## 1svkea2022001

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---

### Recovery in 2021: pandemic headwinds and supply-side disruptions
- GDP growth in 2021: "3 percent"; output at end-2021 "1.2 percent" short of pre-crisis levels.
- 2020 contraction: "4.4 percent".
- Private consumption returned to pre-pandemic levels by 2021:Q3; private investment remained weak in 2021.
- Sectoral patterns:
  - ICT, professional, administrative, and public services exceeded pre-pandemic levels.
  - Manufacturing and contact-intensive services exhibited incomplete recoveries.
- Labor market and wages:
  - Employment rising but slack remains: registered unemployment "1.8 percentage points" above 2019:Q4; employment "1.3 percent" below 2019:Q4 (as of 2022:Q1).
  - Hours worked "9.6 percent" below pre-pandemic levels.
  - Nominal wage growth around "7 percent y/y" in 2021:Q4, with particular acceleration in manufacturing.
- Pandemic and vaccination:
  - Reintroduced containment measures in fall 2021 and early 2022.
  - Share fully vaccinated as of May 2022: "51 percent".
- External and reserves:
  - Current account turned to a deficit in 2021; EBA-lite CA gap estimated at "1.8 percent of GDP".
  - SDR allocation in 2021: "€959.4 million".
- Policy support in 2020–21 estimated at "5.9 percent of GDP", including:
  - Wage support: "2.4 percent of GDP".
  - Tax deferrals: "0.6 percent of GDP".
  - Loan guarantees: "0.9 percent of GDP".
- Recovery and Resilience Plan (RRP) grants: "€6.3 billion (6.9 percent of 2020 GDP)" over 2021–26; all "14" milestones for the first payment completed in April.

### Inflation, distributional impact, and supply pressures
- Headline inflation: "10.9 percent y/y" in April 2022.
- Core inflation: "8.1 percent".
- Inflation decomposition: pronounced contributions from energy, food, services, and nonenergy goods; inflation broader than in the euro area.
- Distributional impact: lower-income households face higher inflation due to larger food and energy weights.
- Producer price increases in 2021 driven by supply disruptions, transmitting pressure to CPI.

### Outlook and baseline projections
- Baseline assumptions: war continues without escalation; no disruptions to natural gas imports from Russia; supply bottlenecks dissipate toward end-2022; 2022 budget executed; ECB monetary support gradually wound down.
- Growth projections:
  - 2022: "2.2 percent" (about "2.5 percentage points" below the pre-war forecast).
  - 2023: "3.5 percent".
- Output gap: forecast at "1.7 percent of GDP" in 2022; expected to gradually close by 2025.
- Medium-term scarring: 2027 output projected "2.5 percent" lower than pre-crisis forecast.
- Refugee integration assumption: "20,000" refugees integrated into labor force.
- Inflation projections:
  - Around "10 percent" in 2022 and "10 percent" in 2023 before receding.
  - Drivers: high global energy and food prices, backward-looking indexation of regulated natural gas prices, declining output gap, strong wage growth.

### Main downside risk and scenario estimates
- Main risk: escalation of the war causing sanctions, deglobalization, gas supply disruptions, and supply-chain breakdowns.
- IMF EUR Regional Economic Outlook estimate: a 12-month Russian supply shut-off would lead to gas shortfalls of "12 percent" for Europe as a whole and around "25 percent" for Slovakia; output loss estimates range from "0.6–6 percent" in related studies.

### Authorities’ views
- Authorities broadly agree with staff assessment: war will weigh on growth through weaker foreign demand, prolonged supply disruptions, and subdued domestic demand.
- Authorities expect gradual strengthening in 2023; risks tilted to the downside.

---

### Fiscal policy — stance, measures, and recommendations
- 2021 fiscal deficit widened to "6.1 percent of GDP".
- 2022 Stability Program projects deficit to decline to "5.1 percent of GDP"; overall stance assessed as slightly expansionary.
- 2022 Stability Program includes initial military and humanitarian aid to Ukraine and "0.3 percent of GDP" reserves for inflation-mitigating measures.
- Staff recommendations:
  - Proceed with planned reduction in Covid support while keeping fiscal policy nimble.
  - Allow automatic stabilizers to fully operate.
  - Accommodate higher spending needs (refugees, energy security, targeted support).
  - Use targeted, temporary transfers to vulnerable households and consider temporary support to viable firms hit by energy prices.
- Fiscal buffers and consolidation:
  - Public debt: "63 percent of GDP".
  - Stability Program foresees "0.5 percent of GDP" annual consolidation for 2023–25.
  - Staff: rebuild buffers once economy on sustained growth path; spelling out concrete consolidation measures for the 2023 budget is important.

### Revenue, expenditure efficiency, and fiscal reform options (estimated yields, Percent of GDP)
- Raising property tax to EA level controlling for income: "0.7"
- Closing VAT gap with the EU average level: "0.2"
- Raising environmental tax to OECD-Europe level (in % of tax revenue): "0.2"
- Realizing half of additional VfM saving potential: "0.5"
- Total potential yield: "1.5"
- Additional fiscal notes:
  - Working children parental pension contribution estimated cost: "0.2 to 0.3 percent of GDP" over projection horizon to 2070.
  - Pension reform: re-link retirement age to life expectancy (an RRP milestone); parental pension bonus could raise fiscal costs.

### Budget figures (selected)
- Overall balance (Percent of GDP): 2019 = -1.3; 2020 = -5.5; 2021 = -6.1; 2022 = -5.2; 2023 = -3.1; 2024 = -2.8; 2025 = -2.7; 2026 = -2.5; 2027 = -2.6.
- General government debt (Percent of GDP): 2019 = 48.1; 2020 = 59.7; 2021 = 63.1; 2022 = 61.5; 2023 = 56.3; 2024 = 54.7; 2025 = 52.3; 2026 = 52.1; 2027 = 52.4.
- Nominal GDP (Millions of euros): 2019 = 94,048; 2020 = 92,079; 2021 = 97,123; 2022 = 106,746; 2023 = 121,428; 2024 = 129,840; 2025 = 137,526; 2026 = 144,934; 2027 = 151,868.
- Revenue and expenditure (Millions of euros): 2021 revenue = 39,512; 2021 expenditure = 45,485; 2022 revenue = 42,799; 2022 expenditure = 48,350.
- EU Grants (Millions of euros): 2021 = 1,196; 2022 = 2,235; 2023 = 4,254.

---

### Financial sector resilience, macroprudential stance, and supervision
- Banking sector indicators:
  - Regulatory capital to risk-weighted assets: 2021 = "19.8" (Percent).
  - Nonperforming loans to gross loans: 2021 = "2.1" (Percent).
  - Return on assets (after tax) 2021 = "0.9" (Percent).
- Credit developments:
  - Household debt (Percent of GDP): 2021 = "50.0".
  - Mortgage characteristics: 91 percent of mortgage loans originated in 2021 had fixed interest rates for 1–5 years; 7 percent fixed up to 1 year.
  - Loans to energy-intensive and highly competitive industries: "6 percent" of NFC credit.
- Macroprudential stance: broadly adequate from financial stability perspective; additional measures if housing imbalances persist.
- Staff recommendations (selected):
  - Stand ready to adjust the countercyclical capital buffer (CCyB). Current CCyB level: "1 percent".
  - Consider capital-based measures on mortgage exposures, including minimum risk weights, and explore sectoral systemic risk buffer (SyRB) after cost-benefit analysis.
  - Adjust borrower-based measures to address pockets of vulnerability (clustering below regulatory limits, rise in mortgages with maturities beyond retirement age); consider amortization requirements and age-related DTI rules.
  - Monitor NPLs among loans previously under moratoria: "0.3 percent" of total corporate loans and "0.4 percent" of total retail loans as of September 2021.
  - Strengthen AML/CFT framework, cyber resilience, and forward-looking provisioning under IFRS.
- Stress-test result: a 25 percent housing price correction would cut bank capital by about "150 bps" but remain above the Maximum Distributable Amount given estimated "550 bps" capital management buffer.

### Housing market risks and recommended policies
- House price growth reached "22 percent y/y" in 2022:Q1.
- Model-based house price overvaluation estimated at about "20 percent".
- Vulnerabilities:
  - Household debt rising faster and higher than peers.
  - Clustering of mortgages just below regulatory DSTI limits.
  - Increase in mortgages with maturities beyond borrowers' retirement age.
- Policy recommendations:
  - Address housing supply shortages; recent construction and spatial planning laws are welcomed.
  - Develop the rental market.
  - Raise property taxes to dampen overheating and strengthen public finances.
  - Monitor and address mortgages near regulatory limits and those with maturities past retirement age.

---

### Structural policies: labor market, green transition, and energy security
- Labor market:
  - Two-thirds of jobs estimated at risk of automation.
  - ALMP spending, particularly on training, remains low among OECD countries.
  - Recommendations: scale up ALMPs (training, reskilling, job search assistance, targeted hiring subsidies), tailor ALMPs to refugees (introductory programs, language training, possible wage subsidies), improve childcare and pre-primary education, and facilitate foreign worker integration.
- Green transition and carbon pricing:
  - Slovakia reduced carbon and energy intensity but needs more effort to meet mitigation goals.
  - Consider introducing explicit carbon taxation once energy prices subside; staff analysis suggests a carbon tax could significantly decrease emissions, with adverse growth consequences mitigated by using tax revenues to lower labor taxation and fund transfers to low-income households.
  - Introduction should be gradual, predictable, and accompanied by protection for vulnerable households.
- Energy security:
  - Reliance on Russian imports for natural gas, oil, and nuclear fuel creates short-run vulnerability.
  - Near-term steps: boosting nuclear fuel stockpiles and LNG imports; securing gas supplies from non-Russian sources; LNG purchases and contingency planning.
  - National Bank of Slovakia estimate: almost "7% natural gas consumption savings" for each 1°C cut in household thermostats.
  - Nuclear additions: Mochovce Unit 3 expected online in 2022; Unit 4 in 2024; additional capacity would turn Slovakia into a net electricity exporter.
  - Recommendations: diversify gas sources, frontload green and energy security investments, use RRF and RePowerEU funds.

### Productivity, governance, and RRP contributions
- RRP commitments: reform judiciary, improve public procurement, strengthen public investment efficiency; "30 percent" of RRP resources devoted to digitalization.
- Education and R&D reforms to strengthen public-private cooperation and incentivize talent retention.
- Improve institutional quality and implement GRECO recommendations.

---

### Debt sustainability, risk assessment, and heat-map highlights
- Large total external financing requirements: "56 percent of GDP in 2021".
- Public gross debt (selected): 2020 = "50.8" (Percent of GDP baseline table); 2021 = "59.7"; 2022 = "63.1"; 2023 = "61.5"; 2024 = "56.3"; 2025 = "54.7"; 2026 = "52.3"; 2027 = "52.4".
- Public gross financing needs (Percent of GDP): 2022 = "6.1"; 2023 = "6.4"; 2024 = "7.5"; 2025 = "7.4"; 2026 = "8.5"; 2027 = "6.9".
- Composition and external holdings:
  - Public debt held by non-residents: "54 percent".
  - ECB holdings through PSPP: about "42 percent of total government debt (84 percent of government external debt)".
- Stress-test scenarios (selected):
  - Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, and Combined Shock with specified parameter paths in the source.
- External debt and financing indicators:
  - Baseline external debt (Percent of GDP) 2021 = "137.0"; 2022 = "133.5"; 2023 = "124.7"; projection to 2027 around "121.9".
  - Scenario with variables at historical averages projects external debt rising to "164.5" (Percent of GDP) by 2027.
- Key benchmarks used in heat-map methodology:
  - External financing requirement benchmarks: "17 and 25 percent of GDP".
  - Public debt held by non-residents benchmarks: "30 and 45 percent".
  - Long-term bond spread benchmarks: "400 and 600 basis points".
  - Gross external financing need benchmarking figures presented in source.

---

### Measures to help households cope with rising commodity prices (selected)
- Freeze regulated electricity prices for households until 2024 (Time of Implementation: Feb-22; Budgetary Cost: 0).
- Reduced electricity distribution fee for unregulated market (Time of Implementation: Nov-21; Budgetary Cost: 0.1).
- Reduced electricity system operation tariff for regulated market (Time of Implementation: Nov-21; Budgetary Cost: 0.04).
- Advance payment of 13th pension from November to July (Time of Implementation: Jul-22; Budgetary Cost: 0).
- Inflation aid package (child benefits and one-off support) (Time of Implementation: Jun-22; Budgetary Cost: 0.3).
- Inflation aid package (child benefits) (Time of Implementation: Jan-23; Budgetary Cost: 1.0).
- Financing: partially by higher taxes including potential windfall tax on main oil refinery.
- Staff advice: prioritize targeted, temporary transfers to vulnerable households; consider temporary support to viable companies using EC Energy Prices Toolbox and Temporary Crisis Framework.

---

### Public investment management, procurement, tax administration, and fiscal transparency
- RRF grants: "€6.3 billion" over 2021–26 (over "6.9 percent of 2020 GDP").
- Investment Authority (IA) expanded mandate: reviews projects above EUR "1 million"; in 2021 IA evaluated more than "250" projects totaling EUR "6.3 billion" and identified potential savings of over EUR "800 million".
- Procurement reform: amendments to Public Procurement Act to speed up processes, align with EU directives, expand e-procurement, and improve controls.
- VAT gap: declined from "35 percent" in 2012 to "12.1 percent" in 2021; EU average VAT gap: "10.3 percent".
- E-invoicing planned for 2024; feasibility studies required for projects > EUR "40 million" (or > EUR "10 million" in IT).
- Fiscal transparency: Slovakia subscribes to SDDS Plus (subscribed on September 16, 2019); quarterly accrual-based general government financial balance sheet available within "85 days" after quarter end.

---

### Annex I — Exposures to the War in Ukraine (selected)
- Refugees: more than "440,000" arrived by end-May, equivalent to over "8.1 percent" of local population; over "78,000" requesting temporary protection.
- Direct exports to Russia and Ukraine: gross exports "2.4 percent" and "1.6 percent" of total exports, respectively.
- Energy reliance: Slovakia relies almost exclusively on Russian imports for natural gas, oil, and nuclear fuel; short-run vulnerability to gas disruptions high.
- Key vulnerable inputs: palladium, nickel, and inert gases sourced from Russia/Ukraine, critical for car manufacturing.
- Government actions: facilitated border crossing, financial support to refugees, amended legislation for access to public services and labor market; secured alternative gas routes and LNG purchases; contingency planning and inter-country solidarity agreements.

---

### Annex IV — Risk Assessment Matrix (selected global and local risks and policy responses)
- High-likelihood, high-impact risks for Slovakia:
  - Russia’s invasion escalation: Relative Likelihood: High; Country-specific note: High; Policy Response includes discretionary fiscal support, securing alternative energy, contingency plans.
  - Geopolitical tensions and deglobalization: Relative Likelihood: High; Country-specific note: High; Policy Response includes structural reforms and EU coordination.
  - Rising and volatile food and energy prices: Relative Likelihood: High; Country-specific note: High; Policy Response includes targeted, timely transfers and incentives for domestic food production.
- Other notable risks:
  - Outbreaks of lethal Covid-19 variants: Relative Likelihood: Medium; Policy Response: ramp up vaccination, targeted fiscal support.
  - De-anchoring of inflation expectations: Relative Likelihood: Low/Medium for EA; Medium for USA; Policy Response: coordinated monetary policy at EA level, extend debt maturity, accelerate EU funds absorption.
  - Local risks: extended supply-chain disruptions (High), property market downturn (High country-specific vulnerability), disorderly migration flows (Medium).

*Source: Slovak Republic — International Monetary Fund, “1. The Recovery in 2021: Pandemic Headwinds and Supply Side Disruptions.”*

### 1. The Recovery in 2021: Pandemic Headwinds and Supply Side Disruptions ______________________5

### 1. The Recovery in 2021: Pandemic Headwinds and Supply Side Disruptions

### Recovery and near-term impact
- The Slovak economy entered 2021 poised to rebound from a "4.4 percent" contraction in 2020, supported by robust policy responses that shielded household and corporate balance sheets, limited unemployment rises, and ensured continued credit flow.
- GDP growth in 2021 was "3 percent", one of the lowest in the EU, leaving economic output at end-2021 "1.2 percent" short of pre-crisis levels.
- The economy is highly vulnerable to the fallout from the war in Ukraine; Slovakia accepted more than "440,000" Ukrainian war refugees and is heavily exposed through energy reliance on Russia, integration in global value chains, and a dominant auto sector.
- Slovakia was disproportionately affected by global supply chain breakdowns (notably semiconductor scarcity), given its industrial structure, GVC integration, and dependence on specialized suppliers.

### Demand and supply heterogeneity
- Private consumption returned to pre-pandemic levels by 2021:Q3, supported by policy measures and unwinding of accumulated excess household savings.
- Private investment (gross fixed capital formation) remained weak in 2021.
- Gross value added: ICT, professional, administrative, and public services exceeded pre-pandemic levels, while manufacturing and contact-intensive services had incomplete recoveries.

### Pandemic developments and labor market
- COVID-19 containment measures were reintroduced with infections rising sharply in the fall of 2021 and early 2022; only "51 percent" of the population was fully vaccinated as of May 2022.
- Employment is rising but some labor market slack remains: registered unemployment remains "1.8 percentage points" above 2019:Q4 levels and employment remains "1.3 percent" below 2019:Q4 levels as of 2022:Q1.
- Hours worked are still "9.6 percent" below pre-pandemic levels, with significant sectoral heterogeneity.
- Nominal wage growth was around "7 percent y/y" in 2021:Q4, with particular acceleration in manufacturing.

### Inflation and distributional impact
- Headline inflation reached "10.9 percent y/y" in April 2022, driven by rising energy and food prices, hikes in some regulated prices, and one-off policy changes.
- Core inflation stood at "8.1 percent" and has accelerated and broadened.
- Inflation has been more broad-based than in the euro area, with accelerated inflation in food, services, and non-commodity goods.
- Inflation is felt more acutely by lower-income households due to higher weights of food and energy in their consumption baskets.

### External and reserve developments
- After a small surplus in 2020, the current account turned into a deficit in 2021 due to higher imports with domestic consumption and curtailed exports from supply chain disruptions (especially the auto sector).
- The 2021 current account gap under the EBA-lite CA approach is estimated at "1.8 percent of GDP".
- Slovakia’s SDR allocation in 2021 was "€959.4 million", strengthening official reserve assets.

### Policy support through 2021
- The 2020–21 direct fiscal support to the pandemic is estimated at "5.9 percent of GDP", including:
  - "2.4 percent of GDP" in wage support,
  - "0.6 percent of GDP" in tax deferrals,
  - "0.9 percent of GDP" in loan guarantees.
- Some key 2020 measures were extended and made more targeted; a permanent wage-subsidy scheme replaced the First Aid scheme starting March 2022.
- Bank solvency, liquidity and profitability increased in 2021, supported by measures from the National Bank of Slovakia, the ECB, and the European Banking Authorities.
- Credit growth remained robust after guarantee programs ended; mortgage growth reached double digits and house price growth accelerated. Corporate bankruptcies picked up in 2021:H2 but remained low and did not trigger bank asset quality deterioration.

### Recovery and Resilience Plan (RRP)
- Slovakia is set to receive "€6.3 billion (6.9 percent of 2020 GDP)" in grants over 2021–26 under the RRP.
- Slovakia completed all "14" milestones for the first RRP payment request in April and more than half of the milestones for the second payment request.

---

### Real and Inflation Developments (high-level findings)
- Supply shocks in 2021 weighed more heavily on Slovakia’s industrial production than in the Euro Area.
- Producer price increases in 2021 were sizably driven by supply disruptions, transmitting pressure to CPI.
- Inflation decomposition shows pronounced contributions from energy, food, services, and nonenergy goods; inflation across income quintiles is higher for lower quintiles.

