20220629-IMF-Slovak_Republic_2022_Article_IV_Consultation-Press_Release_and_Staff_Report_73页_2mb

Summary of the 2022 Article IV Consultation with the Slovak Republic

Core Content

The 2022 Article IV consultation with the Slovak Republic, conducted by the IMF, assessed the country's economic outlook and policy priorities in the context of the war in Ukraine and its aftermath. The consultation highlighted Slovakia's vulnerability to external shocks due to its reliance on Russian energy, integration into global value chains, and the ongoing effects of the pandemic.

Main Views

Economic Recovery and Growth

• 2021 Growth: Slovakia's economy rebounded with a 3.0% real GDP growth, but the recovery was hampered by resurgent infections and supply chain disruptions.
• 2022 Outlook: Growth is projected to slow to 2.2% due to the war's impact on energy prices, supply chains, and global demand. Inflation is expected to average 10% in 2022–23.
• 2023 Projection: Growth is forecasted to rebound to 3.5%, supported by EU fund inflows and a normalization of the external environment.
• Output Gap: The output gap is expected to narrow gradually, reaching -0.5% of GDP by 2025, but the war could cause additional scarring, leading to a 2.5% lower output in 2027 compared to pre-crisis forecasts.

Inflation and Prices

• Inflation Trends: Inflation surged to 10.9% year-on-year in April 2022, driven by energy and food price increases, regulated price hikes, and one-off policy changes.
• Core Inflation: Core inflation remained high, at 8.1% in 2022, with broad-based impacts across sectors.
• Price Drivers: Supply disruptions and the backward-looking indexation of gas prices are key contributors to inflation. The freeze on electricity prices may help contain inflationary pressures in 2023.

Fiscal Policy

• Immediate Priorities: Fiscal policy should be flexible to address the humanitarian crisis and economic fallout, with automatic stabilizers operating fully to cushion the growth slowdown.
• Refugee Costs: The budget should be adjusted to accommodate refugee-related spending, especially in energy security and targeted support.
• Fiscal Consolidation: A gradual fiscal consolidation is needed to rebuild buffers once the economy stabilizes, supported by EU funds.
• Reforms: Progress in reducing the VAT gap is welcomed. Reforms in the fiscal framework and pension system are critical for long-term fiscal sustainability.

Financial Sector

• Credit Growth: Credit to the private sector continued to grow in 2021, though with sectoral differences. Mortgage lending and house prices rose sharply.
• Supervision: Enhanced monitoring and supervision of the financial sector, including stress testing and anti-money laundering (AML/CFT) measures, are necessary.
• Macroprudential Measures: Capital-based measures on mortgage exposures and borrower-based adjustments could help address vulnerabilities in the housing market.

Structural Reforms

• Energy Security: Strengthening energy security is a key policy goal, including diversifying energy sources and accelerating renewable energy investments.
• Green and Digital Transition: Structural reforms to boost green and digital transformation are essential for long-term growth and resilience.
• Human Capital: Investment in education, labor market policies, and skills development is needed to support an aging population and integrate refugees.

Labor Market

• Employment Trends: Employment is rising, but remains 1.3% below 2019:Q4 levels. Unemployment is 1.8 percentage points above pre-pandemic levels.
• Wage Growth: Nominal wage growth reached 7.5% in 2022, with manufacturing sectors experiencing higher increases.
• Labor Shortages: Skills mismatches and reluctance to return to certain sectors are contributing to labor shortages.

External Sector

• Current Account: The current account turned into a deficit in 2021, reaching 1.8% of GDP under the EBA-lite approach.
• Reserve Assets: The SDR allocation of €959.4 million in 2021 helped strengthen official reserves.
• Debt Sustainability: The external debt-to-GDP ratio is projected to decline, but risks remain due to potential disruptions from the war.

Key Risks and Uncertainties

• Downside Risks: Escalation of sanctions, deglobalization, and further supply chain disruptions could worsen the economic outlook.
• Uncertainty: The war's impact is still uncertain, with potential effects on energy security, trade, and global demand.
• Policy Adjustments: The need for flexible and clear communication is emphasized to address evolving risks.

IMF Recommendations

• Fiscal Flexibility: Allow automatic stabilizers to operate and revise the budget to prioritize refugee support and energy security.
• Targeted Support: Provide time-bound and targeted transfers to vulnerable households and businesses to avoid inflationary pressures.
• Structural Reforms: Continue and accelerate reforms in the fiscal framework, pension system, and green transition.
• Financial Sector Vigilance: Strengthen supervision, monitor asset quality, and adjust macroprudential tools as needed.
• Energy Transition: Consider introducing carbon taxation once energy prices stabilize, alongside measures to protect vulnerable households.

Conclusion

The IMF endorsed the staff appraisal and emphasized the importance of a flexible and responsive fiscal policy, robust financial sector oversight, and structural reforms to support long-term growth and resilience. The war in Ukraine has significantly impacted Slovakia's recovery, and the country is expected to face continued challenges in the short term, with a gradual return to more stable growth conditions in the medium term.