IMF Wraps 2025 Article IV Talks With Slovenia

Washington, DC: The Executive Board of the International Monetary Fund (IMF) completed the Article IV Consultation [1] with the Republic of Slovenia and considered and endorsed the staff appraisal without a meeting on a lapse of time basis. The authorities have consented to the publication of the Staff Report prepared for this consultation. [2]

Slovenia has shown resilience in face of multiple shocks. Improving fiscal balances in 2021-24 reversed a significant increase in public debt incurred during the pandemic and helped build fiscal buffers, while high scores on social indicators were preserved. Slovenia's banking system appears healthy. The authorities have also embarked on important pension, long-term care, and health sector reforms to address challenges from population aging.

Real GDP contracted in the first quarter of 2025, as investment and exports fell amid weak external demand. It has since bounced back, supported by a pickup in investment and private consumption, and growth is projected at 0.8 percent in 2025. Despite some signs of softening, the labor market remains tight as job vacancies are still above long-term averages. Inflation fell sharply in 2024 from multi-decade highs in 2022-23, but increased temporarily in 2025, driven largely by food prices.

The general government deficit widened significantly in 2025 on account of higher spending. The anticipated widening from 0.9 percent of GDP in 2024 to 2.2 percent of GDP in 2025 reflected primarily higher post-flood reconstruction and a significant increase in the public sector wage bill from a public wage reform and a new winter holiday allowance. Gross public debt is projected to have declined slightly to 66 percent of GDP in 2025.

Executive Board Assessment [3]

In concluding the 2025 Article IV Consultation with the Republic of Slovenia, Executive Directors endorsed staff's appraisal as follows:

The Slovenian economy has recovered strongly since a contraction in the first quarter of 2025. Both investment and private consumption expanded, supported by favorable financial conditions and rising real incomes. The external position in 2025 is assessed to be moderately stronger than the level implied by fundamentals and desirable policies, based on projected data.

Growth is projected to strengthen in 2026-27 before moderating to its potential over the medium term, alongside a gradual decline in inflation. Growth is expected to strengthen in the next years from improved investor confidence and increased export demand. It is projected to stabilize at just above 2 percent in the medium term, with investment and improved total factor productivity counterbalancing demographic headwinds. Inflation would gradually decline toward the 2 percent European Central Bank target as food and energy prices stabilize.

Risks to the outlook are tilted to the downside. Escalating trade measures and prolonged uncertainty could weaken export demand, undermine confidence, and lower investment. Higher import prices could slow disinflation and reduce real incomes. Domestically, delays in implementing public investment or structural reforms, or wage growth outpacing labor productivity, could erode competitiveness and slow income convergence. Faster progress in deepening the EU single market poses an upside risk.

The 2026 budget will support activity, although a smaller deficit would have helped preserve fiscal space. Its stance is moderately expansionary and will help bolster growth given the still negative output gap. In light of elevated uncertainty and medium-term pressures, a somewhat smaller deficit would have been preferable, implemented through measures to reduce current spending.

Slovenia is facing important spending pressures over the medium term. On top of growing costs for pension and healthcare as the population ages, there are spending needs for defense and the green and digital transitions. Incorporating the most acute pressures suggests that public debt would remain at about 66 percent of GDP. The overall risk of sovereign debt distress is still assessed as low, but an extended forecast horizon would see an increase in the debt ratio reflecting further spending pressures.

Fiscal consolidation is needed to reduce public debt and preserve the country's ability to respond to shocks. A gradual, growth-friendly fiscal consolidation would place the debt ratio firmly on a downward path. On the revenue side, broadening the bases of value added and personal income taxes, further improving revenue administration, and reforming the property tax could yield sizable revenue gains, while reducing the high labor wedge would make the tax system more conducive to growth. Efforts should also focus on reducing spending inefficiencies. A significant increase in the public wage bill following the public sector wage reform and the introduction of a winter holiday allowance warrants regular reviews to maintain the compensation system's effectiveness and sustainability. Defense spending above the baseline assumptions should be accommodated by reprioritizing other expenditures, while protecting growth-enhancing public investment and well-targeted social spending.

Fiscal reforms should continue. Implementing the 2025 pension reform is the linchpin to public pension sustainability. If demographic pressures were to intensify, further measures might be needed. Ongoing health and long-term care reforms should focus on diversifying revenue sources, improving efficiency, and promoting active aging, while addressing health sector labor shortages is critical to ensure quality services.

Slovenia's banking system remains resilient, although financial stability risks have increased slightly since the 2024 Article IV consultation. Banks are well capitalized, highly liquid, and profitable. However, credit risks have risen for some export-oriented manufacturers. Thus, close monitoring of asset quality, especially for exposed banks and portfolio segments, should continue. The macroprudential policy stance is appropriate. Letting the bank asset tax expire as planned at end-2028 will help preserve capital buffers.

Boosting Slovenia's long-term growth requires comprehensive structural reforms focused on enhancing investment and productivity. Tackling persistent skilled labor shortages requires better aligning education and training systems with market needs, expanding vocational and lifelong learning, and improving migrant integration and recognition of foreign qualifications. Enhancing the business environment, including by simplifying construction permits, could speed up project implementation and increase competition. At the same time, a stronger innovation ecosystem alongside expanding access to finance for young and innovative firms, including through venture capital, would support dynamic firm growth.

[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] Under the IMF's Articles of Agreement, publication of documents that pertain to member countries is voluntary and requires the member consent. The staff report will be shortly published on the https://www.imf.org/en/countries/svn page.

[3] The Executive Board takes decisions under the lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.