Press Release No. 24/158

IMF Executive Board Concludes 2024 Article IV Consultation with Slovenia

May 14, 2024

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with the Republic of Slovenia on Friday, May 3, 2024.

Slovenia’s economy recovered well from the pandemic, only to be hit by spillovers from the war in Ukraine, followed by severe flooding in 2023. After a strong recovery in 2021, growth slowed in 2022 because of adverse energy price spillovers from the war in Ukraine and supply chain disruptions. Severe floods in August 2023 posed new challenges, with direct damages estimated by the authorities at almost 5 percent of GDP, and the cost of upgrading infrastructure to be more climate resilient estimated to be much higher. Inflation has fallen from earlier highs as pressures from commodity prices abated, and as tighter monetary policy fed through to prices.

Growth is expected to recover and inflation to fall further this year, although uncertainty remains high and risks appear on the downside. Growth is expected to increase to about 2 percent in 2024, led by domestic demand, including because of higher flood-related investment, and higher consumption as real wages recover. Inflation is projected to decline to below 3 percent by end-year and to 2 percent in 2025. External risks include an intensification of regional conflicts, renewed commodity price volatility, and lower external demand. Supply chain disruptions pose additional risks but also may create opportunities for Slovenia in the event of nearshoring. Labor shortages and broader capacity constraints could affect post-flood reconstruction or undermine disinflation. Severe weather events also remain a risk.

Executive Board Assessment[2]

Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for Slovenia’s economic resilience and their timely and effective policy response to shocks, including the recent devastating floods. Directors looked forward to the envisaged recovery, while recognizing that the outlook is subject to uncertainty and downside risks. They underscored the need to maintain prudent fiscal and macroprudential policies and advance structural reforms to boost growth, accelerate income convergence with the EU, and strengthen climate resilience.

Directors agreed that stronger medium‑term fiscal consolidation and fiscal reforms are important to rebuild fiscal space and underpin debt sustainability, especially given the expected increase in age‑related spending. Noting the increase in core public spending and the high tax wedge, Directors called for expenditure‑driven consolidation, accompanied by pension, health, tax, and public sector wage reforms. Eliminating remaining pandemic and energy‑related measures would also support consolidation. Directors welcomed the authorities’ transparent handling of flood‑related spending and underscored the need for careful prioritization and phasing. They recognized the potential negative effects of the new bank asset tax and agreed that it should be allowed to lapse after the allotted 5‑year period. Noting the expected increase in public investment, Directors recommended enhancing the efficiency of capital spending by implementing recommendations from the recent Public Investment Management Assessment.

Directors agreed that the banking system appears sound, with strong profitability, capital, and liquidity, and with low non‑performing loans. High interest rates have, however, increased repayment and rollover risks, warranting continued close monitoring of bank assets. Directors concurred that the Bank of Slovenia’s macroprudential stance is appropriate and that the planned increase in the neutral countercyclical capital buffer will help to strengthen the banking system’s capacity to respond to adverse shocks. They also welcomed progress on strengthening the AML/CFT framework.

Directors called for structural reforms to boost productivity growth, supported by the EU‑backed National Recovery and Resilience Plan. They underscored the need to address skill mismatches, improve regulatory quality, and deepen capital markets.  Reducing the tax wedge on labor would help to support a higher labor supply. Directors welcomed the authorities’ emphasis on investment in the digital and green transitions. They also stressed the need to continue to adapt to climate change and for timely preparation of a national climate adaptation strategy.

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

1Under 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 summing up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm