Public Information Notices

Republic of Slovenia and the IMF

Free Email Notification

Receive emails when we post new items of interest to you.

Subscribe or Modify your profile




Public Information Notice (PIN) No. 05/97
28 July, 2005
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Executive Board Concludes 2005 Article IV Consultation with the Republic of Slovenia

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 2005 Article IV consultation with the Republic of Slovenia is also available.

On July 20, 2005, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Slovenia.1

Background

Real GDP growth accelerated to 4½ percent in 2004 driven by a large positive swing in the contribution of net foreign demand, while domestic demand growth maintained momentum. Private consumption strengthened, though to a lesser extent than expected owing to an apparent increase in the propensity to save. Investment growth slowed, owing to a smaller contribution from inventory accumulation. Exports rose markedly in response to stronger import demand in the main trading partners. However, because of a deterioration in the terms of trade on account of higher oil and commodity prices, the external current account deficit widened to almost 1 percent of GDP. Competitiveness remained adequate. However, owing to increased external financing by banks to fund their lending activities, total external debt rose sharply.

Progress with disinflation continued, notwithstanding higher oil prices, a pickup in producer prices, and a narrowing of the output gap. Year-on-year inflation declined from 4.6 percent in December 2003 to 3.2 percent in December 2004 and fell further to 2.1 percent in May 2005. An improved harvest, the elimination of remaining duties on imports from the European Union, and increased competition in the retail market resulted in lower food prices and moderate increases in the prices of non-food items. Disinflation was additionally reinforced by the widening of the gap between real wage increases and productivity growth and by the stabilization of the exchange rate after ERM2 entry on June 28, 2004.

The monetary framework changed following ERM2 entry and monetary conditions became tighter. However, with further convergence of tolar lending interest rates and increased competition in the banking sector, bank credit accelerated. The pickup in credit growth was particularly strong for individuals. Upon ERM2 entry, the Bank of Slovenia ended its depreciation policy and set the central parity to at SIT 239.64 per euro, close to the then-prevailing market rate. Since then, the market rate has not deviated from the central parity by more than ±0.20 percent, and the Bank of Slovenia has kept its key policy interest rate (on 60-day bills) unchanged at 4 percent.

The general government deficit in 2004, at 1.4 percent of GDP, was lower than envisaged in the budget, but the expenditure structure became more rigid. Faced with uncertainties about VAT receipts, the authorities cut spending on goods and services in the fourth quarter. Capital expenditure from domestic resources was also lower than budgeted. However, the wage bill exceeded the budgeted level.

Economic growth is expected to moderate to 4 percent in 2005, but would still be above estimates of potential. Domestic demand is expected to ease, owing to a further slowdown of inventory accumulation. In addition, factors that led to higher household saving in 2004 are likely to persist. The stimulus to growth from net foreign demand would be small in the foreseeable future. Export growth would ease in line with projected import demand in Slovenia's main trading partners, and the rising trend in import content of domestic demand is likely to continue. With higher oil prices contributing to a further deterioration in the terms of trade, the external current account is projected to widen to 1½ percent of GDP in 2005. The authorities expect average inflation of about 2½ percent in 2005. The revised 2005 budget envisages a broadly neutral fiscal stance.

Following EU accession and ERM2 entry in 2004, the authorities are concentrating on securing a smooth transition to euro adoption in early 2007.

Executive Board Assessment

Executive Directors congratulated the authorities for Slovenia's entry into the European Union and ERM2 in 2004 and subsequent strong economic performance. Directors considered that, taking into account the degree of real convergence with other EU economies, its competitiveness, and the fact that it already meets the Maastricht criteria for long-term interest rates, the fiscal deficit, and public debt ratios, Slovenia is well positioned to adopt the euro in early 2007. However, risks remain: although disinflation has continued, meeting the Maastricht inflation criterion during the assessment period (June 2005-June 2006) will be challenging, as will sustaining low inflation after euro adoption. The authorities will also need to address the budgetary implications of an aging population in order to meet the medium-term balanced budget objective.

Directors agreed that, given the intended policy stance, inflation in 2005-06 is likely to be modest, but they cautioned that higher oil prices, continued faster-than-potential economic growth, and larger-than-expected producer price increases could create upside inflation risks. They welcomed the authorities' readiness to take corrective measures—including monetary tightening—if signs emerged that inflation would exceed the target or that the Maastricht inflation criterion would be jeopardized. They emphasized, however, that the scope for monetary tightening to have its intended effect on inflation within the assessment period would become smaller as the end of the period approached. Directors supported the Bank of Slovenia's intention to keep policy interest rates unchanged, unless forced otherwise by market conditions.

