particularly fiscal policies and also structural changes that enhance productivity and innovation.
- Hungary has a unique opportunity to revitalize its economy. The new government has committed to deeper European integration and has moved swiftly to unlock previously frozen EU funds. Growth is gradually picking up and headline inflation is below target. Markets have responded positively.
- The government’s stated goal of adopting the euro could provide a suitable anchor—but it is not a substitute—for broad reforms. Fiscal consolidation should be credible and growth-friendly, while monetary policy should remain appropriately cautious until disinflation becomes durably sustained. Financial-sector oversight and macroprudential policies should contain emerging vulnerabilities, while structural reforms should raise productivity, investment, and innovation.
- We look forward to the government’s medium-term fiscal program to be announced soon, and stand ready to help—through our analyses, policy suggestions, as well as technical assistance.
Economic Outlook
Growth is projected to strengthen gradually over the medium term. Under current policies, growth is projected at around 2 percent in 2026, rising to around 2½ percent over the medium term as €16 billion (7 percent of GDP) in previously frozen EU funds disburse, boosting public investments in energy security, infrastructure and human capital, and car and battery plants bolster production. Inflation is projected, on average, to remain well below the central bank’s current 3 percent target this year but to rise back towards 3 percent in 2027. This mainly reflects the expected dissipation of the exceptionally benign environment for food prices, the increase in excise duties on tobacco products from November 2026, and volatile global energy prices. The fiscal deficit under unchanged policies (i.e., without further policy announcements) is expected to exceed the Maastricht criteria through the medium-term and the public debt ratio would continue to rise. Higher energy prices are expected to push the external balance into a small deficit this year, before it returns to surplus along with the expected normalization of energy prices and expansion of export capacity.
The unblocking of EU funds could help catalyze growth and relieve external and fiscal financing pressures. By putting in place stronger governance standards, and more transparent public procurement, the new government paved the way for the release of about €16 billion (around 7 percent of GDP) in previously frozen grants and loans to finance needed investments in energy security, infrastructure, and human capital development. Used well, these resources and a more level playing field in the private sector (see below) could help to raise potential growth while easing pressure on the budget and external balances.
Risks to the outlook are tilted to the downside. A prolongation and/or escalation of the war in the Middle East could push energy prices higher, weighing on growth, the budget, and the external balance. Weaker demand in Europe or new trade barriers would hurt Hungary’s export-oriented manufacturers. Inflation could also prove higher and more persistent than envisaged if wages continue to outpace productivity, weighing on competitiveness. Recent currency strength and sharply lower yields could reverse if reforms do not meet market expectations. On the other hand, a credible fiscal adjustment package could stimulate further positive market sentiment.
There is no time like the present
Hungary’s economy faces major structural challenges. For much of the past decade, Hungary grew by attracting foreign investment into manufacturing—especially in the auto sector—supported by generous state incentives. That model now faces stiffer global competition, a workforce that is rapidly aging, and wages that have risen faster than productivity. After three years of near-stagnation, investment remains weak. At the same time, increasingly interventionist policies have blunted competition and the incentive to innovate. These include a range of consumer price protections that come at considerable fiscal cost, subsidized loans to businesses and home buyers, and sector-specific taxes. Reviving growth requires a new engine led by a dynamic private sector, a more efficient state, and a better-skilled workforce.
Hungary has a uniquely favorable window of opportunity to revitalize its economy. The new government’s agenda—to deepen integration with the rest of the EU, strengthen governance, and restore the health of the public finances—has earned considerable goodwill: the forint has strengthened and the government’s borrowing costs have fallen. With inflation below target, a banking system with strong soundness indicators, and the return of EU funds, the necessary conditions for an optimistic future are taking shape. This window of opportunity is unlikely to last if the goodwill given by the markets is not fully utilized. A comprehensive, credible, and appropriately front-loaded reform package is needed now to translate these favorable conditions into stronger investment, productivity, and durable growth.
The government’s goal of adopting the euro could provide a powerful anchor—but is not a substitute—for the necessary reforms. Hungary is well placed to share a common currency, as its economic cycle moves closely with that of the eurozone. Membership could bring lasting benefits: it would remove currency risk, lower borrowing costs for households, firms, and the government, and deepen trade and investment ties. But it also entails giving up an independent monetary policy and a flexible exchange rate that helps absorb shocks. International experience shows that the benefits of euro adoption crucially depend on how well prepared an economy is when it joins the currency union. Labor and product markets need to become more flexible over the transition period to euro adoption, which will help make the economy more resilient to shocks. Public finances also must strengthen substantially to face long-term pressures such as aging and the changing climate.
Promoting Growth-Friendly Fiscal Adjustment
International experience indicates that a successful and durable fiscal adjustment should have four essential attributes—it should be growth-friendly; credible—both in terms of its underlying assumptions and provide adequate detail regarding the measures which form its building blocks; front-loaded enough to provide a “down payment’ that conveys intent; and it should build in enough buffers to counter unanticipated surprises.
