Public Information Notice: IMF Concludes Article IV Consultation with the Republic of Slovenia

May 21, 2001

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On May 11, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Slovenia.1


Slovenia is among the most successful transition economies of central and eastern Europe. Broadly balanced budgets (although small deficits have emerged since 1997) and a conservative monetary policy in the context of monetary targeting and a managed float for the tolar have brought inflation down to the single digits since 1997, kept government debt to about 25 percent of GDP, and maintained a balanced current account until 1998. The economy is very open to trade and increasingly integrated with western Europe (exports amount to almost 60 percent of GDP, and more than two-thirds are directed to the EU). Growth has averaged around 4 percent in the 1990s, largely driven by exports.

The economy enjoyed fast and stable growth in 2000 thanks to a favorable competitiveness position and strong investment. Real GDP growth reached 4.8 percent in 2000, and unemployment fell to 7 percent-a record low. Continued real wage moderation in the private sector and the depreciation of the tolar during the year led to a historically strong competitiveness position. Export volumes grew by over 10 percent and, despite deteriorating terms of trade, the current account deficit declined to 3.3 percent of GDP in 2000. The current account deficit was mainly financed by medium- and long-term borrowing abroad, and reserve coverage in terms of imports and short-term debt remained broadly unchanged. However, inflation accelerated and remains high, partly as a result of successive exogenous price shocks and partly reflecting accommodating policies in the first part of 2000. Twelve-month inflation jumped from 4.3 percent in June 1999 to an average of 8.9 percent in 2000, and the 12-month inflation rate in April 2001 was still 9 percent.

Macroeconomic policies were adjusted during the second half of 2000 to contain fiscal slippages and rising inflation. Spending increased in the first half of the year due to higher-than-expected indexation payments for wages, pensions, and social transfers, and closer to the elections due to increases in some public sector wages, while revenues were lower-than-budgeted owing to a shift in the composition of demand toward exports. The new government froze most expenditures in the last quarter of 2000 and contained the general government deficit (excluding privatization receipts) for the year as a whole to 1.3 percent of GDP, compared to the budgeted 1 percent. Monetary conditions were lax during the first half of the year and were tightened in the second half, as the Bank of Slovenia gradually shifted its priority towards the pursuit of disinflation. Although broad money growth ended the year within the target range of 12-18 percent, the easy conditions prevailing during the first part of 2000 allowed price shocks to turn into inflation, while the frequent changes in monetary policy sent conflicting signals to the market and probably contributed to an increase in currency substitution.

Progress in structural reforms was relatively limited in 2000 due to the pre-election period and the state continues to have a significant presence in the economy. Steps were taken toward the resolution of the outstanding legal issues concerning the ownership of insurance companies; an energy regulatory agency was created; and a new law on railway traffic was passed, but there was little progress in the macroeconomically more relevant areas of bank privatization, labor market deregulation, or tax reform, and the indexation of financial contracts is still widespread.

Economic prospects for 2001 are good, and policies have been tightened in an effort to reduce inflation. Growth is projected to decelerate only marginally vis-à-vis 2000, as the competitiveness position continues to be strong. The 2001 budget aims at a reduction in the general government cash deficit to 1 percent of GDP. The Bank of Slovenia lowered its M3 target growth range for end-2001 and raised interest rates in April. The external current account deficit is expected to be reduced to about 2.7 percent of GDP.

Executive Board Assessment

Executive Directors noted that the Republic of Slovenia is among the most successful transition economies in Central and Eastern Europe. It has already achieved significant economic convergence with the European Union, and has built up an impressive record of sustained, broad-based growth, reflecting strong competitiveness and investment. However, Directors considered that an acceleration in the pace of remaining structural reforms would be appropriate.

Directors regarded the near-term economic outlook as favorable, even if external demand slackens. However, they noted the worrisome persistence of inflation. Directors recognized that this partly reflected the one-time impact of introducing a VAT as well as higher world oil prices last year, but they also considered that backward-looking wage indexation and accommodating financial policies had been important contributory factors.

Directors stressed that a rapid reduction in inflation should be a central aim of economic policy. Lower inflation would provide a favorable environment for the envisaged de-indexation of the economy; it would underpin the prospective continuing moderation in real wages; it would help safeguard competitiveness; and it would secure a convergence of inflation rates with EU countries. Against this background, Directors welcomed the tightening of policies in late 2000, as well as the moderately contractionary fiscal policy envisaged in the budget for 200l. Directors stressed, however, that monetary policy should be the main tool for lowering inflation, and should be guided principally by that objective. Directors considered that, in setting monetary policy, the authorities should give less emphasis than hitherto to preserving external competitiveness, which should preferably be achieved through appropriate structural and incomes policies. Directors welcomed the recent increase in interest rates, and urged the authorities to take further action if domestic liquidity remains excessive or the rate of exchange rate depreciation jeopardizes the goal of disinflation.

Directors regarded the envisaged de-indexation of the economy as another critical part of the authorities' strategy to lower inflation and dampen price shocks. They welcomed the agreement in principle between the government and the social partners to move to forward-looking wage indexation and to link wages and productivity in the private sector as of 2002, as well as the ongoing efforts by the Ministry of Finance and the Bank of Slovenia to promote de-indexed financial instruments.

Directors supported the authorities' medium-term objectives of competitiveness, sustainable growth, and social peace. They saw these objectives as within reach, provided that structural reform is boldly pursued, notably with regard to deregulation, privatization, corporate governance, and accelerating private sector development. Directors noted that, until now, the pace of structural reforms had deliberately been gradual. However, they considered that the outstanding reform agenda should now be addressed decisively in order to boost the economy's potential growth rate, increase its resilience to external shocks, increase its attractiveness to foreign investors, and prepare it for EU membership.

