Public Information Notice: IMF Executive Board Concludes 2009 Article IV Consultation with the Slovak Republic

July 28, 2009

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. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2009 Article IV Consultation with the Slovak Republic is also available.

Public Information Notice (PIN) No. 09/90
July 28, 2009

On July 20, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation with the Slovak Republic.1


Following a period of rapid growth, economic activity tumbled in the first half of 2009 as a result of the global crisis. Strong economic fundamentals and a sound financial sector boosted economic growth in 2004–08, and shielded the economy from the global financial crisis until recently, while facilitating successful euro adoption at the beginning of 2009. However, the country is highly dependent on external economic developments, and the pronounced economic weakening in the euro area caused a sharp drop in output in the first quarter. The economy is projected to shrink by about 5 percent this year, and to return to growth on the order of 2 percent in 2010. Reflecting the broad economic downturn, the unemployment rate is projected to increase to more than 12 percent by end-2009, and remain high through 2010.

The fiscal position is weakening rapidly because of revenue underperformance. The shortfall in tax revenues and social security contributions deepened in the first half of the year, and is projected to reach about 2 percent of GDP for the year as a whole. Government spending, on the other hand, has been kept in line with budget plans. A package of stimulus measures was offset by reallocation and rationalization of spending elsewhere. Overall, the general government deficit is forecast to widen to about 5 percent of GDP, up from 2¼ percent in 2008.

Slovakia’s banks have so far withstood the global crisis relatively well. Reflecting the sector’s focus on traditional domestic banking activities, banks have avoided sub-prime, structured products, and foreign currency denominated lending. They are currently well capitalized, liquid, properly provisioned and rely mainly on domestic retail deposits. Nonetheless, strains from the crisis are manifest: profits in the first half of 2009 are down sharply compared with the same period last year, and the share of non-performing loans is on the rise. Looking ahead, pressures on banks are expected to intensify in the second half of the year as an increasing number of borrowers will face financial difficulties.

Banks and the supervisor, the National Bank of Slovakia (NBS), have been preparing for further strains. Banks have tightened lending requirements, limited dividend payouts, raised capital and increased provisions. The supervisor pro-actively introduced a series of measures, including steps to safeguard domestic liquidity, when the global crisis hit Europe in the fall of 2008, and has stepped up the scope and frequency of bank monitoring. Cross-border supervisory coordination also has been strengthened.

Executive Board Assessment

Executive Directors noted that Slovakia’s strong economic and policy fundamentals have contributed to rapid growth in recent years and successful euro adoption in the beginning of 2009. However, the global economic slump has led to a sharp contraction in the first quarter of the year and continues to deeply affect the Slovak economy. Directors agreed that the main challenge facing Slovak policymakers is to support domestic demand in the short run, while preserving and further strengthening the country’s strong economic foundations over the medium term.

Directors considered fiscal policy to be appropriately accommodating in 2009. Freely operating automatic stabilizers and a contained stimulus package, financed by spending reallocations, will help support economic activity without hurting confidence. Directors welcomed the authorities’ intention to accelerate the utilization of EU funds, and, in this context, underscored the importance of improving investment planning and implementation and absorption capacity. They also looked forward to the development of a proper legal, monitoring, and reporting framework to underpin the government’s plans for Public-Private Partnerships.

Directors encouraged the authorities to formulate and announce a credible medium-term fiscal consolidation strategy, aimed at bringing down the general government deficit to within the Maastricht norm in a timely manner. They called on the authorities to move ahead with already identified consolidation measures, and observed that sustainable deficit reduction would require additional expenditure savings as well as revenue enhancing measures, including some tax increases. To preserve long-term sustainable public finances, they further recommended consideration of binding expenditure rules and moving forward with pension reform.

Directors noted with satisfaction that Slovakia’s banks have withstood the global crisis relatively well. They commended the pro-active response by the supervisory authorities when the global crisis hit Europe, which has helped shore up confidence and stability. Continued vigilance will nevertheless be required, along with sustained efforts to strengthen risk monitoring and management. In particular, loan losses are expected to intensify as the impact of the recession deepens. Directors were encouraged by results from recent stress tests showing that it would take very severe shocks to push capital and liquidity positions into danger zones.

Directors emphasized that external competitiveness will require sustained structural reforms and wage discipline. While standard indicators of competitiveness do not raise immediate concerns, continued close attention is warranted. Directors welcomed recent tripartite wage agreements aimed at keeping real wage growth in line with productivity growth. Such wage moderation will help Slovakia remain competitive, in combination with productivity-enhancing reforms. In this regard, Directors recommended further steps to improve the business environment and to strengthen education and human capital formation.

Slovak Republic: Summary of Economic Indicators, 2006-2011

  2006 2007 2008 2009 2010 2011

Real GDP

8.5 10.4 6.4 -4.7 1.9 5.2

Domestic demand

6.1 5.8 6.6 -1.5 2.7 5.0

Public consumption

10.2 -1.3 4.3 4.1 2.7 2.2

Private consumption

5.9 7.1 6.1 0.2 3.0 5.5

Gross capital formation

4.1 8.1 9.1 -8.0 2.0 6.1

Net exports


Exports of goods and services

21.0 13.8 3.2 -16.0 -1.3 8.8

Imports of goods and services

17.7 8.9 3.3 -13.0 -0.3 8.6



Inflation (CPI)

4.5 2.8 4.6 2.3 2.9 3.1

Inflation (CPI, end of period)

3.7 3.2 4.4 3.9 3.8 3.1

Core inflation (end of period) 1/

1.5 2.1 2.0 2.0 2.0 2.0

Inflation (GDP deflator)

2.9 1.1 3.4 1.8 2.4 2.7

Employment and wages


Employment (ESA95)

2.3 2.1 2.8 -2.4 0.1 0.8

Nominal wages

8.0 7.2 8.1 2.7 4.8 7.0


6.1 8.1 3.5 -2.3 1.8 4.4

Real wages

3.3 4.3 3.4 0.4 1.8 3.8

Unit labor costs

1.8 -0.9 4.4 5.1 3.0 2.5

Unemployment rate (percent)

13.3 11.0 9.6 12.4 12.5 12.1
  (In percent of GDP)

Public Finance


General government balance

-3.5 -1.9 -2.5 -5.2 -4.5 -3.0

Primary balance

-2.1 -0.6 -1.3 -3.7 -3.2 -1.6

Primary expenditure

36.5 35.3 36.0 39.2 39.1 37.2

General government debt

30.4 29.4 27.6 33.7 36.7 37.0

Monetary and financial indicators


Credit to private sector

39.6 43.4 45.7      

Lending rates 2/

8.0 8.3 8.4      

Deposit rates 3/

2.2 2.4 2.5      

Government bond yield

4.2 4.6 4.7      
  (In percent of GDP)

Balance of payments


Trade balance

-4.6 -1.2 -0.7 -1.3 -1.0 -0.8

Current account balance

-7.0 -5.4 -6.5 -6.5 -5.9 -5.5

Gross external debt

54.7 52.0 50.3 50.3 49.8 48.9

Sources: National Authorities; and IMF staff calculations.

1/ Headline inflation minus the change in regulated prices.

2/ Average of interest rates on new loans to households and nonfinancial corporations.

3/ Average of interest rates on deposits from households and nonfinancial corporations.

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.


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