The authorities’ focus on cutting waste and prioritizing health and education is welcome-but tax reform is needed too. We fully concur with the authorities that targeting overpriced procurements and wasteful operating expenses should be a high priority. Nevertheless, the tax system needs fundamental reforms to make it more growth friendly, fairer, and more effective in raising revenues. Such changes would also help reduce the fiscal deficit—particularly if the envisaged spending cuts do not fully materialize in the envisaged time frame, or even if they materialize but do not fully offset the government’s new spending initiatives. Our analysis shows that a blend of revenue and spending adjustments paired with higher productive spending could reduce the deficit to 5 percent or slightly lower by 2027, which we view as a credibly large downpayment toward meeting the Maastricht criteria, and to 3 percent by 2029. Such a blended package would have lower negative effects on GDP and less impact on lower income households than a spending- or revenue-only approach to reducing the deficit. More specifically, we recommend:
- Revenue mobilization: Hungary’s tax system is the least progressive in the OECD and raises less revenue than needed with flat personal and corporate income tax rates among the lowest in the region. A more progressive personal income tax schedule—including tax relief for the lower end of the wage distribution—with child tax credits replacing regressive family related allowances would raise both revenue and labor participation. Higher taxation of capital income would help ensure more fairness, while a higher corporate tax rate with full expensing of investment would improve efficiency and strengthen investment incentives. In time, it would also obviate the need for special sectoral taxes.
- Fewer VAT tax loopholes: Scaling back those exemptions and preferential rates which mostly benefit higher-income households, would strengthen efficiency and equity, while targeted transfers could protect vulnerable households.
- Reducing subsidies and administrative spending. Lowering subsidized energy consumption thresholds and expanding means-tested cash support would reduce fiscal costs and incentivize more efficient energy use. Remaining lending subsidy programs should be phased out as they distort credit allocation and impair the monetary transmission mechanism. A spending review could identify procurement and administrative savings while public payroll restraint would also help preserve space for increased spending on infrastructure, health and education.
Stronger fiscal controls and oversight of state financial guarantees and greater efforts to reduce long-term spending pressures would further improve the country’s fiscal health. State-owned enterprises’ assets account for roughly 25 percent of GDP and government guarantees for 14 percent. Stronger reporting and tighter limits on such guarantees would reduce recurring support from the state and contain contingent liabilities. Realizing the potential gains from increased EU funding will require significantly improved public investment management and public financial management practices; the Fund stands ready to provide technical assistance deemed useful by the authorities. Looking ahead, pension and healthcare costs are projected to rise by nearly 4 percentage points of GDP by 2050. Containing these pressures requires linking the retirement age to life expectancy, phasing out early retirement options, recalibrating pension benefits, and improving health spending efficiency.
Durably Anchoring Inflation
We welcome the MNB’s recent decision to pause interest rate cuts. Inflation has run below expectations this year, allowing the MNB to cut the policy rate by a cumulative 100 basis points to 5.5 percent. The policy rate is now close to neutral in our estimation. However, services inflation remains elevated, and wages continue to grow in excess of productivity. In our view, therefore, further rate cuts should wait for more durable evidence of sustained disinflation. In a highly uncertain global environment, the MNB should also remain agile and prepared to tighten should energy prices spike significantly higher causing further second-round effects across the consumer basket, major central banks further tighten significantly, and/or if the forint were to weaken persistently.
The MNB’s reduction of the inflation target from 3 to 2.5 percent, effective January 2028, is a critical step toward euro adoption. It aligns the target more closely with regional peers. In our view, the lower target necessitates a more hawkish policy stance, particularly as inflation is expected to rise temporarily above 3 percent in 2027 before the new target takes effect. The Central Bank has rightly announced the change of target well in advance to give the economy time to adjust. Credible fiscal consolidation and wage growth aligned with productivity are essential for successful achievement of the lower target. Phasing out distortionary price controls and energy subsidies will be challenging but should occur, nonetheless.
Safeguarding Financial Sector Stability
The banking system remains broadly resilient, yet some vulnerabilities require close attention. Banks are well capitalized, liquid, and highly profitable, with non-performing loans at historic lows. FSAP stress tests suggest the system could withstand severe but plausible shocks in the aggregate, but pockets of vulnerabilities warrant continued close supervisory monitoring. Salient financial stability risks arise from increasing housing market overvaluation and strong sovereign-bank linkages in the context of elevated public debt. Corporate foreign-currency debt, around half of which matures within three years, and weaknesses in the commercial real estate sector also require close monitoring.