---

### Outlook and projections
- Baseline assumptions: the war continues with no resolution but does not escalate; no disruptions to natural gas imports from Russia; supply bottlenecks start dissipating towards the end of 2022; the 2022 budget is executed; ECB monetary policy support is gradually wound down.
- Growth projections:
  - "2.2 percent" in 2022 (about "2.5 percentage points" below the pre-war forecast),
  - "3.5 percent" in 2023, assuming gradual normalization and recovery in net exports, stronger investment, and higher EU grants.
- Output gap is forecast at "1.7 percent of GDP" in 2022 and expected to gradually close by 2025.
- Medium-term scarring from the war: 2027 output projected to be "2.5 percent" lower than the pre-crisis forecast.
- Integration of "20,000" Ukrainian refugees is assumed, which could partly relieve aging-related labor supply pressures.
- Inflation projections:
  - Around "10 percent" in 2022 and "10 percent" in 2023 before receding in the medium term.
  - Factors keeping inflation high include high global energy and food prices, backward-looking indexation of regulated natural gas prices, a decline in the output gap, and strong wage growth.
- Main downside risk: escalation of the war leading to sanctions and deglobalization, disrupting gas supplies and supply chains.
  - An IMF EUR Regional Economic Outlook estimate: a 12-month Russian supply shut-off would lead to gas shortfalls of "12 percent" for Europe as a whole and around "25 percent" for Slovakia; output loss estimates range from "0.6–6 percent" in related studies.

---

### Authorities’ views
- Authorities broadly agreed with staff’s assessment: war will weigh on growth mainly through weaker foreign demand, prolonged supply chain disruptions, and subdued domestic demand due to surging commodity prices.
- Authorities forecast gradual strengthening in 2023 as effects of the war dissipate; risks are tilted to the downside with high uncertainty reflected in wide forecast ranges.

---

### Policy discussions — Fiscal policy (findings and recommendations)
- 2021 fiscal stance: expansionary; the fiscal deficit widened to "6.1 percent of GDP" due to higher Covid-related expenditures. The outturn was significantly lower than budgeted, driven by higher tax (CIT and VAT) income and under-execution of domestically-financed capital spending.
- The 2022 Stability Program projects the fiscal deficit to decline to "5.1 percent of GDP" as Covid-related measures are phased out; the overall stance is assessed as slightly expansionary.
- The Stability Program envisages a significant boost to public investment, facilitated by EU grants, and includes initial military and humanitarian aid to Ukraine and "0.3 percent of GDP" reserves for inflation-mitigating measures; the budget will likely be revised to fully accommodate war-related fiscal needs.
- Staff recommendations:
  - Proceed with planned reduction in Covid support while keeping fiscal policy nimble and ready to adjust.
  - Allow automatic stabilizers to fully operate.
  - Accommodate possibly higher spending on refugees, energy security investments, and targeted support.
  - Continue to monitor war and pandemic developments and adjust policies as needed.

---

*Source: Slovak Republic — International Monetary Fund, “1. The Recovery in 2021: Pandemic Headwinds and Supply Side Disruptions.”*

### 15.      The authorities are taking measures to help households cope with rising commodity

### 15.      The authorities are taking measures to help households cope with rising commodity

### Measures to help households cope with rising commodity prices
- Agreement with the main power utility provider to freeze regulated electricity prices for households until 2024 (Time of Implementation: Feb-22; Budgetary Cost: 0).
  - Note: Cost to the utility is limited as more than 50 percent of electricity in Slovakia is generated by the nuclear power plant it owns.
- Reduced electricity distribution fee for the unregulated market (Time of Implementation: Nov-21; Budgetary Cost: 0.1).
- Reduced electricity system operation tariff for the regulated market (Time of Implementation: Nov-21; Budgetary Cost: 0.04).
- Advancing the payment of the 13th pension from November to July (Time of Implementation: Jul-22; Budgetary Cost: 0).
- Inflation aid package (child benefits and one-off support to selected vulnerable groups) (Time of Implementation: Jun-22; Budgetary Cost: 0.3).
- Inflation aid package (child benefits) (Time of Implementation: Jan-23; Budgetary Cost: 1.0).
- The inflation aid package would be partially financed by higher taxes including a potential windfall tax on the main oil refinery.
- Staff advice:
  - Targeted and temporary transfers to vulnerable households would provide more cost-effective relief and avoid adding to inflationary pressures.
  - Consider temporary support to viable companies hit hard by energy prices, using policies in the 2021 EC Energy Prices Toolbox and the recent Temporary Crisis Framework to prevent unnecessary bankruptcies.

### Fiscal stance, buffers, and consolidation
- Public debt: 63 percent of GDP.
- 2022 Stability Program: foresees a 0.5 percent of GDP annual consolidation for 2023–25 in line with the new multiannual expenditure ceilings.
- Under the baseline, timing and pace of consolidation aim to balance rebuilding buffers and protecting activity, with large EU funds inflows mitigating consolidation’s drag on growth.
- With elections in 2024, spelling out concrete consolidation measures for the 2023 budget is important.
- Staff recommendation: rebuild fiscal buffers once the economy is on a sustained growth path.

### Revenue, expenditure efficiency, and fiscal framework reforms
- Potential revenue measures and estimated fiscal yields (Percent of GDP):
  - Raising property tax to the EA level controlling for income: 0.7
  - Closing VAT gap with the EU average level: 0.2
  - Raising environmental tax to the OECD-Europe level (in % of tax revenue): 0.2
  - Realizing half of additional VfM saving potential: 0.5
  - Total: 1.5
- Additional measures and observations:
  - Raising real estate taxation (e.g., link real-estate taxes to market values) could generate revenue and help contain house price growth; mitigate adverse effects on vulnerable populations by means-test exemptions.
  - Raising environmental taxation (e.g., introduce a carbon tax once energy prices subside) could support revenue and Slovakia’s green transition.
  - Sustaining the reduction of the VAT gap in 2021 and introducing e-invoicing would strengthen tax collection, especially if accompanied by a broad compliance package.
  - Stepped-up implementation of value for money (VfM) measures and their systematic integration in the budget process could improve spending efficiency and yield savings.
- Fiscal framework reforms:
  - Introduction of expenditure limits welcomed; would mitigate policy procyclicality and enhance credibility of consolidation plans.
  - Envisaged amendments to the Constitutional Act on Budgetary Responsibility (debt rules and multiannual spending ceiling) and strengthening the Council on Budgetary Responsibility (CBR) and independent forecast committees would strengthen the fiscal framework.
  - Introducing constraints on the overall tax burden would limit government savings in good times and would not help ensure fiscal sustainability.
- Pension system:
  - Amendment to the Social Insurance Law re-introduces the link between retirement age and life expectancy (a RRP milestone) — approval and implementation critical to secure public finances and boost labor supply.
  - Parental pension bonus in the same amendment could raise fiscal costs; authorities should seek to minimize its fiscal cost.
  - Working children will be allowed to contribute 1.5 percent of their gross salary to their parents' pensions, estimated to cost 0.2 to 0.3 percent of GDP over the entire projection horizon of 2070.
  - Enshrining multiyear spending ceilings and the retirement-age linkage in constitutional acts would help prevent reversal.

### EU funds absorption and investment governance
- Only about half of 2014–20 MFF EU funds were absorbed; significant inflows through the RRF imply the government needs to spend a record 3.5 percent of GDP in EU grants in 2023.
- Measures to improve absorption and governance:
  - Establishment of an Investment Authority to streamline and increase quality of investment projects.
  - Public procurement law amendments to simplify processes, align with EU directives, and improve controls.
  - Recommendations from 2019 PIMA: better coordination between regional and sectoral strategies and stronger oversight of SOEs.

### Authorities’ views on fiscal policy and measures
- Authorities agreed with most staff recommendations and underscored adoption of binding multiyear expenditure ceilings.
- They are ready to further adjust fiscal policy given high uncertainties from the war in Ukraine and are introducing measures to help households cope with surging inflation.
- The recently approved social aid package mixes temporary targeted transfers and enhanced family support; it largely affects the 2023 balance and offsetting revenue measures are being discussed.
- Authorities report steps to improve EU funds absorption and supervision, including procurement simplifications, centralized strategic purchases, greater digitalization, and a crisis management system.

### Financial sector policy — resilience, monitoring, and supervision
- Banking sector: well capitalized, liquid, and profitable; NPLs declined despite withdrawal of support measures.
- Contributing factors to stronger profits in 2021: lower provisioning costs and elimination of the bank levy.
- Loans to corporates in industries that are both energy-intensive and highly competitive: 6 percent of NFC credit (NBS FSR November 2021).
- Staff recommendations:
  - Stand ready to adjust the countercyclical capital buffer (CCyB) in line with cyclical conditions. Current CCyB level: 1 percent.
    - Raising the CCyB may be warranted if the strong credit cycle continues; be ready to delay increases or release buffers if risks materialize.
  - Continue close monitoring of asset quality and assess war-related spillover risks (rising cost pressures, depressed household incomes); calibrate stress tests accordingly.
  - Pay particular attention to NPLs among loans previously under moratoria and loans subject to guarantees, and in sectors supported by pandemic-related measures.
    - Non-performing loans among those previously under moratoria: 0.3 percent of total corporate loans and 0.4 percent of total retail loans as of September 2021 (NBS FSR November 2021).
  - Ensure loan staging is forward-looking and provisioning levels are appropriate under IFRS for timely risk identification.
  - Heightened cyber risk: include in financial stability analysis, strengthen cyber regulation and supervision, and improve response and recovery capacities.
  - Continue upgrading the AML/CFT framework, implement a risk-based supervisory model, ensure availability of beneficial ownership information, and mitigate risks posed by politically exposed persons.
    - NBS developed an IT tool for risk-based supervision; transposition of the 6AMLD and implementation of Resolution No. 381 will further enhance the AML/CFT legislative framework.
  - Staff welcomes an ongoing audit of the government’s COVID response and encourages follow-up on findings.

### Insolvency framework and restructuring
- Slovakia is reforming its insolvency framework to digitalize processes, establish early warning systems, and introduce a specialized court.
- Law modernizing insolvency law and implementing the EU Restructuring Directive was adopted in March 2022.
- Implementation of these measures would strengthen insolvency efficiency and facilitate effective restructuring, particularly for distressed but not yet insolvent enterprises.

### Housing market and macroprudential concerns
- House price growth accelerated, reaching 22 percent y/y in 2022:Q1, with a wide gap between actual and model-predicted prices.
- Mortgage market characteristics and risks:
  - 91 percent of mortgage loans originated in 2021 had a fixed interest rate for 1–5 years; 7 percent had rates fixed up to 1 year.
  - Household debt relative to GDP has risen faster and is higher than peer countries due to increased homeowners with mortgages and topping-up of existing mortgages.
  - Active use of borrower-based measures reduced the share of high LTV, DTI, and DSTI mortgages, but a cluster of mortgages right below regulatory limits is a potential vulnerability.
  - Increase in mortgages with maturities extending beyond borrowers’ retirement age.
  - Housing cost overburden for lower-income households is moderate from an international perspective, but tightening financial conditions and higher inflation could quickly change affordability.
- Macroprudential monitoring and action advised:
  - Close monitoring of housing market vulnerabilities given rising banks’ exposure to the real estate sector.
  - Address clusters of mortgages near regulatory limits and monitor loans with maturities past retirement age.

*Source: IMF staff report excerpts from the Slovak Republic country report sections on fiscal policy, financial sector policy, and housing market.*

### 29.      While the macroprudential stance is broadly adequate from a financial stability point

### 1svkea2022001 - 29.      While the macroprudential stance is broadly adequate from a financial stability point

### Macroprudential stance and housing-market vulnerabilities
- Finding: The macroprudential stance is broadly adequate from a financial stability point of view, but additional measures could be considered if housing market imbalances persist.
- Recommended capital-based measures:
  - Introduce capital-based measures on mortgage exposures, including minimum risk weights, to strengthen banks’ resilience to adverse housing market shocks.
  - Explore applying the sectoral systemic risk buffer (SyRB) to target systemic risks from mortgage loans under the new Capital Requirements Directive (CRD V) flexibility, after conducting a cost-benefit analysis.
- Recommended borrower-based measures:
  - Adjust borrower-based measures to address pockets of vulnerability (e.g., concentration of loans below regulatory limits; rise in loans with maturities beyond retirement age).
  - Consider additional amortization requirements for new mortgages at the regulatory ceilings to reduce clustering just below ceilings.
  - Consider a gradually falling DTI limit as borrowers approach retirement age to limit overindebtedness of vulnerable pensioners, while monitoring implementation to avoid excessively reducing access to credit for credit-worthy older borrowers.
- Stress-test result (Staff): Under a mortgage stress scenario, with a 25 percent housing price correction, bank capital could fall by about 150 bps but remain above the Maximum Distributable Amount given the estimated 550 bps capital management buffer (IMF SR 2021).

### Housing market pressures, supply, and taxation
- Finding: Model-based estimates suggest a house price overvaluation of about 20 percent.
- Finding: Household debt has increased more and is higher than in peer countries.
- Finding: Repayment difficulties are significantly more common for mortgages with higher DSTI, DTI and LTV.
- Finding: The average age of mortgage holders is increasing rapidly.
- Policy recommendations:
  - Address housing supply shortages to dampen house price growth and associated vulnerabilities; recent construction and spatial planning laws aiming to simplify construction code and shorten building permit processes are welcomed.
  - Develop the rental market to help contain house price inflation.
  - Raise Slovakia’s property taxes to strengthen public finances and dampen overheating pressures.
- Social context: Over the past decade, the overcrowding rate in Slovakia declined from 40 to 30 percent between 2011 and 2020, compared to the EU average of about 18 percent; the inflow of refugees might raise housing demand.

### Authorities’ views on housing measures
- The authorities broadly concurred with staff’s assessment of housing market risks.
- They are open to expanding the macroprudential toolkit with capital-based measures, such as minimum risk weights, but request a thorough cost-benefit analysis given sizable differences in mortgage risk-weights among IRB banks.
- They plan to introduce age-related DTI limits to address mortgages with maturities extending beyond retirement age; their analysis suggests early adoption would limit excessive indebtedness and reduce risk accumulation with only a slight reduction of credit growth.
- They highlighted recent regulatory changes to bolster housing supply flexibility.

