## cr18241

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### Low Female Labor Force Participation and Employment in Slovak Republic: The Role of Childcare and Parental Leave Policies
- Context and challenges
  - Real per capita GDP expanded by about 3 percent annually during the last five years.
  - Output gap is slightly positive.
  - Acute labor shortages and rising household indebtedness are material constraints to growth.
  - Post-crisis employment and total factor productivity growth rates have been less than half of their pre-crisis levels.
  - Slovakia is projected to experience one of the fastest declines in working age population in the EU in coming decades.
  - Education outcomes show notable gaps relative to EU peers (PISA scores lower than EU average).
- Labor market findings relevant to female participation
  - Gender participation gap persistently higher than EU peers, driven mostly by lack of affordable early childcare and long parental leave hardly taken up by fathers.
  - Around 75 percent of women aged between 25 and 49 years report family care responsibilities as the main reason for not participating in the labor market.
  - Unemployment rate declined from about 14 percent during 2010–14 to below 8 percent at end-2017.
  - Regional unemployment ranged from 4.2 percent in Bratislava to 12 percent in Eastern Slovakia.
  - Employment rate by age of youngest child: substantially lower female employment for mothers with children below 6 years old compared to fathers.
- Drivers of low female participation
  - Lack of affordable early childcare facilities, especially for children aged below three.
  - Long parental leave rarely taken by fathers, reinforcing gendered division of paid and unpaid work.
  - Insufficient flexible employment options for mothers.
  - Spatial mismatches and low labor mobility (insufficient transport infrastructure and underdeveloped rental housing markets).
  - Education and skills gaps; ALMPs focused on employability rather than job creation.
- Policy recommendations / reform menu
  - Expand formal childcare services, especially for children aged below three; authorities’ plan to expand formal childcare services described as appropriate.
  - Reform parental leave benefits to encourage gender parity:
    - Allow parents to alternate between periods of leave and work.
    - Support flexible employment for mothers.
  - Increase participation and employment of disadvantaged groups:
    - Expand pre-primary education, better integrate into standard schools, support teacher training in special needs education.
  - Strengthen framework for issuing work permits to foreigners in the short run:
    - Amendment to the Employment Services Act simplified conditions for hiring non-EU nationals for occupations experiencing labor shortages with company-level and regional restrictions.
    - Further clarify treatment of skilled versus mid- or low-skilled foreign workers and streamline administrative requirements.
  - Focus ALMP spending on building skills and employability: shift from primarily job-creation to training, job counseling, and measures to enhance labor mobility targeted at long-term unemployed and disadvantaged groups.
  - Improve education quality: raise teacher remuneration, improve teacher training, optimize regional school network, strengthen links between vocational education and employers, increase work-based learning, provide career guidance, and design forward-looking higher education strategy.
- Implementation and financing
  - Most reforms are complementary and can mostly be financed by increasing efficiency of current social spending and more efficient and extensive use of EU funds.
  - Authorities: construction of 90 additional childcare facilities with capacity of 1,800 children.

### Institutional Quality and Productivity
- Perceived weaknesses and drivers
  - Slovakia fares unfavorably in governance indicators relative to EU peers.
  - Perceived weak judiciary due to low prosecution rates of cases against public officials and lengthy court procedures.
  - Other inefficiencies: frequent change in laws, limited coordination between ministries, anti-competitive practices in public procurement, political influence in hiring and functioning of regulatory bodies.
  - Significant compliance gaps in core taxes contribute to low public confidence in tax administration integrity.
- Estimated productivity gains from reforms (staff analysis; estimates subject to large uncertainties)
  - Lowering by half the gap between Slovakia and the EU-15 best performer in perception of corruption could yield significant productivity gains in the long run.
- Policy recommendations to lift productivity
  - Effective implementation of Civil Service Act and Anti-Offshore Law.
  - Increase competition and transparency in public procurement.
  - Strengthen judicial independence and improve tax compliance.

### Fiscal Policy: Increasing Efficiency to Invest in Priority Areas — Baseline and Risks
- Staff baseline projections and fiscal anchors
  - Slovakia on track to reach its MTO, a structural balance of -0.5 percent of potential GDP, by 2020 and a balanced budget by 2020.
  - Gross public debt will drop below the lower range of the debt ceiling path set by the Fiscal Responsibility Act (FRA).
  - Baseline projections assume no additional revenue efficiency gains and incorporate authorities’ planned infrastructure and education investments and projected savings from pension and health sector reforms.
- Expected medium-term outcomes
  - Declining and low fiscal deficit.
  - Single-digit gross financing needs.
  - Stable access to financing, creating sizable fiscal space under the FRA.
- Near-term downside risks
  - Strong wage pressures in the private sector could spill over into the public sector.
  - Authorities are not contemplating introducing any escape clause to the FRA.
- Recent efforts to improve revenue and expenditure efficiency
  - Three-phase action plan to fight tax evasion significantly improved VAT compliance.
  - New tax administration reform plan for 2018–20 aims to simplify taxpayer interactions, expand e-services, increase analytics to target non-compliance.
  - Multi-year thematic spending review program (Value for Money Program) entering its third wave in 2018; completed review of most major ministries and expected to cover public wage bill in 2018.
  - Progress limited in prioritizing action plans and realizing operational savings except in health sector.
- Key estimated yields from proposed measures (Cumulative, 2018–2023)
  - Higher EU funds absorption in education and transport: 3.6 percent of 2023 GDP; 3.0 Billions of euros.
  - Education: 2.9 percent of 2023 GDP; 2.5 Billions of euros.
  - Healthcare: 0.6 percent of 2023 GDP; 0.5 Billions of euros.
  - Environment: 0.1 percent of 2023 GDP; 0.1 Billions of euros.
  - Increasing public investment efficiency: 0.4 percent of 2023 GDP; 0.3 Billions of euros.
  - Reducing the VAT gap: 1.7 percent of 2023 GDP; 1.4 Billions of euros.
  - Raising property and environmental taxes to EU average: 1.3 percent of 2023 GDP; 1.1 Billions of euros.
- Revenue efficiency recommendations
  - Strengthen and broaden audits to include all core tax areas and upskill audit staff.
  - Identification and assessment of risks of non-compliance by taxpayers.
  - More effective dispute resolution mechanisms and improved communication with taxpayers.
- Public expenditure efficiency and EU funds absorption
  - Overall efficiency gap of around 23 percent compared to EU-15 average gap of 13 percent in public infrastructure investment.
  - Full absorption of EU funds programmed for education and infrastructure would make available nearly €3 billion in additional funding from the 2014–20 programming period.
  - Full utilization requires improvements in staff expertise, simplification of national rules, better transparency and competition in procurement, and strategic project selection.
- Use of efficiency gains and infrastructure needs
  - Resources freed could be used for priority spending in education, infrastructure, and labor market policies.
  - Slovakia shows significant gaps in motorway infrastructure relative to population and area; needs for improving lower-class roads, railway modernization, and maintenance.
- Property and environmental taxes
  - Bringing property and environmental tax revenue in line with EU average would create up to 1.3 percent of GDP per year in additional revenues.
  - Meaningful increase in property taxes by linking taxable amount to market value would support efforts to slow residential mortgage growth.
- Authorities’ fiscal commitments
  - Authorities committed to achieving a balanced budget in 2020.
  - For 2018, they project a deficit of 0.8 percent of GDP.
  - With public debt projected to fall below lowest FRA threshold, authorities studying options for an expenditure ceiling; planning a Public Investment Management Assessment next year.

