Hungarian banks stated on Tuesday that measures requiring them to contribute to the country’s “defense fund” will harm their ability to lend, rejecting government accusations that they are profiting excessively from the war in Ukraine.
On Monday, the Hungarian government announced it would finance the defense fund by maintaining existing windfall taxes on retailers and multinational companies beyond this year, instead of phasing them out as previously expected. The government will also tax foreign currency bank transactions and increase transaction fees.
Impact of Inflation and War
Rising inflation, partly driven by increased fuel prices due to Western sanctions on Russian energy following Moscow’s invasion of Ukraine in 2022, has led to higher profits for private banks. This is because the central bank, along with others in Europe, raised interest rates to curb inflationary trends.
However, the Hungarian Banking Association argued that banks are not earning windfall profits from deliberate business decisions related to the war in Ukraine, which shares a border with Hungary to the east. They warned that the proposed measures would negatively impact the banking sector.
“The unpredictability of a series of government tasks and measures severely limits the credit capacity of the banking sector, international competitiveness, and its stimulative role,” bankers said.
Economic Challenges
Analysts note that inflation in Hungary has significantly exceeded price increases in other European Union countries due to rising energy costs and ineffective government interventions to control prices. The government imposed exceptional taxes on large companies to bolster its budget in 2022.
Hungary’s budget deficit has substantially surpassed EU limits, averaging nearly 7% of economic output over the past four years.
Gergely Gulyás, the chief of staff to Prime Minister Viktor Orbán, stated that a defense fund is necessary in the current “wartime” conditions, but did not specify how the additional tax revenues from company profits would be used.