### Structural policies: labor market, green transition, and energy security
- Labor market challenges and recommendations:
  - Structural reforms needed for resilient, inclusive, and sustainable growth amid external shocks and global trends (automation, digitalization, climate mitigation).
  - Two-thirds of jobs in Slovakia are estimated to be at risk of automation.
  - More effective Active Labor Market Policies (ALMP) (training, reskilling, job search assistance, targeted hiring subsidies) can reduce skill mismatches and support reallocation; ALMP tailored to refugees (introductory programs, language training, possible wage subsidies) can aid integration.
  - Slovakia’s ALMP spending, particularly on training, remains low among OECD countries.
  - Over the medium and long term, raise labor participation of women of childbearing age and the elderly, reduce long-term unemployment (notably among the disadvantaged Roma community), and attract foreign workers.
  - Policy tools: improve childcare and pre-primary education; targeted upskilling; one-stop-shop portal for foreign workers; strengthen integration services; improve long-term elderly care and health care.
- Green transition and energy policy:
  - Slovakia has reduced carbon and energy intensity but needs significant effort to reach climate mitigation goals; existing and envisaged policies may fall short of delivering carbon neutrality by 2050.
  - Consider introducing explicit carbon taxation; staff analysis suggests a carbon tax could significantly decrease emissions and energy consumption, with adverse growth consequences mitigated by using tax revenue for lower labor taxation and efficient transfers to low-income households.
  - Carbon taxation introduction should be gradual, predictable, complemented with protection for vulnerable households, and timed once energy prices have subsided; preparations should start as soon as feasible.
  - Ensure energy security via review of energy strategies, collaboration with neighbors and EU, and higher investment; immediate focus on mitigating potential shut-off effects (sourcing alternative supplies, building inventories, contingency planning).
  - Recent steps: securing gas supplies from non-Russian sources and LNG purchases; extend inter-country solidarity agreements; public campaigns to incentivize energy efficiency. The National Bank of Slovakia estimates almost 7% natural gas consumption savings for each 1°C cut in household thermostats.
  - Frontload and expand planned green and energy security investments, including use of Recovery and Resilience Facility (RRF), RePowerEU and other EU funds.
  - Medium-term plans: develop other renewable energy sources, expand nuclear energy, diversify natural gas sources and alternatives (geothermal, hydrogen, biomethane), update technology to utilize renewable fuels, increase energy efficiency, and accelerate targeted investments in energy storage, LNG supplies and transmission and distribution networks.
- Nuclear and timing: The Mochovce Unit 3 nuclear reactor is expected to come on stream in 2022 with unit 4 following in 2024; the additional power generation capacity would turn Slovakia into a net electricity exporter.

### Boosting productivity and governance
- Finding: Strengthening institutional quality and governance could raise efficiency and productivity and amplify gains from other structural reforms.
- RRP commitments:
  - Reform judiciary, improve public procurement, and strengthen public investment efficiency.
  - 30 percent of resources of the RRP will be devoted to boosting digitalization.
  - Reforms in higher education and R&D to strengthen public-private cooperation, more efficient grant evaluation and incentives to attract and retain talent.
- Complementary recommendation: Address recommendations made by the Council of Europe’s Group of States against corruption (GRECO).

### Authorities’ views on structural reforms and energy coordination
- Authorities agreed with staff priorities and noted progress under the RRP as catalyst for reforms and political consensus.
- Noted active labor market measures (e.g., “take your chance” program) and comprehensive support to Ukrainian refugees to facilitate labor market integration; permanent Kurzarbeit scheme became effective in March and is being used.
- Lifelong learning strategy approved in November to complement education reform in the RRP.
- On energy: diversified gas routes to the Czech Republic, Hungary, Austria and Ukraine, with a connection to Poland to start operations in mid-2022; Slovak gas company made LNG purchases and authorities developed a contingency plan for rationing.
- Authorities stressed EU-level coordination and solidarity for energy security, and view regional coordination as important if a carbon tax is introduced once energy prices recede.
- Authorities’ analysis based on marginal abatement cost curves suggests reaching Slovakia’s 2030 climate mitigation goals is feasible.

### Staff appraisal: outlook, fiscal policy, and consolidation
- Economic outlook and risks:
  - The war in Ukraine has clouded the outlook while Slovakia was still recovering from the pandemic.
  - Effects already felt through surging commodity prices, input shortages, subdued confidence, weaker global demand and heightened energy security risks.
  - Humanitarian impact: more than 440,000 Ukrainian refugees have crossed the Slovak border.
  - Growth projection: growth is projected to decline to 2.2 percent in 2022.
  - Inflation projection: inflation averaging close to 10 percent during 2022−23.
  - Key risks: stronger spillovers from the war (especially energy supply disruptions) and protracted supply chain breakdowns.
  - External position in 2021: assessed to be moderately weaker than fundamentals and desirable policies.
- Fiscal recommendations:
  - Fiscal policy needs to be flexible and ready to adjust, while avoiding adding to inflationary pressures.
  - Immediate priority: mitigate economic fallout of the war and minimize the humanitarian crisis; allow automatic stabilizers to operate fully.
  - Budget could be revised to reprioritize spending and accommodate higher spending (refugees, energy security, targeted support).
  - Use targeted and time-bound transfers to vulnerable households to cushion rising commodity prices—preferable to large, permanent, and less targeted increases in benefits.
  - Consider temporary support to viable companies hit hard by rising commodity prices, if needed.
- Rebuilding fiscal buffers:
  - Begin once the economy is on a solid growth path to create room for maneuver and accommodate rising ageing-related spending.
  - The 0.5 percent of GDP annual consolidation over 2023−25 envisaged in the stability program appears appropriate as high EU fund inflows would help offset the consolidation’s drag on growth.
  - A credible medium-term consolidation path requires spelling out concrete measures.
  - Progress noted in reducing the VAT gap; raising real estate and environmental taxation could yield sizable revenue.
  - On expenditure, stepped-up implementation of value for money measures will help realize the saving potential identified in spending reviews.

*Excerpted and summarized from the provided IMF chapter content.*

### 43.      Recent reforms to the fiscal framework and the pension system could significantly

### Recent reforms to the fiscal framework and the pension system could significantly

### Fiscal framework and pension reforms
- Multiyear spending ceilings should strengthen fiscal discipline.
- The link between retirement age and life expectancy will improve fiscal sustainability.
- These reforms could be enshrined in constitutional acts to help prevent their reversal.
- Some elements of the ongoing fiscal reforms require further consideration:
  - Constraints on the overall tax burden limit the ability of fiscal policy to respond to shocks.
  - The parental bonus would entail fiscal costs before savings from other elements of the pension reforms are realized.

