IMF Executive Board Concludes 2011 Article IV Consultation with Slovak Republic

Public Information Notice (PIN) No. 11/68
May 31, 2011

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 25, 2011 the Executive Board of the IMF concluded the Article IV consultation with the Slovak Republic, and considered and endorsed the staff appraisal without a meeting.1


The Slovak economy has continued its robust recovery. The upturn has been stronger than in most of Slovakia’s neighbors reflecting strong fundamentals and a surge in the export-oriented manufacturing sector, which benefited from a revival in global demand. In tandem, the financial sector has regained strength, profits in the corporate sector are recovering, real estate prices have stabilized, and the fiscal position is improving.

The growth outlook for 2011 and beyond is favorable. While growth will still be driven mainly by the export sector, a gradual rebound in domestic demand would provide some boost and broadly offset the withdrawal of fiscal support. Overall, staff projects real GDP growth of about 3¾ percent in 2011 and of about 4¼ percent in 2012–15, among the strongest performances in the European Union, but still significantly below the pre-crisis rate of expansion.

The economic recovery has had little positive effect on employment. The unemployment rate, has climbed to over 14 percent, and is even higher among low-skilled workers and in less prosperous regions. With the turnaround in economic activity, employment started to recover in late 2010, but the gains, so far, have been small and insufficient to prevent an increase in long-term unemployment.

Inflation dropped to among the lowest in the euro zone in 2010, but accelerated in early 2011. Reflecting the global increase in the price of oil and other commodities, and in part because of indirect tax hikes at the beginning of 2011, CPI inflation jumped to 3.8 percent (year-on-year) in March. However, as core inflation remains well-anchored, the projected tightening of monetary conditions will help reduce CPI inflation to below 3 percent in 2012 and beyond.

The 2011 budget includes a significant fiscal consolidation package that is projected to reduce the general government deficit to about 5 percent of GDP. A structural drop in revenue and continued strong expenditure growth kept the fiscal deficit in 2010 at around 8 percent of GDP for a second year in a row. The high deficits contributed to a rapid increase in the general government debt to around 41 percent of GDP. Yet, this ratio is still relatively low, and market confidence has remained intact—reflected in a relatively low risk premium over corresponding euro zone benchmark bonds.

Financial conditions and the situation of the financial sector have improved. Credit growth is recovering gradually, and monetary conditions are supportive with a low interest rate. Banks have enhanced their balance sheet and improved capital and liquidity ratios. Their profits rebounded in 2010, reflecting cost cutting measures, higher interest rate spreads and lower provisions, notwithstanding a still high level of nonperforming loans.

Executive Board Assessment

In concluding the 2010 Article IV consultation with the Slovak Republic, Executive Directors endorsed the staff’s appraisal, as follows:

The Slovak economy is recovering from the sharp recession. The immediate priorities are to restore fiscal sustainability and address the high unemployment, while over the medium term maintaining external competitiveness within the monetary union should be a key objective.

The sharp deterioration in the fiscal position, which largely reflects structural weaknesses, is a concern. In this regard, the front-loaded fiscal adjustment of about 2½ percentage points of GDP in 2011, and the authorities’ strong commitment to bring the fiscal deficit down to below the Maastricht norm in 2013 are welcomed. The adjustment properly balances the dual objectives of ensuring fiscal sustainability and allowing the recovery to continue.

To spread the burden over time and enhance market confidence, the 2011 adjustment should be anchored within a clear medium-term fiscal consolidation strategy. This could be facilitated by adopting a real expenditure growth ceiling consistent with deficit targets and expenditure policy priorities, including reforming health care and pensions. In addition to containing expenditure, revenue measures, including raising indirect taxes and eliminating exemptions, will also be necessary.

The resilience of the banking sector in the face of the global crisis is encouraging. The supervisory authority’s proactive response to the crisis and the confirmation by stress test results of the ability of the sector to absorb a variety of severe shocks are welcomed. Continued close monitoring of banking sector developments, in particular lending to corporate and real estate sectors, will nevertheless remain essential. In light of the large share of foreign ownership in Slovak banks, enhancing cross-border supervisory coordination is essential.

The increase in long-term unemployment, particularly among low-skilled workers is regrettable. The authorities should remove structural impediments to employment, including by strengthening higher education and vocational programs and enhancing active labor market policies. The authorities’ initiative to improve the labor market prospects of low-skilled workers through a combination of reduced social security contributions and in-job benefits are welcome.

External competitiveness has been preserved in recent years with wages growing in line with productivity, and Slovakia’s market share in global exports continuing to expand. However, maintaining competitiveness in the monetary union will require sustained structural reforms. In addition to labor market and educational reforms, enhancing the business environment and strengthening public sector governance, with a special emphasis on public procurement and the absorption of EU funds are important.

Slovak Republic: Summary of Economic Indicators, 2006–12
(As percent of World GDP)
  2006 2007 2008 2009 2010 2011 2012
  (Annual percentage change, constant prices, unless noted otherwise)

Real GDP

8.5 10.5 5.8 -4.8 4.0 3.8 4.2

  Domestic demand

6.6 6.4 5.7 -7.9 2.7 1.8 3.6

    Public consumption

9.7 0.1 6.1 5.6 0.1 0.2 1.7

    Private consumption

5.9 6.8 6.2 0.3 -0.3 2.3 3.8

    Gross capital formation

6.1 9.7 4.7 -31.0 12.9 1.7 4.7

  Net exports (contributions to growth)

2.1 4.7 0.1 2.0 2.1 1.5 0.8

    Exports of goods and services

21.0 14.3 3.1 -15.9 16.4 8.5 6.6

    Imports of goods and services

17.8 9.2 3.1 -18.6 14.9 7.5 6.3



  Inflation (CPI)

4.3 1.9 3.9 0.9 0.7 3.4 2.7

  Inflation (CPI, end of period)

3.5 2.4 3.5 0.1 1.3 3.4 2.9

Employment and wages



3.8 2.4 3.2 -2.8 -2.1 1.9 1.6

  Nominal wages

6.7 6.4 7.6 2.4 5.4 4.0 6.5

  Unemployment rate (percent)

13.3 11.0 9.6 12.1 14.4 13.3 12.1
  (Percent of GDP)

Public Finance, General Government



33.4 32.5 32.9 33.6 33.1 33.1 32.7


36.6 34.3 35.0 41.5 40.9 37.9 36.3

  Overall balance

-3.2 -1.8 -2.1 -7.9 -7.8 -4.9 -3.7

  Primary balance

-1.7 -0.4 -0.8 -6.5 -6.4 -3.2 -1.9

  General government debt

30.5 29.6 27.8 35.4 41.7 44.4 45.4

Monetary and financial indicators


  Bank credit to private sector (growth rate) 1/

23.9 22.2 15.6 1.0 3.4    

  Lending rates 2/

9.2 9.3 8.1 6.9 6.8    

  Deposit rates 3/

0.9 0.8 0.7 0.3 0.2    

  Government 10-year bond yield

4.4 4.5 4.7 4.7 3.9    
  (Percent of GDP)

Balance of payments


  Trade balance (goods)

-4.7 -1.2 -1.1 1.9 0.8 0.6 0.5

  Current account balance

-7.8 -5.3 -6.6 -3.6 -3.4 -2.8 -2.7

  Gross external debt

51.0 54.5 56.3 71.9 72.1 70.4 67.8

Sources: National Authorities; and IMF staff calculations.

1/ Last data point 30 September 2010.

2/ Loans of up to one year, non-housing new loans to households.

3/ Average of interest rates on new overnight 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. An explanation of any qualifiers used in summing ups can be found here:


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