Despite some improvement in Hungarian economy, the mid-term growth prospects remain subdued, the IMF said in a statement following Article IV consultations. Raising potential growth will require higher labour demand, enhanced business climate and policy environment, lower regulatory burden, tax changes and increased productivity in the services sectors, according to the IMF.

Hungary’s GDP is projected to increase by 2% y/y in 2014, accelerating from 1.1% y/y in 2013 on the back of further expansion in exports and improvement in investments and private consumption.

The IMF acknowledged that the country has educed its vulnerabilities but high public and external financing needs, heavy reliance on non-resident funding, uncertainty regarding advanced economies’ monetary policies, and re-emergence of financial stress in emerging markets pose risks.

According to the IMF, the Hungarian government will meet its budget deficit target, set at 2.9% of GDP in 2014, only if budget reserves are saved. The public debt is projected to remain broadly unchanged. At the same time, the IMF welcomed the government’s commitment to reduce the structural fiscal deficit over the medium term, which will also ensure a sustainable reduction in public debt without weighing on growth. In particular, fiscal consolidation would rely on durable expenditure reduction, a better composition of expenditure and a gradual elimination of distortionary taxes.

The IMF believes that a cautious approach in monetary policy easing needs to be followed in the period ahead. It is expected that inflationary pressures will build up as the economy recovers, the output gap narrows, and one-off effects on prices wane.

The banking sector remains under pressure and the restoration of financial intermediation should primarily rely on a sustainable improvement in the banks’ operating environment, including steps to facilitate faster non-performing loans resolution and reduce the tax burden, IMF said. It noted that the first phase of the central bank’s of the Funding for Growth Scheme proved successful in improving credit conditions for SMEs. Moreover, it sees scope for some modifications to the support scheme, which will increase its impact on growth, while keeping it bounded to SMEs.