20240312-IMF-Slovak_Republic_2023_Article_IV_Consultation-Press_Release_and_Staff_Report_65页_7mb

2023 Article IV Consultation with the Slovak Republic Summary

Core Content

The IMF Executive Board concluded the 2023 Article IV consultation with the Slovak Republic on March 6, 2024. The consultation assessed the country's economic performance, outlook, and policy frameworks, emphasizing fiscal sustainability, structural reforms, and macro-financial stability.

Main Economic Developments

• Growth: The Slovak economy slowed in 2023 to 1.1% due to the exhaustion of pandemic-era savings and negative real wage growth, but is expected to rebound to 2.1% in 2024 and 2.6% in 2025.
• Inflation: Inflation declined from record highs in early 2023 to 11% in 2023 and further to 2.8% in December 2023. However, it remains among the highest in the euro area, with core inflation at 11.4%.
• Public and Private Consumption: Public consumption rose in 2023 due to increased social spending and energy support measures, while private consumption was negatively affected by real wage growth.
• Public Investment: Record-high EU-funded public investments helped offset the negative impacts of the pandemic and energy price shocks.
• Exports and Imports: Exports recovered, while imports remained high, leading to a current account deficit of 1.7% of GDP in 2023. The trade balance has improved slightly in recent quarters.
• Output Gap: The output gap closed to 0.0% in 2023:Q4, with a modest recovery in real GDP.
• Real Wages: Real wages remain below pre-pandemic levels, with a -1.3% growth in 2023.

Main Policy Recommendations

Fiscal Policy

• Fiscal Consolidation: A more ambitious fiscal consolidation in 2024 is needed to reverse the structural deterioration in public finances and build space for future spending pressures.
• Debt Reduction: Debt is expected to remain stable at 58% of GDP due to the negative real interest rate.
• Reforms: Strengthening the fiscal framework and improving transparency are essential for long-term public finance stability.
• Tax Adjustments: Raising the basic VAT rate, property, and environmental taxes is encouraged. Social spending should be better targeted, and subsidies reduced.

Financial Sector Policy

• Macroprudential Measures: The commercial real estate (CRE) sector and low-income households are vulnerable, and targeted macroprudential measures should be considered.
• Supervision: Continued enhanced monitoring and supervision of banks is necessary to ensure adequate provisioning for expected losses and emerging risks.
• Bank Levy: The new bank levy should be phased out as planned.
• AML/CFT: Addressing deficiencies in the AML/CFT framework and strengthening resilience against cyber-attacks is prioritized.

Structural Policies

• Inclusive Growth: Structural reforms should promote inclusive and climate-friendly growth, address demographic challenges, and reduce regional inequality.
• Labor Market: Policies to increase labor force participation of women and seniors are needed to counter the effects of an aging population.
• Social Inclusion: Fostering social inclusion among the Roma community and other disadvantaged groups will help reduce regional inequality.
• Green Transition: Accelerating the green transition and implementing the National Energy and Climate Plan is encouraged.

Key Risks and Challenges

• Downside Risks: Weaker external demand, commodity price shocks, delays in fiscal consolidation, slow structural reforms, and ineffective absorption of EU grants pose significant risks.
• Demographics: Unfavorable demographics will continue to weigh on medium-term growth.
• Credit Gap: A widening negative credit gap is observed, though less severe than in the euro area.
• Wage-Price Spiral: Nominal wage growth has lagged behind inflation, and real wages have not yet fully recovered to pre-pandemic levels.
• Gender Pay Gap: The unadjusted gender pay gap has narrowed but remains high relative to other EU countries.

Summary of Economic Indicators (2019–2029)

Key Risks and Outlook

• Outlook: Growth is expected to rise to 2.1% in 2024 and 2.6% in 2025, with inflation moderating and returning to target by end-2026.
• Downside Risks: Risks are tilted to the downside due to global slowdown, geopolitical tensions, commodity price shocks, fiscal consolidation delays, slow structural reforms, and inefficient absorption of EU grants.
• Fiscal Deficit: The fiscal deficit is projected to widen to 6.5% of GDP in 2023, with the primary balance at -5.6%.
• EU Grants and Energy Support: EU grants are expected to increase to 2.6% of GDP in 2023, and energy support measures have contributed to the fiscal impulse.

Conclusion

The Slovak Republic has shown resilience despite significant challenges, including high inflation, demographic pressures, and external shocks. The IMF encourages continued fiscal consolidation, structural reforms, and macroprudential measures to ensure long-term stability and inclusive growth. The financial sector and labor market are key areas for attention, with the gender pay gap and labor productivity also highlighted as important issues. The green transition and EU funding absorption are seen as crucial for future economic development.