### Financial Sector: Household Indebtedness, Banking Soundness, and Macroprudential Policy
- Household indebtedness and housing market
  - Overall household loan stock at 40 percent of GDP in end-2017.
  - One third of new loans to households has a loan-to-value ratio of 80 percent.
  - Average house prices increased but remain significantly below pre-crisis levels; apartment prices in certain areas have experienced faster increases.
- Banking sector soundness
  - Profitability remains high supported by low operating costs.
  - Banks’ capital adequacy strengthened in 2017 due to higher retained earnings.
  - Loans are fully funded by domestic deposits.
  - Non-performing loans are low and adequately provisioned.
  - Banks expanded loan books to compensate for low interest rates, increasing sensitivity to adverse shocks.
- Macroprudential measures and impact
  - Borrower-based measures moved from recommendations to binding restrictions covering mortgage and consumer lending and both bank and non-bank lending.
  - Countercyclical capital buffer (CCB) raised to 0.5 percent in August 2017 and will be raised to 1.25 percent as of August 1, 2018.
  - Complementary measures: maturity limits, interest rate sensitivity tests, mandatory amortization schedule for annuities.
  - Measures appear to be slowing household credit growth and reducing share of loans with high LTV ratios.
- Overview of key measure revisions (textual summary)
  - LTV limit: Share of 90+ limited to 10% (phase-in) → Additional limit for 80+ limited to 40% (phase-in) → 80% of Share of 80+ limited to 20% (phase-in).
  - DSTI limit: 100% → 80% (phase-in).
  - Interest Rate Sensitivity Test: Applies to new loans only → Applies to all customer’s loans with variable interest rates.
  - Maturity Limit: Pre-secured loans: 30Y (except 10%); Unsecured loans: 8Y (phase-in applied).
  - Amortization Rule: Mandatory amortization with annuity.
  - DTI: 8 (phase-in applies) introduced in latest revision.
- Complementary tax and macroprudential suggestions
  - Consider reducing tax subsidies for owner-occupied housing:
    - Staff analysis: tax on owner-occupied housing in Slovakia is just 58 percent of the tax-neutral benchmark.
    - Average subsidy on untaxed capital gains could be reduced from current level of 18 percent to bring it in line with EU average of 13 percent.
    - Direct subsidies for home ownership exist for individuals under the age of 35.
- Authorities’ views
  - Authorities view macroprudential policies taken so far as adequate and stand ready to further tighten if warranted.
  - NBS view: DSTI calibration at least as strict as in other countries for median-income households; DTI limit would curb excessive borrowing by highly-indebted high-income households.
  - Authorities estimate second round of macroprudential measures approved end-May likely to slow credit growth by 0.5 to 1.4 percentage points.
  - Financial sector conditions remain fluid; further measures including another increase in CCB are not ruled out.
  - National authorities do not view housing subsidies as significantly contributing to excess demand.

### Banking Regulation, IFRS 9, and MREL
- Authorities support European efforts to strengthen banking regulations while stressing the importance of preserving relative position of subsidiaries and host supervisors.
- Assessments show relatively high profitability and adequate capital buffers provide Slovak banks room to change funding structure and absorb costs of issuing MREL-eligible liabilities if required.
- IFRS 9 migration:
  - Implemented on January 1, with a five-year transition period.
  - Expected to have a mild effect on banking sector’s own funds as provisioning standards are tightened; not expected to impact bank profitability in 2018.
- Macroprudential stance
  - NBS and ECB share common understanding of financial sector risks and need for targeted macroprudential measures.
  - Consensus that fast rise in household indebtedness represents a risk that has been building for quite some time.

### Public Debt Sustainability Analysis (Annex I) — Baseline and Scenarios (Selected figures)
- Baseline scenario — key projections (Percent of GDP unless otherwise indicated)
  - Nominal gross public debt: 2016: 43.65; 2017: 51.85; 2018: 50.94; 2019: 48.84; 2020: 47.54; 2021: 45.24; 2022: 43.24; 2023: 41.74; 2023 (last column repeated): 40.5
  - Net public debt: 2016: 43.65; 2017: 51.85; 2018: 50.94; 2019: 48.84; 2020: 47.44; 2021: 45.24; 2022: 43.24; 2023: 41.74; 2023: 40.5
  - Public gross financing needs: 2016: 10.1; 2017: 7.9; 2018: 7.7; 2019: 4.4; 2020: 3.3; 2021: 4.7; 2022: 3.0; 2023: 3.5; 2023: 3.9
  - Real GDP growth (percent): 2016: 3.2; 2017: 3.3; 2018: 3.4; 2019: 4.0; 2020: 4.2; 2021: 3.8; 2022: 3.7; 2023: 3.5; 2023: 3.4
  - Inflation (GDP deflator, percent): 2016: 0.7; 2017: -0.4; 2018: 1.3; 2019: 1.9; 2020: 2.2; 2021: 2.1; 2022: 2.1; 2023: 1.9; 2023: 1.8
  - Nominal GDP growth (percent): 2016: 3.9; 2017: 2.9; 2018: 4.7; 2019: 6.0; 2020: 6.5; 2021: 6.0; 2022: 5.9; 2023: 5.5; 2023: 5.3
  - Effective interest rate (percent): 2016: 4.1; 2017: 3.2; 2018: 2.8; 2019: 3.2; 2020: 3.6; 2021: 4.1; 2022: 4.6; 2023: 5.0; 2023: 5.5
- Contribution to changes in public debt — identified flows (Percent of GDP)
  - Change in gross public sector debt (annual): 2016: 2.4; 2017: -0.5; 2018: -1.0; 2019: -2.1; 2020: -1.3; 2021: -2.3; 2022: -2.0; 2023: -1.5; 2023: -1.2; cumulative: -10.3
  - Identified debt-creating flows (annual): 2016: 2.7; 2017: 0.5; 2018: -1.0; 2019: -1.9; 2020: -1.2; 2021: -2.2; 2022: -1.9; 2023: -1.5; 2023: -1.1; cumulative: -9.9
    - Primary deficit: 2016: 2.8; 2017: 0.8; 2018: 1.0; 2019: -0.5; 2020: -0.7; 2021: -1.1; 2022: -1.1; 2023: -1.0; 2023: -0.9; cumulative: -5.2
    - Primary (noninterest) revenue and grants (percent of GDP): cumulative 2007–2023: 36.7; 2016: 39.0; 2017: 38.0; 2018: 38.3; 2019: 38.1; 2020: 38.6; 2021: 37.9; 2022: 37.5; 2023: 37.4; 2023: 37.4; cumulative total: 227.8
    - Primary (noninterest) expenditure (percent of GDP): cumulative 2007–2023: 39.5; 2016: 39.9; 2017: 39.0; 2018: 37.9; 2019: 37.9; 2020: 37.5; 2021: 36.9; 2022: 36.5; 2023: 36.5; cumulative total: 222.6
  - Automatic debt dynamics (annual): 2016: 0.0; 2017: 0.3; 2018: -1.2; 2019: -1.4; 2020: -1.3; 2021: -0.8; 2022: -0.6; 2023: -0.2; 2023: 0.1; cumulative: -4.1
    - Interest rate/growth differential (annual): 2016: 0.1; 2017: 0.2; 2018: -0.9; 2019: -1.4; 2020: -1.3; 2021: -0.8; 2022: -0.6; 2023: -0.2; 2023: 0.1; cumulative: -4.1
      - Real interest rate: 2016: 1.3; 2017: 1.9; 2018: 0.7; 2019: 0.6; 2020: 0.6; 2021: 0.9; 2022: 1.0; 2023: 1.3; 2023: 1.4; cumulative: 5.8
      - Real GDP growth contribution: 2016: -1.2; 2017: -1.7; 2018: -1.7; 2019: -1.9; 2020: -1.9; 2021: -1.7; 2022: -1.6; 2023: -1.4; 2023: -1.3; cumulative: -9.9
  - Other identified debt-creating flows (annual): 2016: -0.1; 2017: -0.6; 2018: -0.8; 2019: -0.1; 2020: 0.7; 2021: -0.3; 2022: -0.3; 2023: -0.3; 2023: -0.3; cumulative: -0.6
  - Residual, including asset changes (annual): 2016: -0.3; 2017: -1.1; 2018: 0.0; 2019: -0.2; 2020: -0.1; 2021: -0.1; 2022: 0.0; 2023: 0.0; 2023: 0.0; cumulative: -0.4
- Debt and market indicators (as of May 23, 2018, and other dates)
  - 5Y CDS (bp): 39
  - Credit ratings: Moody's: A2 / A2; S&Ps: A+ / A+; Fitch: A+ / A+
- Alternative scenarios — selected baseline assumptions (2018–2023)
  - Baseline Scenario assumptions:
    - Real GDP growth: 2018: 4.0; 2019: 4.2; 2020: 3.8; 2021: 3.7; 2022: 3.5; 2023: 3.4
    - Inflation: 2018: 1.9; 2019: 2.2; 2020: 2.1; 2021: 2.1; 2022: 1.9; 2023: 1.8
    - Primary Balance: 2018: 0.5; 2019: 0.7; 2020: 1.1; 2021: 1.1; 2022: 1.0; 2023: 0.9
    - Effective interest rate: 2018: 3.2; 2019: 3.6; 2020: 4.1; 2021: 4.6; 2022: 5.0; 2023: 5.5
  - Historical Scenario assumptions:
    - Real GDP growth: 2018: 4.0; 2019: 2.5; 2020: 2.5; 2021: 2.5; 2022: 2.5; 2023: 2.5
    - Primary Balance: 2018: 0.5; 2019: -2.6; 2020: -2.6; 2021: -2.6; 2022: -2.6; 2023: -2.6
  - Contingent Liability Shock assumptions (selected):
    - Primary Balance: 2019: -8.5; 2020: 1.1; 2021: 1.1; 2022: 1.0; 2023: 0.9
- Key fiscal and macro context (selected)
  - As of 2017: Real GDP growth 3.4 percent; inflation 1.3 percent; unemployment around 8 percent.
  - Fiscal deficit reduced from 2.2 percent of GDP in 2016 to 1.0 percent in 2017.
  - Public debt projected to decline from 51 percent in 2017 to 45 percent in 2020.
  - Long-term demographic pressure: old-age dependency ratio projected to increase from recent 20 percent to 60 percent.

### Domestic Revenue Mobilization: Achievements, Policy Efforts and Priorities (Box 3)
- Anti-evasion action plan timeline and measures
  - Action plan implemented in 2012 and supplemented in 2015.
  - Initial action plan included 50 measures: inter-agency collaboration pilot for serious tax fraud; introduction of cashless payments; electronic control statements (KV).
  - 2015–16 measures focused on taxpayer identification, collection, tax recovery, and excise taxes.
- VAT outcomes
  - VAT base gap declined from over 40 percent in 2012 to 26.3 percent in 2017.
  - VAT collections rose by 1.35 percent of GDP over the same period.
- CIT outcomes and measures
  - CIT rate raised from 19 to 23 percent in 2013; special levies on banks and regulated industries introduced.
  - CIT rate lowered to 22 percent in 2014 and to 21 percent in 2017.
  - Preliminary estimates: CIT base gap declined from 37 percent since 2012 to 24 percent in 2016.
  - CIT collections up by more than 1 percent of GDP.
  - Planned work: estimate CIT base gap using bottom-up approach based on audit data.
- Excise taxes
  - Mineral oils duty gap increased from 11 percent in 2010 to 27 percent in 2014.
  - Excise tax collections remained broadly stable after expanded compliance measures.
- 2017 action plan (measures through 2018)
  - Improvements in tax audits including electronic cash desk eKASA connecting cash registers to central register.
  - Establishment of a Unified Analytical Center to deal with financial delinquency and prepare draft legislation to reduce tax fraud.
  - Strengthening voluntary compliance and taxpayer services: electronic taxpayer customer service channels, enhanced Call Center services, sending pre-filled tax returns for vehicle circulation taxes for business.

### Pension Reform, Structural Reforms, and Short-term Priorities
- Pension reform and adequacy
  - 2012 pension reform mitigates aging pressures by linking retirement age to life expectancy, unifying retirement age of men and women, and indexing pension benefits only to inflation.
  - Raising pension benefits for low-income pensioners important for adequacy and would have only a limited and temporary impact on system balance.
- Value for Money program and spending reviews
  - Introduced in 2016; mandate for regular spending reviews covering majority of general government expenditures.
  - First two years: assessed transportation, health, IT, environment, labor, and education; covered two-fifths of overall general government expenditures (15 percent of GDP).
  - Identified potential savings worth 0.6 percent of GDP with implementation through 2020.
  - Three new spending reviews ongoing: public wage bill, agriculture, and marginalized groups expenditure.
  - Mandate extended to cost-benefit appraisals of investment projects with costs exceeding EUR 40 million (and 10 million for IT projects).
- Short-term priorities: labor market, credit growth, housing
  - Main short-term challenges: tightening labor market and strong credit growth.
  - Activation of long-term unemployed and marginalized groups and improved education as key to unlock labor reserves.
  - Legislation changes eased foreign worker access; number of foreign workers increased by 40 percent in 2017 (from a low base).
  - NBS actions in 2018: introduced a new DTI limit, further restricted LTV limit, increased CCB to 1.5 percent effective as of August 2019.
  - Legislative change extending macroprudential measures to pre-approved loans expected by end of year.
  - Authorities cautious on property taxation increases given demographic drivers of housing demand and low living space per person.

### Procedural note
- Recommendation that the next Article IV consultation with the Slovak Republic take place on the standard 12-month consultation cycle.

*Source: IMF staff report excerpt (cr18241).*

### 1. Low Female Labor Force Participation and Employment in Slovak Republic: The Role of

### 1. Low Female Labor Force Participation and Employment in Slovak Republic: The Role of Childcare and Parental Leave Policies

### Context and Key Challenges
- Real per capita GDP expanded by about 3 percent annually during the last five years, supported by strong credit and jobs growth.
- Output gap is slightly positive; external sector developments are in line with long-term averages.
- Acute labor shortages and rising household indebtedness are material constraints to growth.
- Post-crisis employment and total factor productivity growth rates have been less than half of their pre-crisis levels.
- Slovakia is projected to experience one of the fastest declines in working age population in the EU in coming decades.
- Education outcomes show notable gaps relative to EU peers (PISA scores in Science, Math, Reading shown as lower than EU average).
- Quality of institutions (judiciary and public administration) is perceived to need improvement.

### Labor Market Findings Relevant to Female Participation
- The gender gap in participation has been persistently higher than EU peers, driven mostly by a lack of affordable early childcare facilities and long parental leave hardly taken up by fathers.
- Around 75 percent of women aged between 25 and 49 years report family care responsibilities as the main reason for not participating in the labor market.
- Employment and unemployment developments:
  - Unemployment rate declined from about 14 percent during 2010–14 to below 8 percent at end-2017.
  - Regional unemployment ranged from 4.2 percent in Bratislava to 12 percent in Eastern Slovakia.
- Low work intensity among the Roma population and strong integration challenges constrain labor supply of disadvantaged groups.
- Employment rate by age of youngest child shows substantially lower female employment for mothers with children below 6 years old compared to fathers.

### Drivers of Low Female Labor Force Participation
- Lack of affordable early childcare facilities, especially for children aged below three.
- Long parental leave that is rarely taken up by fathers, reinforcing gendered division of paid and unpaid work.
- Insufficient flexible employment options for mothers.
- Spatial mismatches and low labor mobility (insufficient transport infrastructure and underdeveloped rental housing markets) that interact with childcare constraints.
- Education and skills gaps, and limited active labor market policies (ALMP) focused on employability rather than job creation.

### Policy Recommendations and Reform Menu
- Expand formal childcare services, especially for children aged below three.
  - The authorities’ plan to expand formal childcare services is described as appropriate.
- Reform parental leave benefits to encourage gender parity between paid and unpaid work.
  - Examples of reforms suggested: allowing parents to alternate between periods of leave and work; further supporting flexible employment for mothers.
- Increase labor force participation and employment of disadvantaged groups.
  - Establish equal education opportunities for disadvantaged groups by expanding pre-primary education, better integration into standard schools, and supporting teacher training in special needs education.
- Strengthen the framework for issuing work permits to foreigners in the short run to alleviate immediate labor shortages.
  - The amendment to the Employment Services Act has simplified conditions for hiring non-EU nationals for occupations experiencing labor shortages with company-level and regional restrictions.
  - Further clarifying the treatment of skilled versus mid- or low-skilled foreign workers and streamlining administrative requirements would help Slovakia compete better for skilled foreign workers.
- Focus ALMP spending on building skills and employability.
  - Shift ALMP from primarily job-creation to training, job counseling, and measures to enhance labor mobility, especially targeted at the long-term unemployed and other disadvantaged groups.
- Improve education quality to address skills mismatch.
  - Raise teacher remuneration to attract higher-quality teachers, coupled with improvements in teachers’ training and optimization of the regional school network.
  - Strengthen links between vocational education and employers, increase use of work-based learning, provide effective career guidance, and design a forward-looking higher education strategy accounting for rapidly changing skills demand.

### Implementation and Financing Notes
- Most reforms are complementary and can mostly be financed by increasing efficiency of current social spending, as well as more efficient and extensive use of EU funds.

*Source: IMF staff report excerpt (chapter 1) on the Slovak Republic.*

### 17.      Perceived gaps in institutional quality are additional drags to productivity growth.

### 17.      Perceived gaps in institutional quality are additional drags to productivity growth.

### Institutional quality and productivity
- Slovakia fares unfavorably in various governance indicators relative to EU peers.
- Factors contributing to perceived weak judiciary:
  - Low prosecution rates of cases against public officials.
  - Lengthy court procedures.
- Other institutional weaknesses highlighted in the EU 2018 country report that could result in inefficiencies:
  - Frequent change in laws.
  - Limited coordination between government ministries.
  - Anti-competitive practices in public procurement.
  - Political influence in hiring and functioning of regulatory bodies.
- Significant compliance gaps in core taxes contribute to low public confidence in the effectiveness and integrity of tax administration.
- Staff analysis: lowering by half the gap between Slovakia and the EU-15 best performer in perception of corruption could yield significant productivity gains in the long run (estimates subject to large uncertainties).

### Policy recommendations to lift productivity
- Effective implementation of recently approved legislation:
  - Civil Service Act.
  - Anti-Offshore Law.
- Reforms to:
  - Increase competition in and transparency of the public procurement system.
  - Strengthen judicial independence.
  - Improve tax compliance.
- These measures could boost future productivity.

### Authorities’ views on structural policies and labor/education
- Broad agreement on need for multi-faceted structural policies to lift productivity growth.
- Labor shortages:
  - Authorities finalizing list of occupations facing labor shortages to be published in June.
  - Part of labor shortage can be met by a slowdown in net emigration and increased inter-regional mobility facilitated by relocation and commuting allowance.
  - Construction of 90 additional childcare facilities with a capacity of 1,800 children to expand formal childcare services.
  - Disadvantaged groups (including Roma population and long-term unemployed) seen as a larger source of potential labor supply than women with small children; role for education and ALMP.
- Education:
  - Plans to increase participation in on-the-job training by easing administrative burdens and increasing cooperation between schools and firms.
  - Plan to introduce compulsory pre-primary education for children at the age of five starting in September, with plan to extend it to children at the age of three in the future.
  - Expectation that such policies will, over time, better integrate Roma population into the labor force.
- Institutions:
  - Working on a comprehensive strategy for corruption prevention.
  - Measures introduced to reduce procedural time of public procurement, increase transparency through e-procurement, and invest in capacity building.
  - Recent amendment to the Civil Service Act establishes clear rules for recruitment and dismissal of civil servants, limits room for political interference, and provides opportunity for greater public scrutiny of nominees for high-level public posts.

### B. Fiscal Policy: Increasing Efficiency to Invest in Priority Areas — baseline and risks
- With a positive output gap, authorities’ objective to continue fiscal consolidation is appropriate.
- Staff’s baseline projections:
  - Slovakia on track to reach its MTO, a structural balance of -0.5 percent of potential GDP, by 2020 and a balanced budget by 2020.
  - Gross public debt will drop below the lower range of the debt ceiling path set by the current Fiscal Responsibility Act (FRA).
  - Baseline projections assume no additional revenue efficiency gains, and incorporate authorities’ planned infrastructure and education investments as well as projected savings from recent pension and health sector reforms.
- Expected medium-term fiscal outcomes:
  - Declining and low fiscal deficit.
  - Single-digit gross financing needs.
  - Stable access to financing, creating sizable fiscal space under the FRA to mitigate shocks and accommodate growth-enhancing public investment.
- Near-term downside risks:
  - Strong wage pressures in the private sector could spill over into the public sector.
  - Authorities are not contemplating introducing any escape clause to the FRA to accommodate specific spending.

### Fiscal policy: recent efforts and priorities
- Recent efforts focused on improving revenue and expenditure efficiency:
  - Three-phase action plan to fight tax evasion significantly improved VAT compliance.
  - New tax administration reform plan for 2018–20 aims to simplify taxpayers’ interactions, expand e-services, and increase the use of analytics to target non-compliance.
  - Multi-year thematic spending review program (Value for Money Program) entering its third wave in 2018; has completed a review of most major ministries and expected to cover public wage bill in 2018.
  - Progress limited in prioritizing action plans and realizing operational savings except in the health sector.
- Staff supports further increasing efficiency of the public sector, which can generate significant fiscal resources (Text Table 2 estimates).

### Key estimated yields from proposed measures (Cumulative, 2018–2023)
- Higher EU funds absorption in education and transport: 3.6 percent of 2023 GDP; 3.0 Billions of euros.
- Education: 2.9 percent of 2023 GDP; 2.5 Billions of euros.
- Healthcare: 0.6 percent of 2023 GDP; 0.5 Billions of euros.
- Environment: 0.1 percent of 2023 GDP; 0.1 Billions of euros.
- Increasing public investment efficiency: 0.4 percent of 2023 GDP; 0.3 Billions of euros.
- Reducing the VAT gap: 1.7 percent of 2023 GDP; 1.4 Billions of euros.
- Raising property and environmental taxes to EU average: 1.3 percent of 2023 GDP; 1.1 Billions of euros.
- Notes on assumptions:
  - EU funds absorption assumes 95 percent ESIF funds allocated to educational and vocational training and network infrastructures and transport and energy will be absorbed; amounts shown net of what is already budgeted and of needed co-financing.
  - Public investment efficiency estimate assumes Slovakia closes a quarter of its investment efficiency gap with respect to Germany.
  - VAT reduction estimate assumes Slovakia closes a quarter of its VAT efficiency gap with EU-28 average.

### Revenue efficiency recommendations
- In line with TADAT assessment recommendations, the 2018–20 reform plan needs clear prioritization:
  - Strengthen and broaden audits to include all core tax areas and upskilling of audit staff.
  - Identification and assessment of risks of non-compliance by taxpayers.
  - More effective dispute resolution mechanisms.
  - Improved communication with taxpayers.

### Public expenditure efficiency and EU funds absorption
- Public expenditure efficiency:
  - Continued resourcing of the Implementation Unit and integrating identified savings into the medium-term budget process are key to realize efficiency gains from spending reviews.
  - Efficiency of public infrastructure investment is particularly low in Slovakia due to project selection and procurement weaknesses:
    - Overall efficiency gap of around 23 percent compared to the EU-15 average gap of 13 percent.
  - Authorities working to strengthen public procurement system; cost assessments now standard pre-requisite in transport sector and should be complemented by project prioritization.
- EU funds absorption efficiency:
  - Full absorption of EU funds programmed for education and infrastructure would make available nearly €3 billion in additional funding for priority spending from the 2014–20 programming period.
  - Full utilization requires improvements in staff expertise and capacity to assess projects, simplification of national rules, better transparency and more competition in public procurement, and more strategic project selection.

### Use of efficiency gains and infrastructure needs
- Resources freed by higher efficiency could be used for priority spending in education, infrastructure, and labor market policies.
- Slovakia shows significant gaps in motorway infrastructure relative to population and area.
- Current motorway spending captures most transport spending, leaving resource constraints for:
  - Improving lower-class roads (which carry most road traffic).
  - Railway modernization.
  - Maintenance of existing roads.
- Authorities estimate large transport infrastructure investment needs to increase inter-regional connectivity and connectivity within lagging regions.

### Property and environmental taxes
- Bringing Slovakia’s current property and environmental tax revenue in line with the EU average would create up to 1.3 percent of GDP per year in additional revenues.
- Meaningful increase in property taxes by linking taxable amount to market value would support efforts to slow residential mortgage growth.

### Long-term fiscal risks: pensions and health care
- Rising pension and health care costs due to population aging remain main risk for long-term fiscal sustainability despite recent reforms.
- Pension reform timeline and measures:
  - Ambitious pension reform started in 2012 with multi-year implementation.
  - In 2017, pensionable age calculation changed to link it to average life expectancy.
  - Ad hoc measures: increase in pensions valorization by 2 percent in 2017 and higher valorization in 2018–21 for low-income pensioners, which will likely offset some reform savings.
- Health care inefficiencies being addressed via reforms:
  - Cost savings from better management of hospital personnel.
  - Introduction of an e-health system.
  - Pilot project for diagnosis-linked reimbursement systems.

### Authorities’ views on fiscal commitments and efficiency
- Authorities committed to achieving a balanced budget in 2020.
  - For 2018, they project a deficit of 0.8 percent of GDP.
  - Acknowledge downside risks from higher public sector wage increases; believe moderate wage increases could largely be absorbed through reallocation of reserve funds if needed.
- With public debt projected to fall below lowest FRA threshold, authorities studying options for an expenditure ceiling in the medium term as an operational tool for fiscal policy; interested in future discussion with staff when more concrete.
- Commitment to raising revenue and spending efficiency:
  - Plans to further improve taxpayer compliance and reduce VAT gap (some reservations on EU-average comparison due to methodological issues).
  - High priority on implementing Value for Money program measures; strengthening mandate and capacity of Implementation Unit.
  - Spending reviews should undergo regular implementation assessment and serve as starting point for follow-up reviews (already the case in health sector).
  - Planning to undertake a Public Investment Management Assessment next year.

### C. Financial Sector: ensuring stability — household indebtedness and banking soundness
- Household indebtedness and credit growth:
  - Overall household loan stock at 40 percent of GDP in end-2017.
  - One third of new loans to households has a loan-to-value ratio of 80 percent, indicating a relatively elevated share of risky borrowers.
  - Average house prices increased but remain significantly below pre-crisis levels; apartment prices in certain areas have experienced faster increases.
- Banking sector soundness and vulnerabilities:
  - Profitability remains high supported by low operating costs.
  - Banks’ capital adequacy strengthened in 2017 due to higher retained earnings.
  - Loans are fully funded by domestic deposits.
  - Non-performing loans are low and adequately provisioned.
  - Banks have expanded loan books to compensate for low interest rates, increasing sensitivity to adverse shocks (decline in net interest margin or increase in operational cost).
  - Additional risks from increasing maturity mismatches and exposure to commercial real estate sector.

### Macroprudential policy measures and impact
- Authorities gradually tightened capital and borrower-based macroprudential measures:
  - Borrower-based measures (limits on LTV and DSTI ratios) moved from recommendations to binding restrictions covering mortgage and consumer lending, and both bank and non-bank lending.
  - Countercyclical capital buffer (CCB) on domestic exposures was raised to 0.5 percent in August 2017 and will be raised to 1.25 percent as of August 1, 2018.
  - Complementary measures: maturity limits, interest rate sensitivity tests, mandatory amortization schedule for annuities.
  - Measures appear to be slowing household credit growth and reducing share of loans with high LTV ratios.
- Overview of key measure revisions (Text Table 3 highlights):
  - LTV limit: Share of 90+ limited to 10% (phase-in) → Additional limit for 80+ limited to 40% (phase-in) → 80% of Share of 80+ limited to 20% (phase-in).
  - DSTI limit: 100% → 80% (phase-in applies).
  - Interest Rate Sensitivity Test: Applies to new loans only → Applies to all customer’s loans with variable interest rates.
  - Maturity Limit: Pre-secured loans: 30Y (except 10%); Unsecured loans: 8Y (phase-in applied) — no change in later revision.
  - Amortization Rule: Mandatory amortization with annuity — no change.
  - DTI: 8 (phase-in applies) introduced in latest revision.

### Complementary tax and macroprudential suggestions
- Consideration could be given to reducing tax subsidies for owner-occupied housing:
  - Staff analysis: tax on owner-occupied housing in Slovakia is just 58 percent of the tax-neutral benchmark, indicating sizable subsidies (untaxed capital gains and exemption of imputed rent).
  - Main residences are exempt from capital gains tax after 2 years of tenure, contributing to tax subsidy.
  - Average subsidy on untaxed capital gains could be reduced from current level of 18 percent to bring it in line with EU average of 13 percent.
  - Direct subsidies for home ownership exist for individuals under the age of 35.

### Authorities’ views on macroprudential stance and housing subsidies
- Authorities view the macroprudential policies taken so far as adequate and stand ready to further tighten policies if warranted.
  - NBS view: DSTI calibration is at least as strict as in other countries for households earning median income and even stricter for those with lower incomes; less binding for higher-income households.
  - DTI limit would curb excessive borrowing by highly-indebted high-income households and complement DSTI limits by covering entire income spectrum.
  - Authorities estimate second round of macroprudential measures approved end-May likely to slow credit growth by 0.5 to 1.4 percentage points, bringing indebtedness growth more in line with fundamentals.
  - Financial sector conditions remain fluid; further measures including another increase in CCB are not ruled out.
- On subsidies to owner-occupied housing, national authorities do not view these as significantly contributing to excess demand.

*Source: IMF staff report chapter on the Slovak Republic.*

### 34.      The authorities support European efforts to further strengthen banking regulations.

### 34.      The authorities support European efforts to further strengthen banking regulations.

### Banking regulation, IFRS 9, and MREL
- Authorities support European efforts to further strengthen banking regulations while stressing the importance of ensuring that the relative position of subsidiaries and host supervisors is not undermined.
- Assessments by both SSM and NBS supervisors show:
  - Relatively high profitability and adequate capital buffers provide Slovak banks with room to change their funding structure and absorb the costs of issuing MREL-eligible liabilities if required.
- IFRS 9 migration:
  - Implemented on January 1, but with a five-year transition period.
  - Expected to have a mild effect on the banking sector’s own funds as provisioning standards are tightened.
  - Not expected to have an impact on bank profitability in 2018.

### Macroprudential stance and household indebtedness
- The NBS and ECB share a common understanding of financial sector risks and the need for targeted macroprudential measures.
- Consensus that the fast rise in household indebtedness represents a risk that has been building for quite some time.
- Importance of sustained and continued vigilance in the implementation of targeted non-interest rate policies.

### Recent economic performance and outlook
- Per capita real income grew by around 3 percent annually during the last five years supported by strong labor market dynamics and credit growth.
- Real GDP growth is expected to reach 4 percent in 2018 and pick up further in the medium term supported by the coming on stream of new production capacity in    the automotive sector.
- Risks to the outlook:
  - Downside: rising trade protectionism, possible financial turmoil in the EA, skills shortages in the domestic labor market, and a sudden downturn in the property market that can affect indebted households and banks.
  - Upside: higher absorption of EU funds could boost growth further.

### Labor market and childcare policies
- Recent measures to facilitate procedures for issuing work permits to foreigners are steps in the right direction; recommended further actions:
  - Finalize the list of occupations and further simplify administrative procedures.
- Plans to expand formal childcare services, especially for young children, are expected to help increase female labor force participation and should be complemented by encouraging greater gender flexibility in the use of childcare-related leave.
- Childcare and parental leave context and statistics:
  - Per child public spending on early childhood education and care is around 2,000 USD PPP, just above one-third of the EU-15 average, with less than half of it going to children aged less than three years old.
  - Only 0.5 percent of children under three receive formal childcare services compared to 70 percent in Denmark.
  - Parents cite costs as the primary reason for not using formal childcare services.
  - Maternity and parental leave:
    - Eligible Slovak mother entitled to 34 weeks of paid maternity leave with monthly benefits of 75 percent of her gross wage, compared to the EU-average of nearly 20 weeks (with average monthly benefits of around 78 percent of gross wages).
    - After paid maternity leave, mothers can stay on parental leave until the child is three years old, and receive €213.20 per month.
    - Since 2011, fathers allowed up to 28 weeks of paternity leave with benefits similar to maternity leave (subject to contributory criteria and that the mother does not receive maternity or parental benefits at the same time).
  - Social attitudes and usage:
    - Nearly 85 percent of the Slovaks think that paid leave to take care of children should be taken entirely or mostly by mothers, compared to about 50 percent for the EU-15 citizens.
    - Childcare-related leaves are mainly used by women; limited male uptake of parental leave.

### Education, institutional quality, and structural reforms
- Recommended measures on education:
  - Increase attractiveness of the teaching profession.
  - Strengthen collaboration between vocational schools and employers.
  - Teachers’ training, optimization of regional school network, and a forward-looking higher education strategy that accounts for rapidly changing demand for skills.
- Governance and institutional quality:
  - Effective implementation of the recently approved Civil Service Act and the Anti-Offshore Law is important.
  - Measures to increase competition in the public procurement system, improve tax compliance, and anti-corruption efforts are expected to improve governance.
- Box 2 empirical findings on productivity:
  - Closing half of the gaps in corruption perception and skill mismatch between Slovakia and the best EU performer could yield significant productivity gains:
    - Lowering half of the difference in perceived corruption could increase productivity by 10 percent in the long run.
    - Closing half of the gap in skill mismatch could yield around 6 percent productivity gains in the long-run.
    - Potential gains from other policy measures range from 2–5 percent.
  - Caveats: partial gains could be overestimated due to correlation among policy variables; 95 percent confidence band for productivity gains from improvements in corruption perception is 0.4–21.

### Fiscal position and use of efficiency gains
- Recent fiscal consolidation supported by higher social contributions, lower interest payments, and lower social benefits and non-wage current spending.
- Fiscal projections:
  - Overall fiscal balance is projected to improve further, reaching -0.8 percent of GDP this year and a balanced position in the medium-term.
- Staff’s estimates on efficiency gains:
  - Under conservative assumptions, fiscal resources of 3 percent of GDP can be raised through higher efficiency in the public sector with room for additional resources through higher property and environmental taxation.
- Recommended use of resources:
  - Priority spending in infrastructure, education, and labor market reforms.
  - Strengthen and broaden audit activities in all core tax areas, reduce risks of tax compliance, and improve governance in tax administration.
  - Capture savings identified in spending reviews and integrate findings into medium-term budget plans.
  - Save resources in capital investment through strengthened project prioritization and improved public procurement system to ensure timely and full absorption of EU funds.

### Banking sector soundness and vulnerabilities
- Banking sector characteristics:
  - Highly profitable with low levels of non-performing loans that are adequately provisioned.
  - Capital adequacy strengthened further in 2017.
- Vulnerabilities:
  - Banks have maintained profitability by expanding loan volume to compensate for low interest rates, increasing household indebtedness significantly.
  - Both household and banking sectors are vulnerable to adverse macroeconomic shocks and possible property market downturns.
- Macroprudential policy response:
  - Pro-active tightening of macroprudential policies over the last four years targeting risky and highly-indebted borrowers, including introduction of binding limits on loan-to -value and debt-service-to -income ratios, appear to be slowing down household credit growth.
  - Recently-adopted limits on debt-to -income ratios would complement existing borrower-based measures.
  - Consideration could be given to reducing tax subsidies for owner-occupied housing which arise from capital gains exemptions.

### Procedural note
- It is recommended that the next Article IV consultation with the Slovak Republic take place on the standard 12-month consultation cycle.

*International Monetary Fund — staff appraisal excerpt.*

### Box 3. Domestic Revenue Mobilization: Achievements, Policy Efforts and Priorities

### Box 3. Domestic Revenue Mobilization: Achievements, Policy Efforts and Priorities

### Overview of anti-evasion efforts and timeline
- The action plan for combating tax evasion was implemented in 2012 and supplemented with additional measures in 2015.
- The initial action plan included 50 broad-ranging measures, including:
  - a pilot project to encourage inter-agency collaboration on solving cases of serious tax fraud;
  - the introduction of cashless payments; and
  - electronic control statements (KV).
- In 2015–16 the authorities introduced additional measures focused on higher efficiency of taxpayer identification, collection, and tax recovery, and included excise taxes.

### VAT outcomes and findings
- Objective: reduce tax evasion to increase VAT revenue collection.
- Results:
  - VAT base gap declined from over 40 percent in 2012 to 26.3 percent in 2017.
  - VAT collections rose by 1.35 percent of GDP over the same period.

### CIT outcomes and measures
- Policy changes:
  - In 2013 the CIT rate was raised from 19 to 23 percent and special levies on banks and regulated industries were introduced.
  - Measures to broaden the tax base in 2014–15 included tightening the loss carry forward rule and introducing a thin capitalization rule.
  - The CIT rate was lowered to 22 percent in 2014 and to 21 percent in 2017.
- Results:
  - Preliminary estimates show the CIT base gap declined from 37 percent since 2012 to 24 percent in 2016.
  - CIT collections are up by more than 1 percent of GDP.
- Planned work:
  - Further work on estimating the CIT base gap using a bottom up approach based on audit data is planned.

### Excise taxes
- Observations:
  - Mineral oils duty gap increased from 11 percent in 2010 to 27 percent in 2014.
  - Anecdotal reports indicated extensive cross-border shopping.
  - The financial administration expanded measures on compliance risks to non-mineral oils excise tax.
- Outcome: Excise tax collections remained broadly stable.

### 2017 action plan (measures to be implemented through 2018)
- Improvements in tax audits, in part through the introduction of the electronic cash desk eKASA connecting cash registers to the central register at the financial administration.
- Establishment of a Unified Analytical Center to deal with financial delinquency and prepare draft legislation to reduce tax fraud.
- Strengthening voluntary tax compliance and improving taxpayer services by:
  - introducing electronic taxpayer customer service channels;
  - enhancing Call Center services; and
  - sending out pre-filled tax returns for vehicle circulation taxes for business.

*Source: Box 3. Domestic Revenue Mobilization: Achievements, Policy Efforts and Priorities (cr18241).*

### Annex I. Public Debt Sustainability Analysis (DSA)

### Annex I. Public Debt Sustainability Analysis (DSA)

### Baseline Scenario — Key Projections (Percent of GDP, unless otherwise indicated)
- Nominal gross public debt: 2016: 43.65; 2017: 51.85; 2018: 50.94; 2019: 48.84; 2020: 47.54; 2021: 45.24; 2022: 43.24; 2023: 41.74; 2023 (last column repeated): 40.5
- Net public debt: 2016: 43.65; 2017: 51.85; 2018: 50.94; 2019: 48.84; 2020: 47.44; 2021: 45.24; 2022: 43.24; 2023: 41.74; 2023: 40.5
- Public gross financing needs: 2016: 10.1; 2017: 7.9; 2018: 7.7; 2019: 4.4; 2020: 3.3; 2021: 4.7; 2022: 3.0; 2023: 3.5; 2023: 3.9
- Real GDP growth (percent): 2016: 3.2; 2017: 3.3; 2018: 3.4; 2019: 4.0; 2020: 4.2; 2021: 3.8; 2022: 3.7; 2023: 3.5; 2023: 3.4
- Inflation (GDP deflator, percent): 2016: 0.7; 2017: -0.4; 2018: 1.3; 2019: 1.9; 2020: 2.2; 2021: 2.1; 2022: 2.1; 2023: 1.9; 2023: 1.8
- Nominal GDP growth (percent): 2016: 3.9; 2017: 2.9; 2018: 4.7; 2019: 6.0; 2020: 6.5; 2021: 6.0; 2022: 5.9; 2023: 5.5; 2023: 5.3
- Effective interest rate (percent): 2016: 4.1; 2017: 3.2; 2018: 2.8; 2019: 3.2; 2020: 3.6; 2021: 4.1; 2022: 4.6; 2023: 5.0; 2023: 5.5

### Contribution to Changes in Public Debt — Identified Flows (Percent of GDP)
- Change in gross public sector debt (annual): 2016: 2.4; 2017: -0.5; 2018: -1.0; 2019: -2.1; 2020: -1.3; 2021: -2.3; 2022: -2.0; 2023: -1.5; 2023: -1.2; cumulative: -10.3
- Identified debt-creating flows (annual): 2016: 2.7; 2017: 0.5; 2018: -1.0; 2019: -1.9; 2020: -1.2; 2021: -2.2; 2022: -1.9; 2023: -1.5; 2023: -1.1; cumulative: -9.9
  - Primary deficit: 2016: 2.8; 2017: 0.8; 2018: 1.0; 2019: -0.5; 2020: -0.7; 2021: -1.1; 2022: -1.1; 2023: -1.0; 2023: -0.9; cumulative: -5.2
  - Primary (noninterest) revenue and grants (percent of GDP): cumulative 2007–2023: 36.7; 2016: 39.0; 2017: 38.0; 2018: 38.3; 2019: 38.1; 2020: 38.6; 2021: 37.9; 2022: 37.5; 2023: 37.4; 2023: 37.4; cumulative total: 227.8
  - Primary (noninterest) expenditure (percent of GDP): cumulative 2007–2023: 39.5; 2016: 39.9; 2017: 39.0; 2018: 37.9; 2019: 37.9; 2020: 37.5; 2021: 36.9; 2022: 36.5; 2023: 36.5; cumulative total: 222.6
- Automatic debt dynamics (annual): 2016: 0.0; 2017: 0.3; 2018: -1.2; 2019: -1.4; 2020: -1.3; 2021: -0.8; 2022: -0.6; 2023: -0.2; 2023: 0.1; cumulative: -4.1
  - Interest rate/growth differential (annual): 2016: 0.1; 2017: 0.2; 2018: -0.9; 2019: -1.4; 2020: -1.3; 2021: -0.8; 2022: -0.6; 2023: -0.2; 2023: 0.1; cumulative: -4.1
    - Of which: real interest rate: 2016: 1.3; 2017: 1.9; 2018: 0.7; 2019: 0.6; 2020: 0.6; 2021: 0.9; 2022: 1.0; 2023: 1.3; 2023: 1.4; cumulative: 5.8
    - Of which: real GDP growth contribution: 2016: -1.2; 2017: -1.7; 2018: -1.7; 2019: -1.9; 2020: -1.9; 2021: -1.7; 2022: -1.6; 2023: -1.4; 2023: -1.3; cumulative: -9.9
  - Exchange rate depreciation (annual): 2016: -0.1; 2017: 0.1; 2018: -0.2; 2019: -0.3
- Other identified debt-creating flows (annual): 2016: -0.1; 2017: -0.6; 2018: -0.8; 2019: -0.1; 2020: 0.7; 2021: -0.3; 2022: -0.3; 2023: -0.3; 2023: -0.3; cumulative: -0.6
  - Privatization/Drawdown of Deposits (negative reduces financing need) (annual): 2016: -0.1; 2017: -0.6; 2018: -0.8; 2019: -0.1; 2020: 0.7; 2021: -0.3; 2022: -0.3; 2023: -0.3; 2023: -0.3; cumulative: -0.6
  - Contingent liabilities (annual): 0.0 for all years presented
  - Other debt-creating flows (specify) (annual): 0.0 for all years presented
- Residual, including asset changes (annual): 2016: -0.3; 2017: -1.1; 2018: 0.0; 2019: -0.2; 2020: -0.1; 2021: -0.1; 2022: 0.0; 2023: 0.0; 2023: 0.0; cumulative: -0.4

### Debt and Market Indicators (as of May 23, 2018, and other dates indicated)
- Sovereign spreads and market indicators:
  - EMBIG (bp): 3/26 (label present in table)
  - 5Y CDS (bp): 39
- Credit ratings (listed):
  - Moody's: A2 / A2
  - S&Ps: A+ / A+
  - Fitch: A+ / A+
- Notes on definitions:
  - Public sector is defined as general government.
  - Effective interest rate defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.
  - Long-term bond spread over German bonds referenced for EMBIG.

### Alternative Scenarios — Underlying Assumptions (Selected years 2018–2023)
- Baseline Scenario assumptions (per year):
  - Real GDP growth: 2018: 4.0; 2019: 4.2; 2020: 3.8; 2021: 3.7; 2022: 3.5; 2023: 3.4
  - Inflation: 2018: 1.9; 2019: 2.2; 2020: 2.1; 2021: 2.1; 2022: 1.9; 2023: 1.8
  - Primary Balance: 2018: 0.5; 2019: 0.7; 2020: 1.1; 2021: 1.1; 2022: 1.0; 2023: 0.9
  - Effective interest rate: 2018: 3.2; 2019: 3.6; 2020: 4.1; 2021: 4.6; 2022: 5.0; 2023: 5.5
- Historical Scenario assumptions:
  - Real GDP growth: 2018: 4.0; 2019: 2.5; 2020: 2.5; 2021: 2.5; 2022: 2.5; 2023: 2.5
  - Inflation: 2018: 1.9; 2019: 2.2; 2020: 2.1; 2021: 2.1; 2022: 1.9; 2023: 1.8
  - Primary Balance: 2018: 0.5; 2019: -2.6; 2020: -2.6; 2021: -2.6; 2022: -2.6; 2023: -2.6
  - Effective interest rate: 2018: 3.2; 2019: 3.6; 2020: 4.0; 2021: 4.4; 2022: 4.7; 2023: 5.0
- Constant Primary Balance Scenario assumptions:
  - Primary Balance: constant at 0.5 for 2018–2023
  - Real GDP growth and inflation as in Baseline Scenario
- Contingent Liability Shock assumptions (selected):
  - Real GDP growth: 2018: 4.0; 2019: 1.2; 2020: 0.7; 2021: 3.7; 2022: 3.5; 2023: 3.4
  - Primary Balance: 2018: 0.5; 2019: -8.5; 2020: 1.1; 2021: 1.1; 2022: 1.0; 2023: 0.9
  - Effective interest rate: 2018: 3.2; 2019: 4.0; 2020: 4.1; 2021: 4.5; 2022: 4.8; 2023: 5.1

### Composition of Public Debt and Maturity Structure (Figures summarized)
- Composition by currency:
  - Local currency-denominated and foreign currency-denominated shares are charted across 2016–2023 (no numeric breakdown in supplied text).
- By maturity:
  - Short-term and medium- and long-term shares are charted across 2007–2023 (no numeric breakdown in supplied text).
- Net debt and gross nominal public debt are charted (percent of GDP) for 2016–2023 across Baseline, Historical, and Contingent Liability Shock scenarios (no additional numeric detail provided in table text).

