Statement at the Conclusion of an IMF Mission to Slovenia

Press Release No. 07/56
March 20, 2007

The following statement was issued on March 16 in Ljubljana by an International Monetary Fund mission:

"A staff team from the European Department of the International Monetary Fund (IMF) concluded the annual Article IV discussions in Slovenia on March 15, 2007. This consultation focused on ways to sustain Slovenia's good macroeconomic performance following euro adoption and to deal with longer-term challenges, especially in the financial sector, to strengthen competitiveness and growth.

"Slovenia has done well, but euro membership brings new challenges. The recent euro zone entry is a testimony of Slovenia's commitment to sound macroeconomic policies. Looking ahead, maintaining prudent fiscal and wage policies, and increasing economic flexibility and productivity will be key to ensuring that the economy can continue to grow without building up inflationary pressures. Over time, if wages grow faster than productivity, Slovenia can lose competitiveness and fall into a low-growth trap.

"To ensure non-inflationary growth in an economy at capacity limits the IMF mission recommended a tighter than budgeted fiscal stance for 2007-08 underpinned by reforms in rigid spending. This would also help flexibility of fiscal policy over time to deal with shocks, create room for capital spending and accommodate the welcome reduction of taxation. Rationalization measures need to be targeted on inefficient expenditure to ensure the quality of public services in which implementation of performance budgeting will be important. Substantive reforms with the pension system sooner than later are also needed to ensure its sustainability over time given the rapid aging and generous pension benefits in Slovenia—otherwise there is a need to accumulate more savings to cover future pension spending.

"In the financial sector, reducing vulnerabilities during these good economic times and further developing capital markets are important to ensure sustained financial stability and long-term growth. The banking system remains sound and stable, but profitability is regionally low and interest rate margins are under pressure. In an environment of strong credit growth and increasingly integrated markets, closer monitoring of credit risks especially to the leveraged enterprises is important. To increase efficiency in the sector and enhance transparency, privatization should proceed in line with government plans and large financial institutions should be listed on the stock exchange. Together with the development of private pension funds, and full implementation of EU directives this should also contribute to the development of capital markets facilitating access to finance and productivity."



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