Chapter News

IMF Executive Board Concludes 2015 Article IV Consultation with Slovak Republic

On January 11, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Slovak Republic.

Slovakia remains among Europe’s stronger economies, with growth continuing to pick up in 2015, driven by strong domestic demand. A push to spend expiring EU funds has underpinned rising investment while job creation and real wage growth have supported private consumption. Unemployment has fallen significantly since 2013, but is still around 11 percent overall, and is much higher for the long-term unemployed, youth, and women. Regional disparities also remain substantial. The fiscal deficit has held steady between 2.5 and 3 percent of GDP in recent years, and while public debt is manageable and easily financed, it is not far below domestic debt brake thresholds. The banking sector has sound capital and liquidity buffers and private debt is limited, but household borrowing has been rising rapidly.

The outlook is favorable with growth of 3–3.5 percent expected through the medium-term, reflecting sustained domestic demand as well as further contributions from the important export sector as substantial additional foreign auto sector investment is planned. Although Slovakia enjoys substantial buffers, external factors present the greatest risks, especially if shocks were to be transmitted via key trading partners. Negative headline inflation in 2015 is expected to turn positive in 2016.

Discussions focused on: (i) comprehensive actions to reduce unemployment and sharp regional disparities; (ii) high-quality fiscal measures to preserve room for maneuver under domestic debt brakes while funding key priorities; and (iii) macroprudential policies to guard against risks from rapid household credit growth and steps to promote capital market development.

Executive Board Assessment2

Executive Directors welcomed the Slovak Republic’s solid economic performance, driven by a strong pickup in domestic demand. Medium term prospects are favorable, particularly in light of additional foreign investment in the automotive sector, although external factors pose downside risks. Directors stressed the importance of addressing substantial regional disparities and still high unemployment, including for the long term jobless, youth, and women.

Directors encouraged the authorities to pursue a comprehensive approach to spur investment and employment in weaker regions, and to facilitate labor mobility. Policies should focus on enhancing transportation infrastructure, strengthening the business climate by improving the legal and procurement systems and governance, and promoting rental housing. Reducing the tax wedge, especially for low wage or part time workers, enhancing education and training, and bolstering the effectiveness of labor market policies, would encourage hiring, allay rising skill shortages, and promote labor force participation. Gradual diversification of production and export markets would also support long term growth prospects.

Directors commended the authorities’ commitment to fiscal sustainability. They called for high quality and growth friendly fiscal consolidation over the medium term to ensure room for policy maneuver under domestic debt rules and address challenges related to population aging, while also tackling regional disparities and labor market challenges. In this regard, Directors encouraged the authorities to persevere with efforts to strengthen revenue collection particularly for value added and corporate income taxes, broaden the tax base including through a market value based property tax, and achieve spending efficiencies, especially in the health sector. While Directors acknowledged the important policy discipline provided by the Fiscal Responsibility Act (FRA), there was support for revisiting some aspects of the framework over time with a view to lessen potential negative economic effects without undermining discipline.

Directors welcomed the authorities’ continued prudent supervision of the financial system in the context of the Single Supervisory Mechanism. Although the banking sector is sound and private sector leverage is limited, rapid household credit growth calls for close monitoring. Directors welcomed the National Bank of Slovakia’s ongoing initiatives in this area, and encouraged the authorities to strengthen macroprudential measures, and to consider a positive counter cyclical capital buffer should strong credit growth continue and broaden to the corporate sector. They welcomed efforts to facilitate non-bank financing for firms and encouraged greater regional integration.

Slovak Republic: Selected Economics Indicator, 2012–16
2012 2013 2014 2015 2016
National income, prices and wages
Real GDP 1.5 1.4 2.5 3.4 3.6
Inflation (HICP) 3.7 1.5 -0.1 -0.3 0.7
Inflation (HICP, end of period) 3.4 0.4 -0.1 -0.2 1.4
Employment 0.1 -0.8 1.4 2.0 1.7
Public Finance, General Government
Revenue 36.0 38.4 38.9 40.1 38.3
Expenditure 40.1 41.0 41.6 42.8 40.5
Overall balance -4.2 -2.6 -2.8 -2.7 -2.2
General government debt 51.9 54.6 53.5 52.8 52.1
Monetary and financial indicators
Bank credit to private sector (growth rate) 2.8 5.6 6.1
Lending rates 1/ 4.4 4.1 4.0
Deposit rates 2/ 1.4 1.0 0.9
Government 10-year bond yield 3.3 3.2 2.1
Balance of payments
Trade balance (goods) 3.5 4.6 4.4 3.8 4.0
Current account balance 0.9 1.5 0.1 -0.5 -0.5
Gross external debt 75.8 81.9 89.7 92.8 91.9
  • Sources: National Authorities; and IMF staff projections.

    1/ Average of interest rates on new housing loans to households and loans of less than EUR 1 million to nonfinancial corporations (all maturities).

    2/ Average of interest rates on new deposits with agreed maturity (up to 1 year) from households and nonfinancial corporations.

1 Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

2 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here:

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