Washington, DC: The Executive Board of the International Monetary Fund (IMF) Concludes Article IV Consultations[1]with the Slovak Republic on Wednesday, June 29, 2022 and approved the staff evaluation without a meeting.

Growth rebounded to 3.0% in 2021, but a stronger recovery was hampered by resurgence in waves of infection and supply chain disruptions. As a result, the shock of war in Ukraine is hitting Slovakia before it has fully recovered from the pandemic, with output and employment still slightly below pre-crisis levels at the end of 2021.

The war in Ukraine will hamper the recovery given Slovakia’s geographical proximity, its high dependence on energy imports from Russia and its strong integration into global value chains. Growth in 2022 is expected to slow to 2.2%, with inflation averaging 10% in 2022–23. Growth is expected to rebound to 3.5% in 2023, supported by strong inflows of funds from the EU. Uncertainty is exceptionally high, with key risks tilted to the downside.

Board assessment[2]

The war in Ukraine has clouded the outlook for the Slovak economy as it still recovers from the pandemic. The effects of the war are already being felt through soaring commodity prices, input shortages, waning confidence, weak global demand and heightened energy security risks, given the high Slovakia’s dependence on Russian energy imports. Slovakia also feels acutely the humanitarian toll of the war with more than 440,000 Ukrainian refugees having crossed the Slovakian border. In this context, growth is expected to decline to 2.2% in 2022, with average inflation close to 10% in 2022-23. Uncertainty is exceptionally high. The main risks stem from the stronger fallout from the war, in particular from energy supply disruptions and prolonged supply chain outages. Slovakia’s external position in 2021 is assessed as moderately weaker than fundamentals and desirable policies.

Fiscal policy must be flexible and ready to adapt, while avoiding aggravating inflationary pressures. The immediate political priority is to mitigate the economic fallout of the war and minimize the humanitarian crisis. As risks may materialize and new spending priorities emerge, the automatic stabilizers should be able to come into full play. In addition, the budget could be revised to reprioritize spending and take into account possibly higher spending, such as refugees, energy security and targeted support. Targeted and time-limited transfers to vulnerable households could cushion the effect of rising commodity prices. Such transfers provide cost-effective relief to those who need it most without adding to inflationary pressures, and are preferable to large, permanent and less targeted benefit increases. If necessary, the authorities could also consider temporary support for viable businesses hit hard by rising commodity prices.

The rebuilding of fiscal buffers should begin once the economy is on a solid growth path, in order to create room for maneuver and deal with increased age-related spending. The annual consolidation of 0.5% of GDP over the period 2023-2025 envisaged in the Stability Program seems appropriate, as large inflows of EU funds would help offset the slowdown in consolidation on growth. A credible medium-term consolidation path would require defining concrete measures. The significant progress made in reducing the VAT gap is welcome and must be maintained. The increase in real estate and environmental taxation could generate considerable revenues. On the expenditure side, scaling up the implementation of value for money measures will help realize the savings potential identified in the expenditure reviews.

Recent reforms of the fiscal framework and the pension system could significantly strengthen public finances. Multi-annual expenditure ceilings should strengthen fiscal discipline, while the link between retirement age and life expectancy will improve fiscal sustainability. These reforms could be enshrined in constitutional acts to help prevent their reversal. Some of the other elements of the ongoing budget reforms require further examination. Constraints on the overall tax burden limit the ability of fiscal policy to respond to shocks. The parental bonus would also incur budgetary costs before savings from other elements of the pension reform are realised.

The banking sector has weathered the pandemic well, but close monitoring, enhanced oversight and careful calibration of financial sector policies are warranted. Financial sector supervision (including AML/CFT supervision) should continue to closely monitor asset quality, assess risks related to the war and its fallout, and calibrate stress tests accordingly. A CCyB adjustment may be warranted if there are clear signals that the strong credit cycle is continuing, but authorities should be ready to change course if downside risks materialize. The authorities should continue to explore additional measures to address housing market vulnerabilities, such as capital-based measures for mortgage exposures, including minimum risk weights and the targeted use of a risk buffer. sector systemic risk. To address specific pockets of vulnerability, such as the rise in mortgages with maturities beyond borrowers’ retirement age, an adjustment of borrower-based measures would be appropriate.