### Key Fiscal and Macro Context (Selected narrative findings and projections)
- As of 2017:
  - Real GDP growth reached 3.4 percent in 2017.
  - Inflation was 1.3 percent in 2017.
  - Unemployment around 8 percent in 2017 (record low at the time).
  - Fiscal deficit reduced from 2.2 percent of GDP in 2016 to 1.0 percent in 2017.
  - Public debt projected to decline from 51 percent in 2017 to 45 percent in 2020.
- Medium-term outlook:
  - Growth projected to accelerate in 2018–2019 owing to new investments in the automotive industry (Jaguar-Land Rover and Volkswagen).
  - Authorities’ most recent projections for 2018 align with staff; for 2019 the MoF projects 4.5 percent growth and the NBS 4.8 percent.
  - Thereafter growth projected to soften towards potential estimated at around 3.5–4 percent.
  - Unemployment expected to reach around 5.5 percent in 2021; inflation envisaged to edge to around 2.5 percent.
- Long-term challenge:
  - Old-age dependency ratio projected to increase from recent 20 percent to 60 percent (long-term demographic pressure noted).

### Risks, Vulnerabilities, and Policy Implications
- Main external risk:
  - Intensified protectionist tensions in international trade constitute downside risks for Slovakia’s small open economy with concentration in car manufacturing.
- Main domestic risks:
  - High credit growth and labor shortages are the principal domestic risks for the medium-term outlook.
  - Tightening labor market could translate into higher wage demands in the public sector; authorities consider these risks manageable within the approved medium-term budget envelope.
- Fiscal policy stance:
  - Authorities aim to achieve a balanced budget in 2020.
  - Most recent forecasts raised projected revenues by 0.3–0.4 percent of GDP in 2018–2021, providing an additional buffer to cover fiscal risks.

*Source: IMF staff. Annex I. Public Debt Sustainability Analysis (DSA), as of May 23, 2018.*

### 2060. With this in mind, the substantial pension reform implemented in 2012 mitigates aging

### cr18241 - 2060. With this in mind, the substantial pension reform implemented in 2012 mitigates aging

### Pension reform and adequacy
- The 2012 pension reform mitigates aging pressures on pension expenditures by:
  - linking retirement age to life expectancy (the legal retirement age will continuously increase from 2017 onwards),
  - unifying the retirement age of men and women,
  - indexing pension benefits only to inflation.
- Raising pension benefits for pensioners at the lower end of income distribution is important from a pension adequacy perspective and would have only a limited and temporary impact on the pension system balance.

### Fiscal anchors, tax administration, and revenue mobilization
- The European Union fiscal rules and the national debt brake rule (as defined in the constitutional Fiscal Responsibility Act) provide strong fiscal anchors.
- Comprehensive anti-tax-avoidance program (launched in 2012):
  - Substantially reduced compliance gaps.
  - Mobilized approximately 2 percent of GDP of additional VAT and CIT revenues (annually).
  - Current measures focus on:
    - enhancing tax administration efficiency through higher use of new technologies,
    - improving coordination within the tax administration,
    - increasing voluntary compliance.
  - Slovak Financial Administration is updating its operational strategy; the April 2018 TADAT assessment provides input.
  - A new strategy for voluntary tax compliance is being prepared with international experts under financial support from the European Commission.

### Value for Money program and spending reviews
- “Value for Money” program (introduced in 2016) mandate:
  - Conduct regular and systematic spending reviews as part of the budgetary process.
  - Assess a majority of general government expenditures, including tax expenditures, over the election cycle.
- Results over the first two years:
  - Assessed expenditures in transportation, health, IT, environment, labor, and education.
  - Covered two-fifths of overall general government expenditures (15 percent of GDP).
  - Identified potential savings worth 0.6 percent of GDP, with implementation spanning through 2020.
  - Implementation monitored by the Implementation Unit at the Prime Minister’s Office; status implementation reports published as annexes to the general government budget.
- Recent extensions and ongoing work:
  - Three new spending reviews ongoing: public wage bill, agriculture, and marginalized groups expenditure.
  - In 2017, mandate extended to cost-benefit appraisals of all investment projects with costs exceeding EUR 40 million (and 10 million for IT projects) with the obligation to publish the assessments.

### Short-term priorities: labor market, credit growth, and housing
- Main short-term challenges: tightening labor market and strong credit growth.
- Labor market:
  - Tightening labor market feeding into higher wages and inflation but not yet affecting competitiveness (stable REER).
  - Authorities view most remaining unemployment as structural; labor shortages could limit growth.
  - Key domestic avenues to unlock labor reserves:
    - activation of long-term unemployed and marginalized groups through ALMPs,
    - improved education.
  - Staff focused analysis on female labor force participation; authorities agree with recommendations but expect potential labor force gains to be lower than for long-term unemployed and marginalized groups.
  - 2012 pension reform will increase labor market participation among older people, especially women, due to unified retirement age.
  - Legislation changes eased foreign worker access; number of foreign workers increased by 40 percent in 2017 (from a low base); additional measures approved in the year of the report.
- Credit growth and macroprudential policy:
  - Despite a sound banking sector with low and declining NPLs, long-lasting strong credit growth and accelerated house prices require vigilance.
  - Since 2014, the NBS has been introducing and gradually tightening macroprudential LTV and DSTI limits and the countercyclical buffer (CCB).
  - NBS actions in 2018:
    - introduced a new DTI limit,
    - further restricted the LTV limit,
    - increased the CCB to 1.5 percent effective as of August 2019.
  - Legislative change extending macroprudential measures to pre-approved loans expected by the end of the year to close a toolkit gap.
- Property taxation stance:
  - Authorities broadly agree with merit of staff’s recommendation to increase property taxation but are cautious because:
    - Housing demand driven in large part by demographic factors (strong 25–39 age cohorts entering the labor market).
    - Living space per person in Slovakia is one of the smallest in the EU; demand for improved living conditions is a consequence of income convergence.
  - Tax measures might not be the best solution at this juncture to address strong housing demand.

### Structural reforms: health, education, and vocational training
- Health care:
  - Recent policy measures guided by the 2016 healthcare spending review.
  - Measures include better management of hospital personnel, introduction of an e-health system, and a pilot project for diagnosis-linked reimbursement systems.
- Education:
  - Ministry of Education prepared a substantial update of the long-term educational strategy with an action plan of measures to be introduced over the next 10 years.
  - First phase starts in September 2018 and focuses on:
    - improving the quality of teachers’ training,
    - a gradual increase of teachers’ salaries aimed at attracting higher quality teachers.
- Vocational training and skill matching:
  - Authorities identified and removed legal impediments to greater use of work-based training in vocational education.

*Source: cr18241 - 2060. With this in mind, the substantial pension reform implemented in 2012 mitigates aging*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18241.pdf_