Directors commended the authorities for their track record of prudent fiscal policy. They stressed the importance of maintaining a fiscal stance consistent with the aim of lowering inflation, as envisaged in the revised 2005 budget, which will also contribute to putting the public finances on the path to meet the official medium-term goal of structural balance. At the same time, the need to safeguard investment expenditure to support future economic growth was recognized. Directors noted that further fiscal consolidation would create room for higher spending within the Stability and Growth Pact (SGP) deficit threshold in case of adverse cyclical conditions.

Directors called on the authorities to strengthen their efforts to increase budgetary flexibility, noting the relatively large proportion of nondiscretionary spending in the overall budget. These expenditures should be contained, including through the reform of social entitlements and health care; restrictions on non-selective promotions; and a slower increase in public sector employment. Changes in pension indexation that result in higher pension payments should be avoided. In that light, Directors encouraged the authorities to consider linking pensions to inflation—rather than to wage growth, as is currently being considered—and addressing the issue of pension indexation in the framework of a comprehensive reform to ensure the long-term soundness of the pension system. They cautioned against further lowering payroll taxes, unless mechanisms are in place to ensure that the resources thus released are not used for wage increases.

Directors welcomed the indications that productivity growth was continuing to outpace the growth of real wages, and noted that wage restraint and greater wage flexibility will be crucial for adjusting to asymmetric shocks in the euro area. Directors urged the authorities and social partners to eliminate wage indexation in the Social Agreement for 2006, and to adopt a wage setting system that allows greater productivity-based differentiation of wages. Directors recommended that a wage pact at the national and enterprise levels be considered if achievement of the Maastricht inflation criterion was threatened.

Directors noted that Slovenia's banking system remains sound, with the banks adequately capitalized and profitable and their asset quality high. At the same time, due to stiff competition and interest rate convergence, banks are vulnerable to further margin compression in the transition to euro adoption. In addition, the high share of assets held by banks with fixed interest rates and longer maturities may raise their interest rate risks, and increased corporate borrowing in euro may raise their credit risks. Directors therefore welcomed the Bank of Slovenia's intention to maintain tight oversight of financial institutions and to monitor closely banks' exposure to credit and interest rate risks. They encouraged the authorities to enhance the supervision of insurance companies and to ensure that these companies have the capacity to set pricing, provisioning and capital at appropriate levels.

Directors observed that the growth of the economy over the past decade could be attributed in large part to the authorities' sustained structural reform efforts, but that much remained to be done in this area. Labor market flexibility needs to be improved, including by reducing employment protections, and the problem of the long-term unemployed addressed. Directors welcomed the consideration being given to further privatization, and the increased competition in the electricity and gas markets, and urged that this be extended to other sectors, such as telecommunications. Directors encouraged the authorities to simplify administrative procedures and regulation and further strengthen the business environment, which would help to attract higher levels of foreign direct investment and make the economy even more dynamic in coming years.

Slovenia: Selected Economic Indicators, 2000-06


 

Projections

 

2000

2001

2002

2003

2004

2005

2006


 

(Annual percentage change)

Real GDP

3.9

2.7

3.3

2.5

4.6

3.9

4.0

Domestic demand

1.5

0.9

2.3

4.7

4.7

3.8

3.8

Private consumption

0.3

2.3

0.3

2.7

3.5

3.5

3.5

Public consumption

2.3

3.9

1.7

2.6

1.7

3.1

2.5

Gross capital formation

3.3

-4.3

7.4

10.5

9.1

4.9

5.3

               

Output gap (in percent of potential GDP)

1.0

-0.2

-0.6

-1.7

-0.8

-0.6

-0.1

Industrial production

6.2

2.9

2.4

1.4

4.8

...

...

               

Consumer prices

             

Period average

8.9

8.4

7.5

5.6

3.6

2.6

2.5

End of period

8.9

7.0

7.2

4.6

3.2

2.4

2.6

               

Wages

             

Nominal

             

All sectors

10.6

11.9

9.8

7.5

5.7

4.7 1/

5.0 1/

Manufacturing

11.9

10.8

10.4

7.7

7.0

...

...

Public services

11.2

13.9

8.7

6.4

3.3

...

...

Real

             

All sectors

1.6

3.2

2.1

1.9

2.1

2.1 1/

2.6 1/

Manufacturing

2.8

2.2

2.7

2.0

3.3

...

...