### Banking sector resilience and financial supervision
- The banking sector has weathered the pandemic well.
- Continued close monitoring, enhanced supervision, and careful calibration of financial sector policies are warranted.
- Financial sector supervision (including AML/CFT supervision) should:
  - Closely monitor asset quality.
  - Assess risks related to the war and its spillovers and calibrate stress tests accordingly.
- Adjusting the CCyB may be warranted if there are clear signals that the strong credit cycle continues; authorities should be ready to change course if downside risks materialize.
- Continue exploring additional measures to address housing market vulnerabilities, including:
  - Capital-based measures on mortgage exposures, such as minimum risk weights and targeted use of a sectoral systemic risk buffer.
  - Adjusting borrower-based measures to address specific pockets of vulnerability, for example the rise in mortgages with maturities beyond borrowers' retirement age.

### Energy security and climate mitigation
- Ensuring energy security while advancing climate mitigation goals is a key policy priority.
- Immediate focus to mitigate the effects of a potential Russian gas shut-off should include:
  - Securing alternative energy sources.
  - Accelerating inventory buildup.
  - Collaborating at the EU level.
  - Contingency planning.
- Authorities’ plans for higher investment in renewables and improved energy efficiency are welcome and should be accelerated where possible, as they will help improve energy security and reduce greenhouse gas emissions.
- To accelerate the green transition, Slovakia could consider introducing explicit carbon taxation once energy prices have subsided.

### Structural reforms, investments, and human capital
- Structural reforms and investments to accelerate the green and digital transformation will set the stage for resilient, inclusive, and sustainable growth in a more shock-prone world.
- These should be coupled with human capital investments, education reforms, and effective labor market policies to:
  - Strengthen labor supply in a rapidly aging society.
  - Ease the adjustment to structural changes.
  - Ensure the benefits of growth accrue to all.
- Reforms to improve institutional quality, strengthen governance, and innovation would raise efficiency and productivity and amplify gains from other reforms.
- Slovakia’s Recovery and Resilience Plan outlines sizable investments and reforms in these areas; their successful execution would contribute significantly to raising living standards and lifting the economy’s potential.

*SLOVAK REPUBLIC INTERNATIONAL MONETARY FUND*

### 47.      It is recommended that the next Article IV consultation with the Slovak Republic take

### 1svkea2022001 - 47.      It is recommended that the next Article IV consultation with the Slovak Republic take

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

### Real sector developments
- Slovakia has yet to fully recover from the pandemic.
- Supply disruptions have weighed on industrial production.
- The drawdown of household savings supported consumption, along with effective policy measures, resulting in resilient retail trade in 2021H2 and in early 2022 despite high infection rates.
- Economic sentiment among consumers weakened amid large uncertainties related to the Ukraine war, and consumer price inflation surged to record highs.
- GDP Growth During the Pandemic (Cumulative Growth 2020 and 2021): charted values include countries with Slovakia positioned among peers (no single numeric value for Slovakia in the figure caption).
- Retail Trade (SA, constant prices, Million Euro): time series shown from Jan-19 to Jan-22; last observation referenced as 2022.
- Economic Sentiment Indicators (Percent balance, SA): Last obs. 4/2022.
- Harmonized Index of Consumer Prices (Year-on-year percent change, NSA): Last obs. 4/2022.

### Labor market developments
- Unemployment is declining gradually.
- Employment is recovering, though hours worked remain significantly below pre-crisis levels.
- Working Hours Growth Decomposition, 2021Q4 (Percent change relative to 2019Q4): Jobs, Hours per worker, Total hours worked plotted for countries including SVK.
- Registered Unemployment Rate (Percent of labor force, SA): series from 2016Q1 to 2022Q1.
- Share of Producers Reporting Shortages of Labor (SA): series through 2022Q2 for Slovakia.
- Wage growth has been particularly strong in the manufacturing sector: Average Nominal Wages (Percent change, year-on-year) shows Slovakia among higher-growth countries in 2021Q4.
- Employment by Sector (Thousands, Seasonally and working day adjusted): Manufacturing, Public Admin, Education & Support Servs, Total (RHS) shown for 2022Q1.

### External sector developments
- The current account deteriorated in 2021, mainly due to a deterioration in trade balance after Q1.
- Car exports declined in the second half of 2021.
- Slovakia has a large negative NIIP, but external liabilities are FDI-heavy, reducing exposure to capital flow reversals.
- Current Account Balance (Percent of GDP): goods and services, primary income, secondary income and total plotted 2006–2021.
- Foreign Trade (Eur Million; Quarter-on-quarter percent change): exports and imports series through 2021Q3.
- Net International Investment Position (Percent of GDP): components through Last obs. 12/2021.
- REER CPI Based (Index: 2010=100): Slovakia and CE-3 series 2001–2021.
- External Position (Adjusted CA Balance, percent of GDP, RHS): Staff assesses the external position in 2021 to be moderately weaker than fundamentals.
- Contribution to Export Growth (Year-on-year percent change): sectoral contributions including Transportation equipment, Machinery and electrical equipment, etc., series through Dec-21.

### Fiscal sector developments and challenges
- Wage support has declined significantly from peak levels and shifted to contact-intensive services (e.g. accommodation and trade).
- A sizable deficit in 2021 led to a further increase in public debt, while financing costs have also started to rise.
- The public debt-to-GDP ratio is reduced only moderately over the medium term in the no-consolidation scenario.
- Fiscal consolidation would be needed given Slovakia’s long-term pension cost challenges.
- Strong EU funds inflows will help cushion the negative growth impact from fiscal consolidation.
- Public Pension Spending (Percent of GDP): long-run comparisons show Slovakia among countries with rising pension pressures.
- EU Grants to General Government (Mil EUR): 2011–2025 series with visible increases around MFF/RRF periods.
- Fiscal Balance and Public Debt (Percent of GDP): Government consolidated gross debt and fiscal balances series shown with projections.
- 10-year Bond Yield (End-of-Period, Percent): series referenced (DEU vs SVK) through Apr-22.
- Government Wage Support: Distribution Across Sectors (Monthly Share in Total Aid under the First Aid Program; Total in Mln Euros): sectoral shares and totals shown March-20 to Dec-21.

### Financial sector developments
- Credit growth to households accelerated, as did credit to non-financial corporates, amidst looser lending standards in 2021.
- Higher own funds raised capital buffers.
- Only 6 percent of NFC loans were to firms in both energy-intensive and highly competitive industries.
- Household Loan Growth (Year-on-year percent change): HH-total, HH-consumer, HH-housing series Jan-16 to Jan-22.
- NFC Loan Growth (Year-on-year percent change): Total, Overdrafts and operating loans, Investment loans series Jan-16 to Jan-22.
- Credit Standards: series showing tightening/loosening across lending categories (2014Q1–2022Q1).

### Housing sector and household debt
- Record low borrowing costs have supported mortgage credit growth and kept the cost of mortgage servicing stable despite the sharp increase in house prices.
- The tightening of macroprudential measures has been associated with a clustering of mortgages right below the regulatory DSTI limit.
- The share of households that own a house with a mortgage has increased, contributing to overall higher debt.
- Housing Supply (thousands): Residential Building Permits, Started Construction of Dwellings, Completed Construction of Dwellings series 2008–2021.
- Housing Affordability for Average and Median Disposable Income: series 2004Q4–2021Q2; notes on DSTI calculation and median disposable income.
- New Domestic Mortgage Rates (Percent): series from 2009Q1 to 2021Q4 by fixed-duration buckets.
- Percentage of Mortgages per DSTI Bucket: distributions for 2019, 2020, 2021 showing clustering near regulatory buckets.

