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 faced the COVID-19 pandemic from a position of strength, with unemployment at record lows, a banking system with strong capital and liquidity buffers, and some fiscal space. While the pandemic exacted a heavy toll, the effective and timely policy response and resilient external demand limited the economic fallout. The output contraction of 4.8 percent in 2020 was milder than the euro area average and smaller than feared at the onset of the pandemic. The array of measures deployed by the authorities focused on providing income and liquidity support to households and corporates, saving tens of thousands of jobs and businesses. Nonetheless, registered unemployment increased by about 3 percentage points, hitting some workers and regions particularly hard. The fiscal deficit jumped to 6.1 percent of GDP, and the debt-to-GDP ratio, which had been on a declining path, rose above 60 percent.

The outlook for 2021 is for a rebound in economic activity though uncertainty remains very high. With the second wave of infections receding and continued strong policy support, real GDP growth is forecast at 4¾ percent this year, accelerating further in 2022. Over the medium term, growth will be boosted by sizable EU-funded investments. Nevertheless, some scarring is foreseen with medium-term output remaining below the pre-crisis trend. Risks to the forecast are large and dominated by the virus dynamics and the success of the vaccination campaign.

Executive Board Assessment[2]

Executive Directors agreed with the thrust of the staff appraisal. They commended the Slovak authorities for their swift and effective policy response, which helped limit the social and economic impact from the crisis. Looking ahead, Directors noted that, despite high uncertainty, risks are broadly balanced and medium-term prospects are robust on the back of sizable investments.

Directors concurred that the fiscal support budgeted for this year will help secure the recovery and provide insurance against downside risks. They considered that policy support should gradually shift to facilitating needed reallocation of labor and capital and minimizing scarring as the recovery takes hold. Directors welcomed the planned reforms in taxation, public finance administration and the fiscal framework, which will help to strengthen tax collection, improve the efficiency of public spending and increase buffers. Directors emphasized the need to begin the planning process for a credible medium-term consolidation plan. They stressed the importance of well-designed fiscal rules and pension reform and welcomed the envisaged introduction of expenditure ceilings and the relinking of retirement age to life expectancy as outlined in Slovakia’s Recovery and Resilience Plan.

Directors commended the resilience of the banking sector, which entered the crisis with strong capital and liquidity buffers. They encouraged maintaining the flow of credit, while safeguarding financial stability. Directors considered that corporate vulnerabilities and housing market risks require continued vigilance. They assessed the current macroprudential stance as broadly adequate and suggested strengthening restructuring mechanisms and the insolvency framework. Efforts to continue to upgrade the AML/CFT framework were also encouraged.

Directors praised the authorities for the ambitious investments and reforms embedded in the Slovak Recovery and Resilience Plan and encouraged them to use promptly and efficiently EU funds including from the Next Generation EU. They welcomed the focus of the authorities’ reform agenda on accelerating the digital and green transformation, strengthening human and physical capital and boosting productivity, through greater investments in education and healthcare, research and innovation, more efficient public services and improved governance. Directors noted the relative strength of the Slovak labor market and recommended more targeted measures for those disproportionately affected by the crisis to assist the transition of workers and prepare them for the demands of the future.

Timely and effective execution of investments and implementation of reforms would be essential to sustain 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 noted otherwise)

Output/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

Output 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 (Percent)

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

Revenue

41.3

41.6

41.8

41.6

Expenditure

42.7

47.8

50.6

46.5

Overall balance

-1.3

-6.1

-8.8

-4.9

Primary balance

-0.3

-5.1

-7.9

-4.0

Structural balance (Percent 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 private sector (Growth rate)

6.6

4.8

6.5

7.8

Lending rates

1.4

1.1

Balance of payments

(Percent 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

Saving and investment balance

(Percent 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 item

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 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:https://www.IMF.org/external/np/sec/misc/qualifiers.htm.

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