Directors endorsed the authorities' quantitative medium-term fiscal goal of moving to budget balance as well as the preparation of the two-year budget for 2002/03, which they saw as critical to their overall medium-term strategy. They welcomed the emphasis on containing expenditure, noting that, without restraining measures, several factors would combine to cause excessive expenditure growth. These factors include: unsustainable growth in public sector wages; the large share of entitlements; and the net costs of EU harmonization. Directors underlined the need to reform public administration, including wage-setting arrangements, and to restructure entitlement programs. Regarding the revenue side of the budget, Directors called for a reform of direct taxes that should expand the tax base, lower the tax burden, and eliminate distortions. They welcomed the government's intention to include all forms of income in the income tax base.

Directors observed that a fiscal policy emphasizing expenditure restraint would complement and facilitate a reduction in the economic role of the state. They considered such a reduction appropriate in the interests of efficiency and promoting an entrepreneurial private sector, and in view of Slovenia's prospective accession to the EU. They noted that the state's economic role remains disproportionately large compared to other advanced transition economies. Directors welcomed the authorities' intention to begin privatizing state-owned enterprises and utilities and to discontinue the operations of the Slovene Development Corporation. Directors urged the authorities to proceed decisively in making the labor market more flexible and to liberalize employment protection legislation, which continues to be very restrictive.

Directors welcomed the findings of the Financial Sector Assessment Program, noting the resilience of the Slovene financial system to a range of likely macroeconomic shocks. However, in light of the liberalization of the capital account, they encouraged the authorities to enhance competition and provide incentives for consolidation and greater efficiency in the financial sector and strengthen further its supervision. The privatization of the two state-owned banks is a key step in this direction, and the authorities' intention to proceed rapidly in this area is welcome. Equalizing the tax treatment of all financial savings instruments and de-indexing financial assets would also provide strong incentives for efficiency gains and help capital market development. Directors commended the comprehensive Action Plan prepared by the authorities to strengthen prudential standards, improve liquidity management, and deepen the money market. In this context, Directors welcomed the recent introduction of consolidated supervision.

Slovenia: Selected Economic Indicators

    1995 1996 1997 1998 1999 2000 1/   2001  
              Est.   Staff

Real economy                  
  Real GDP (percentage change) 4.1 3.5 4.6 3.8 5.2 4.8   4.5  
  Unemployment rate (in percent)                  
  Labor force survey (ILO definition) 7.4 7.3 7.4 7.9 7.6 7.0   6.7  
  Registered unemployed 2/ 14.0 13.9 14.4 14.5 13.6 12.2      
  Consumer prices (percentage change, end of period) 9.0 9.0 8.8 6.5 8.0 8.5   7.0  
  Real wages (percentage change, period average) 4.4 4.9 3.2 1.6 3.3 1.7   7.0 3/
  Gross national saving (in percent of GDP) 20.8 22.7 23.4 23.9 23.2 25.0   25.4  
  Gross domestic investment (in percent of GDP) 21.4 22.5 23.4 24.6 27.2 28.3   28.1  
Public finance (percent of GDP)                  
  General government balance 4/ 0.1 0.2 -1.2 -0.5 -0.7 -1.2   -0.7  
  of which: privatization receipts 0.3 0.4 0.5 0.4 0.2 0.0   0.3  
  General government debt 18.7 22.9 23.3 23.8 24.7 25.0   24.6  
Money and credit (end of period, percent change)                  
  M3 32.3 19.4 23.8 20.9 15.1 16.0   ...  
  Real credit to the private sector 25.4 9.9 4.5 18.8 13.8 8.0   ...  
Interest rates (percent)                  
  Nominal interbank interest rate (overnight) 12.0 13.8 9.6 7.4 6.8 6.8   ...  
  Nominal lending rates 24-25 17-18 16-17 12-13 12-14 15-17   ...  
  Nominal deposit rates 15-18 8-10 7-10 4-7 6-9 8-12   ...  
Balance of payments                  
  Trade balance (percent of GDP) -5.1 -4.4 -4.3 -4.0 -6.2 -6.0   -2.9  
  Current account balance (percent of GDP) -0.5 0.2 0.1 -0.8 -3.9 -3.3   -2.7  
  Gross Official reserves (US$ billion) 5/ 1,802 2,279 3,297 3,573 3,059 2,859   ...  
  Reserve cover (months of imports of GNFS) 2.0 2.6 3.7 3.8 3.2 3.0   ...  
Exchange rates                  
  Exchange rate regime           Managed float  
  Tolars per U.S. dollar (end-period) 126 141.5 169.2 161.2 196.8 227.4   ...  
  Nominal effective exchange rate (1995=100) 100.0 90.2 85.4 83.2 78.0 71.5   ...  
  Real effective exchange rate (1995=100) 6/ 100.0 97.1 97.8 100.8 100.0 97.6   ...  

Sources: Slovene authorities; and Fund staff calculations and projections.

1/ IMF staff projections or latest actual.
2/ Statistical Office definition. The fall in unemployment in 1999 results from the reclassification of persons taking part in public work
schemes as employed, rather than unemployed as was the case until January 1999.
3/ February 2001.
4/ Official statistics: include privatization revenues in net lending.
5/ Excludes gold, SDRs, and IMF position.
6/ Based on the consumer price index.

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. 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. This PIN summarizes the views of the Executive Board as expressed during the May 11, 2001 Executive Board discussion based on the staff report.


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