Recent macroprudential policy tightening should be complemented by further actions to solidify financial stability and improve resource allocation. Generous government subsidies through the Home Start Program have fueled a sharp rise in residential mortgage loans. This has enabled households to take on greater leverage over the past twelve months, adding to housing market overvaluation. The MNB appropriately increased the sectoral systemic risk buffer on residential real estate exposures at the start of the year. Although there are early signs that housing market pressures may be starting to ease, the MNB should review whether the calibration of its current borrower-based measures is sufficiently conservative and activate the debt-to-income limit to help prevent excessive leverage among new borrowers. Hungarian banks, like those in several other Central and Eastern European (CEE) countries, are among the most exposed in the EU to domestic sovereign securities, which comprise 17 percent of total assets. Subsidized loans and state guarantees further deepen their links with the sovereign. Phasing out subsidies for mortgages and corporate subsidized lending, scaling back state guarantees, and reducing fiscal incentives for banks to hold domestic government securities would help contain housing market imbalances and sovereign concentration risks. The MNB should also consider prudential measures to further mitigate risks stemming from the sovereign-bank nexus. Finally, price signals in the financial sector are distorted not only by subsidies and guarantees but also by a range of loan interest rate caps and distortionary taxes on the sector, which should be eliminated. We welcome the authorities’ ongoing review of these measures.
Financial sector policy frameworks are broadly adequate, however the FSAP identifies scope to strengthen oversight, the safety net and crisis preparedness. Making the MNB’s governance structure and prudential policy powers fully autonomous from the government would strengthen its operational independence and its banking supervision function. Comprehensive on-site inspections should become more risk-based, and the frameworks for related-party transactions, concentration risk, and early intervention should be enhanced. The emergency liquidity assistance (ELA) framework would benefit from stronger legal underpinnings and transparency. A formal cooperation mechanism between the MNB and the Ministry of Finance should be developed for episodes of financial stress wherein government guarantees related to ELA or fiscal backstopping may be required. Coordination between the relevant financial sector authorities for contingency planning related to high-stress scenarios should be formalized by establishing an inter-institutional committee for these purposes.
Structural Reforms to Reinvigorate Growth
Strong governance is foundational to high-quality economic growth. Over the past two decades, Hungary has lost ground across multiple governance dimensions. Ongoing efforts to address EU funds-related governance conditions are therefore welcome. Hungary’s recent accession to the European Public Prosecutor’s Office will strengthen its anti-corruption framework.
Product market reforms are necessary to enable more competition. Hungary has one of the least competitive market structures in the EU. While dominant incumbent firms are shielded by extensive regulations, other firms face frequent and unpredictable regulatory changes coupled with burdensome insolvency procedures. Addressing these distortions would foster more competition and promote productivity growth. Complementary EU single-market reforms, particularly in services and capital markets, would expand opportunities for Hungarian firms to find new opportunities abroad and attract fresh investment.
An appropriate balance should be struck between the state’s role in addressing market failures, and the private sector’s role in enhancing productivity. Our analysis of Hungarian firms reveals that with the notable exception of the agriculture sector, state-owned firms (SOEs) are persistently less profitable and less productive than private firms in the same industry. Significant SOE presence crowds out private firms and may weaken the performance of private competitors. Moreover, our analysis shows that subsidized corporate credit, which reaches over half of all firms with material debt, has not raised productivity and has financed less investment than market loans. Because subsidized borrowers tend to be financially sound and most subsidized loans are maturing within a few years, we recommend phasing out these subsidies as this is unlikely to cause disruptions. It is also unlikely to have a significant effect on employment and could save the government up to 300 billion forints (roughly 0.3 percent of GDP) in expenditures each year.
Labor market reforms must aim to raise mobility, worker skills, and labor force participation. With the working-age population shrinking, growth depends on deploying the existing workforce more productively and attracting and retaining talent. Hungary regulates more professions than any other EU country, which restricts mobility and slows the reallocation of workers to more productive jobs; removing occupational licensing bottlenecks should therefore be a priority. Limitations in digital skills also slow the adoption of new technologies: over 30 percent of Hungarian jobs are highly exposed to but not complemented by AI. Investing in upskilling and reskilling the workforce, including through digital-skills programs, vocational training, adult education and apprenticeships, would prepare workers to adapt to new technologies and compete in a rapidly changing labor market.
These reforms would prepare the economy for euro adoption and strengthen its competitiveness and resilience thereafter. Better governance, a more predictable policy environment that supports private-sector competition, and a more mobile and skilled workforce would raise productivity and help the economy absorb shocks without an independent monetary policy and currency. Our analysis suggests that a reform package—comprising fiscal consolidation, monetary policy adjustment and structural reforms as described above—if implemented now—could raise real GDP by up to a cumulative 2 percent by 2030. Our analysis also shows that front-loading the structural reforms could mitigate the near-term growth drag from fiscal consolidation.
Strengthening energy security would also enhance Hungary’s competitiveness. Hungary is significantly exposed to high and volatile energy prices, and these costs fall unevenly. Firms face some of the EU’s highest electricity prices amid high supply and network costs, while heavily subsidized household prices discourage efficient energy use. Energy sector reforms should prioritize supply diversification and private investment in low-cost infrastructure and generation. Deeper integration into the EU electricity market remains vital for Hungary’s energy security.
