IMF Executive Board concludes 2021 Article IV consultation with Slovak Republic



Washington, DC: On June 18, 2021, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]with the Slovak Republic.

The Slovak economy has faced the COVID-19 pandemic from a position of strength, with unemployment at record levels, a banking system with strong capital and liquidity reserves and some fiscal space. While the pandemic has taken a heavy toll, the efficient and timely policy response and resilient external demand have limited the economic fallout. The 4.8% production contraction in 2020 was more moderate than the euro area average and lower than feared at the start of the pandemic. The range of measures deployed by the authorities has focused on providing income and liquidity to households and businesses, saving tens of thousands of jobs and businesses. However, registered unemployment rose by around 3 percentage points, hitting some workers and regions particularly hard. The budget deficit jumped to 6.1% of GDP, and the debt-to-GDP ratio, which was on a downward trajectory, rose above 60%.

The outlook for 2021 is for a rebound in economic activity, although uncertainty remains very high. As the second wave of infections recedes and strong political support remains, real GDP growth is forecast at 4¾% this year, and will accelerate further in 2022. In the medium term, growth will be boosted by significant investments financed by the EU. Nevertheless, some scarring is expected, with medium-term production remaining below the pre-crisis trend. The risks to the forecast are significant and dominated by the dynamics of the virus and the success of the vaccination campaign.

Board assessment[2]

The executive directors approved the direction of the staff appraisal. They congratulated the Slovak authorities for their swift and effective political response, which made it possible to limit the social and economic impact of the crisis. Looking ahead, directors noted that despite high uncertainty, risks are broadly balanced and the medium-term outlook is strong with significant investments.

Directors agreed that the budget support budgeted for this year will help secure the recovery and provide insurance against downside risks. They felt that political support should gradually shift to facilitate the necessary reallocation of labor and capital and minimize scarring as the recovery takes hold. Directors welcomed the planned reforms in the taxation, public finance administration and fiscal framework, which will help strengthen tax collection, improve the efficiency of public spending and increase safety buffers. Directors stressed the need to begin the process of planning a credible medium-term consolidation plan. They underlined the importance of well-designed fiscal rules and pension reform and welcomed the envisaged introduction of spending ceilings and the reallocation of retirement age to life expectancy, such as indicated in Slovakia’s recovery and resilience plan.

Directors praised the resilience of the banking sector, which entered the crisis with strong capital and liquidity buffers. They encouraged the maintenance of the flow of credit, while preserving financial stability. Directors felt that business vulnerabilities and housing market risks require continued vigilance. They considered that the current macroprudential stance was broadly adequate and suggested strengthening the restructuring mechanisms and the insolvency framework. Efforts to continue upgrading the AML / CFT framework were also encouraged.

Directors commended the authorities for the ambitious investments and reforms enshrined in the Slovak Recovery and Resilience Plan and encouraged them to use EU funds quickly and efficiently, including those from the next generation of the EU. EU. They welcomed the emphasis placed by the authorities’ reform program on accelerating digital and green transformation, strengthening human and physical capital and increasing productivity, through greater investment in education. and health, research and innovation, more efficient public services and better governance. Directors noted the relative strength of the Slovak labor market and recommended more targeted measures for those disproportionately affected by the crisis to help transition workers and prepare them for the demands of the future.

The rapid and efficient execution of investments and the implementation of reforms would be essential to support robust and inclusive growth.

It is expected that the next Article IV consultation with the Slovak Republic will be held on the standard 12-month cycle.

Slovak Republic: Summary of Economic Indicators, 2019-22

2019

2020

2021

2022

Projections

(Annual percentage change, constant prices, unless otherwise indicated)

Production / Demand

Real GDP

2.5

-4.8

4.7

4.9

Domestic demand

3.7

-5.6

3.0

6.8

Public consumption

4.6

0.3

2.2

2.1

Private consumption

2.7

-1.2

0.3

5.9

Gross fixed capital formation

6.6

-12.0

3.7

11.9

Exports of goods and services

0.8

-7.6

11.5

4.2

Imports of goods and services

2.1

-8.5

10.1

6.1

Potential growth

3.0

0.8

3.1

3.3

Production gap

1.0

-4.6

-3.1

-1.5

Contribution to growth

Domestic demand

3.7

-5.4

3.1

6.5

Public consumption

0.8

0.0

0.4

0.4

Private consumption

1.5

-0.7

0.2

3.3

Gross fixed capital formation

1.4

-2.6

0.8

2.4

Inventories

0.0

-2.1

1.8

0.5

Net exports

-1.2

0.6

1.6

-1.6

Prices

Inflation (HICP)

2.8

2.0

1.3

1.9

Inflation (HICP, end of period)

3.2

1.6

1.6

1.8

Core inflation

2.5

2.4

1.9

1.6

GDP deflator

2.5

2.4

1.2

2.2

Employment and wages

Employment

1.0

-1.9

-0.3

0.8

Unemployment rate (Percentage)

5.8

6.7

7.3

6.6

Nominal wages

7.8

3.7

4.8

4.6

(Percent of GDP)

Public finance, general government

Returned

41.3

41.6

41.8

41.6

Spent

42.7

47.8

50.6

46.5

Global balance

-1.3

-6.1

-8.8

-4.9

Primary balance

-0.3

-5.1

-7.9

-4.0

Structural balance (Percentage of potential GDP)

-1.8

-2.1

-4.2

-4.2

General government debt

48.2

60.3

63.0

65.0

Monetary and financial indicators

(Percent)

Credit to the private sector (Growth rate)

6.6

4.8

6.5

7.8

Loan rate

1.4

1.1

Balance of payments

(Percentage of GDP)

Trade balance (goods)

-1.0

0.6

1.5

0.2

Current account balance

-2.7

-0.4

-0.6

-1.6

Gross external debt

112.4

121.2

118.1

115.0

Savings and investment balance

(Percentage of GDP)

Gross national savings

20.7

18.0

17.7

19.3

Private sector

19.2

16.4

16.3

18.0

Public sector

1.4

1.5

1.4

1.3

Gross capital formation

23.4

18.3

18.3

21.0

Memo element

Nominal GDP (millions of euros)

93,900

91 555

97,037

104,080

Sources: National authorities and IMF staff projections.


[1]Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with its members, usually annually. A team of employees visits the country, collects economic and financial information and discusses with those responsible for the development and economic policies of the country. Back at headquarters, the staff prepare a report which forms the basis for the Board of Directors’ discussion.

[2]At the end of the discussion, the Managing Director, in his capacity as Chairman of the Board, summarizes the points of view of the Executive Directors, and this summary is sent to the country’s authorities. An explanation of all the qualifiers used in the summaries can be found here:https://www.IMF.org/external/np/sec/misc/qualifiers.htm.

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