Ensuring energy security, while advancing Slovakia’s climate change mitigation goals, is a key political priority. Immediate focus should be on mitigating the effects of a potential Russian gas shutdown by securing alternative energy sources, accelerating stockpiling, collaborating at EU level and planning for emergencies . The authorities’ plans to increase investment in renewable energy and improve energy efficiency are welcome and should be accelerated where possible, as they will simultaneously help improve energy security and reduce greenhouse gas emissions. greenhouse effect. To accelerate the green transition, Slovakia could consider introducing an explicit carbon tax once energy prices come down.

Structural reforms and investments to accelerate green and digital transformation will pave the way for resilient, inclusive and sustainable growth in a more shock-prone world. These should be accompanied by investments in human capital, education reforms and effective labor market policies to strengthen labor supply in a rapidly aging society, facilitate adjustment to structural changes and ensure that all reap the benefits of growth. Reforms aimed at improving institutional quality, strengthening governance and innovation would increase efficiency and productivity and amplify the gains from other reforms. Slovakia’s Recovery and Resilience Plan foresees considerable investments and reforms in these areas. Their successful execution would go a long way in raising the standard of living and increasing the potential of the economy.

Table 1. Slovak Republic: Summary of Economic Indicators, 2020-23

2020

2021

2022

2023

Screenings

Output/Request

Real GDP

-4.4

3.0

2.2

3.5

Domestic demand

-5.3

3.6

2.8

2.8

Public consumption

0.9

1.9

3.4

3.8

Private consumption

-1.5

1.4

1.6

0.9

Gross fixed capital formation

-11.6

0.6

8.4

7.3

Exports of goods and services

-7.4

10.2

2.1

4.9

Imports of goods and services

-8.4

11.1

2.8

4.3

Potential growth

0.8

1.0

1.8

2.2

Output gap

-4.1

-2.2

-1.8

-0.5

Contribution to growth

Domestic demand

-5.1

3.6

2.9

2.8

Public consumption

0.2

0.4

0.6

0.7

Private consumption

-0.9

0.8

0.9

0.5

Gross fixed capital formation

-2.5

0.1

1.6

1.5

Inventories

-1.9

2.3

-0.3

0.1

Net exports

0.8

-0.5

-0.7

0.7

Prices

Inflation (HICP)

2.0

2.8

10.6

9.8

Inflation (HICP, end of period)

1.6

5.0

11.2

8.0

Core inflation

2.4

3.4

8.0

5.7

GDP deflator

2.4

2.4

7.5

9.9

Employment and wages

Use

-1.9

-0.6

1.1

1.3

Unemployment rate (percent)

6.6

6.8

6.4

6.2

Nominal wages

3.7

6.8

7.5

8.8

Public Finance, General Administration

Revenue

39.9

40.7

40.1

40.2

Spent

45.3

46.8

45.3

43.4

Overall balance

-5.5

-6.1

-5.2

-3.1

Primary balance

-4.4

-5.2

-4.3

-2.3

Structural balance (Percent of potential GDP)

-1.8

-1.7

-3.4

-2.9

General government debt

59.7

63.1

61.5

56.3

Monetary and financial indicators

(Percent)

Credit to the private sector (growth rate)

4.8

7.6

8.9

11.8

Mortgage rates 1/

1.1

1.0

10-year government bond yield 1/

-0.1

-0.04

Balance of payments

(Percent of GDP)

Trade balance (goods)

1.1

-0.1

-2.7

-1.4

Current account balance

0.3

-2.0

-4.5

-3.2

Gross external debt

120.5

137.0

133.5

124.7

Savings and investment balance

(Percent of GDP)

Gross National Savings

19.2

19.4

18.3

20.1

Private sector

21.2

22.3

18.7

18.7

Public sector

-1.9

-2.9

-0.4

1.3

Gross capital formation

18.9

21.4

22.8

23.2

memo element

Nominal GDP (millions of euros)

92,079

97 123

106,746

121,428

Sources: national authorities; and IMF staff estimates and projections.

1/ Latest data available for 2022 (average).

[1]Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with its members, usually annually. A team of staff visits the country, collects economic and financial information and discusses with officials the country’s economic developments and policies. Back at headquarters, staff draft a report that serves as the basis for Board discussions.

[2]Management has determined that it meets established criteria as set forth in Board Decision No. 15207 (12/74); (i) there are no acute or significant risks or policy issues requiring Board discussion; (ii) the policies or circumstances are unlikely to have a significant regional or global impact in the short term; and (iii) the use of the Fund’s resources is not discussed or planned.

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