IMF Urges Hungary to Change Economic Policy

The International Monetary Fund urged Hungary on Monday to shift its economic policy, warning the government's frequent and unpredictable tax policy changes had undermined efforts cut the deficit and attain growth.

"A new policy course is needed to deliver the required medium-term fiscal adjustment in a sustainable way to support growth and confidence...," the IMF said in a statement following a review mission in Budapest.

The IMF has repeatedly taken issue with the economic policies taken by the government of Prime Minister Viktor Orban, particularly temporary windfall taxes imposed on certain business sectors and the nationalization of private pension funds.

While the IMF praised the government's commitment to cut its deficit, it said "increased state interference in the economy and frequent and unpredictable tax policy changes, particularly on the corporate sector, undermined private sector activity."

It warned this "contributed to a negative feedback loop between slow growth, weak investment... and high public debt."

The IMF said the Hungarian economy likely contracted by 1.5 percent last year and would stagnate in 2013, with any improvement in exports outweighed by weak domestic demand.

The European Commission, which also participated in the review mission, also urged the Hungarian government to lower its reliance on sectoral taxes which it said undermined business confidence, growth and employment.

The expected appointment soon of an Orban ally as central bank chief willing to pursue the government's aim of monetary policy easing has in recent weeks led to a weakening of the forint.

The Hungarian currency on Monday rose above 300 forints to the euro for the first time since June.

The IMF also warned that the government's efforts were unlikely to get the public deficit under 3 percent of GDP, as required by EU rules, in 2013-2015.

The IMF said different policies could achieve the needed deficit reduction and boost growth prospects.

The Hungarian government's policies have blocked it from reaching agreement on a 15-billion-euro ($20 billion) precautionary credit line from the European Union and IMF.

A 20-billion-euro bailout from the EU and IMF helped Hungary weather the global economic crisis in 2008-2009.