Public services

2.1

5.1

1.1

0.8

-0.3

...

...

               

Employment

             

Person basis

1.3

1.4

0.6

-0.8

0.5

...

...

National Accounts basis

1.1

0.5

-0.4

-0.3

0.1

0.4 1/

0.5 1/

Average unemployment rate (in percent, ILO definition)

7.0

6.4

6.3

6.7

6.4

6.2 1/

6.0 1/

               

General government finances 2/

(In percent of GDP)

               

Revenue

40.6

41.3

39.2 3/

41.3

41.7

42.5

...

Expenditure

41.9

42.6

42.1

42.7

43.5

43.8

...

General government balance

-1.3

-1.3

-3.0 3/

-1.4

-1.4

-1.3

...

Structural general government budget balance

-1.7

-1.3

-1.3

-0.7

-1.0

-1.1

...

State budget balance

-0.9

-1.0

-2.6 3/

-1.2

-1.3

-1.4

...

General government debt

27.4

28.1

29.5

29.4

29.5

30.1

...

               

Money and credit

(Percentage change, end-period)

Broad money

15.3

28.3

18.4

5.0

6.8

...

...

Base money

1.9

37.7

-4.3

4.1

2.2

...

...

Credit to the private sector 4/

18.1

18.5

10.5

15.5

20.2

...

...

Interest rates (in percent)

             

BoS Lombard rate

11.0

12.0

10.5

7.3

5.0

...

...

Rate on 60-day BoS bills

10.0

8.0

8.3

6.0

4.0

...

...

Lending rates

14.6-18.4

15.8-12.3

11.6-14.7

9.0-10.3

7.9-8.5

...

...

Deposit rates 5/

10.9-13.2

8.5-11.0

7.6-8.6

4.8-5.7

3.2-4.0

...

...

               

Balance of payments

(In millions of euros, unless noted otherwise)

Merchandise exports

9,574

10,454

11,082

11,414

12,736

13,977

15,465

Exports volume (percent change, volume)

12.9

7.0

6.5

4.4

13.2

8.6

9.0

Merchandise imports

-10,801

-11,139

-11,351

-11,960

-13,576

-15,041

-16,392

Imports volume (percent change, volume)

7.7

3.2

4.4

7.3

13.2

8.3

8.4

Terms of trade (percent change)

-3.3

2.1

2.0

0.5

-1.7

-1.3

1.0

Current account balance

-583

38

335

-91

-238

-427

-246

(in percent of GDP)

-2.8

0.2

1.4

-0.4

-0.9

-1.6

-0.8

Gross official reserves

3,436

4,984

6,781

6,879

6,542

5,937

6,130

(in months of imports of goods and nonfactor services)

3.3

4.7

6.2

5.9

5.0

4.1

3.9

               

External debt (percent of GDP, end-period)

46.4

47.4

48.9

54.1

59.4

62.1

64.8

Of which: Public and publicly guaranteed

15.3

15.4

14.5

14.5

14.1

...

...

External debt service

1,119

1,849

1,937

2,144

2,424

3,066

3,026

(in percent of exports of goods and nonfactor services)

9.5

14.9

13.1

15.4

15.6

17.9

16.0

               

Exchange rate

             

Tolars per U.S. dollar (end-period)

227.4

251.0

221.1

189.4

176.2

...

...

Tolars per euro (end-period)

211.5

221.4

230.3

236.7

239.7

...

...

Nominal effective exchange rate (1998Q1=100, period average)

90.6

85.0

81.8

80.6

79.1

...

...

Real effective exchange rate

             

(CPI based, 1998Q1=100, period average)

102.3

101.4

103.1

105.4

105.1

...

...

(ULC based, 1998Q1=100, period average)

97.3

97.0

96.9

96.8

95.9

...

...


Sources: Data provided by the Slovene authorities; and Fund staff calculations and projections.
1/ Projections by the Institute for Macroeconomic Analysis and Development (IMAD).
2/ Revised budget for 2005. Figures include higher transfers from EU and EU-related expenditures.
3/ Figures reflect a shift in the budget accounting to a pure cash basis entailing only 11 months of VAT and excise tax revenues. Adjusted for the change, the general government deficit would be 1.5 percent of GDP.
4/ Including loans and other claims.
5/ For deposits with maturity between 31 days and 1 year.

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.



IMF EXTERNAL RELATIONS DEPARTMENT

Public Affairs    Media Relations
E-mail: publicaffairs@imf.org E-mail: media@imf.org
Fax: 202-623-6278 Phone: 202-623-7100