### Structural gaps
- Efforts will be needed to strengthen participation in non-compulsory education, make the educational system more inclusive, and improve health outcomes.
- Expenditure in R&D is low relative to other EU countries.
- Slovakia lags behind most EU countries on the innovation scoreboard and on perception of governance quality.
- Participation in Early Childhood Education, Adult Training, Share of population with tertiary education: Slovakia vs EU Average comparisons (Participation data "As of 2019").
- European Innovation Scoreboard, 2021: multiple indicators plotted showing Slovakia relative to median and 90th percentile.
- Expenditure in R&D, 2020 (Euros per capita): Slovakia placed among lower-spending EU countries.
- Preventable and Treatable Deaths, 2018 (Per 100K residents; years): Slovakia values shown alongside life expectancy (Note: Life expectancy as of 2020).
- Corruption Perceptions Index: Slovakia scores compared to EU average for 2012 and 2021.
- Difference in Reading Performance by Socio-Economic Background (Difference in score, top vs bottom decile, 2018): Slovakia compared across countries.

### Key macroeconomic projections and indicators (from Table 1, selected)
- Real GDP: 2019 = 2.6, 2020 = -4.4, 2021 = 3.0, 2022 = 2.2, 2023 = 3.5, 2024 = 3.8, 2025 = 3.5, 2026 = 3.2, 2027 = 2.8 (Percent)
- Domestic demand: 2019 = 3.8, 2020 = -5.3, 2021 = 3.6, 2022 = 2.8, 2023 = 2.8, 2024 = 2.4, 2025 = 2.6, 2026 = 2.3, 2027 = 2.2 (Percent)
- Inflation (HICP): 2019 = 2.8, 2020 = 2.0, 2021 = 2.8, 2022 = 10.6, 2023 = 9.8, 2024 = 3.1, 2025 = 2.5, 2026 = 2.2, 2027 = 2.0 (Percent)
- Unemployment rate (Percent): 2019 = 5.7, 2020 = 6.6, 2021 = 6.8, 2022 = 6.4, 2023 = 5.9, 2024 = 5.7, 2025 = 5.7, 2026 = 5.7, 2027 = 5.7
- Nominal wages (Percent): 2019 = 7.8, 2020 = 3.7, 2021 = 6.8, 2022 = 7.5, 2023 = 8.8, 2024 = 7.3, 2025 = 6.0, 2026 = 5.5, 2027 = 4.9
- Overall balance (Percent of GDP): 2019 = -1.3, 2020 = -5.5, 2021 = -6.1, 2022 = -5.2, 2023 = -3.1, 2024 = -2.8, 2025 = -2.7, 2026 = -2.5, 2027 = -2.6
- General government debt (Percent of GDP): 2019 = 48.1, 2020 = 59.7, 2021 = 63.1, 2022 = 61.5, 2023 = 56.3, 2024 = 54.7, 2025 = 52.3, 2026 = 52.1, 2027 = 52.4
- Nominal GDP (Millions of euros): 2019 = 94,048; 2020 = 92,079; 2021 = 97,123; 2022 = 106,746; 2023 = 121,428; 2024 = 129,840; 2025 = 137,526; 2026 = 144,934; 2027 = 151,868

### Fiscal operations (selected figures from Table 2)
- Revenue (Millions of euros): 2019 = 37,022; 2020 = 36,695; 2021 = 39,512; 2022 = 42,799; 2023 = 48,842; 2024 = 49,005; 2025 = 51,195; 2026 = 53,875; 2027 = 55,877
- Expenditure (Millions of euros): 2019 = 38,241; 2020 = 41,730; 2021 = 45,485; 2022 = 48,350; 2023 = 52,661; 2024 = 52,616; 2025 = 54,922; 2026 = 57,492; 2027 = 59,819
- Net Lending(+)/Borrowing(-) (Millions of euros): 2019 = -1,219; 2020 = -5,035; 2021 = -5,973; 2022 = -5,551; 2023 = -3,819; 2024 = -3,611; 2025 = -3,727; 2026 = -3,617; 2027 = -3,942
- o/w EU Grants (Millions of euros): 2019 = 945; 2020 = 1,098; 2021 = 1,196; 2022 = 2,235; 2023 = 4,254; 2024 = 2,355; 2025 = 2,384; 2026 = 2,437; 2027 = 1,978

### Balance of payments (selected figures from Table 3)
- Current Account (Millions of euros): 2019 = -3,163; 2020 = 319; 2021 = -1,910; 2022 = -4,846; 2023 = -3,849; 2024 = -2,505; 2025 = -1,735; 2026 = -739; 2027 = -1
- Exports, f.o.b. (Millions of euros): 2019 = 75,522; 2020 = 70,011; 2021 = 81,464; 2022 = 89,226; 2023 = 94,968; 2024 = 101,185; 2025 = 106,931; 2026 = 112,296; 2027 = 117,201
- Imports, f.o.b. (Millions of euros): 2019 = 76,658; 2020 = 68,996; 2021 = 81,539; 2022 = 92,075; 2023 = 96,715; 2024 = 101,757; 2025 = 106,844; 2026 = 111,385; 2027 = 115,725
- Net International Investment Position (Millions of euros): 2019 = -61,993; 2020 = -60,517; 2021 = -60,081; 2022 = -63,398; 2023 = -65,664; 2024 = -66,546; 2025 = -66,928; 2026 = -66,671; 2027 = -65,729
- External Debt (Millions of euros): 2019 = 106,016; 2020 = 110,925; 2021 = 133,057; 2022 = 142,456; 2023 = 151,458; 2024 = 159,266; 2025 = 166,695; 2026 = 175,317; 2027 = 185,176

### Banking sector financial soundness indicators (selected from Table 4)
- Regulatory capital to risk-weighted assets: 2014 = 17.3, 2015 = 17.8, 2016 = 18.0, 2017 = 18.6, 2018 = 18.3, 2019 = 18.2, 2020 = 19.7, 2021 = 19.8 (Percent)
- Nonperforming loans to gross loans: 2014 = 5.2, 2015 = 4.7, 2016 = 4.3, 2017 = 3.6, 2018 = 3.1, 2019 = 3.0, 2020 = 2.6, 2021 = 2.1 (Percent)
- Return on assets (after tax): 2014 = 1.2, 2015 = 1.3, 2016 = 1.4, 2017 = 1.1, 2018 = 1.1, 2019 = 1.0, 2020 = 0.7, 2021 = 0.9 (Percent)
- Households debt (in percent of GDP): 2014 = 35.8, 2015 = 37.9, 2016 = 41.0, 2017 = 43.5, 2018 = 45.0, 2019 = 46.4, 2020 = 49.1, 2021 = 50.0 (Percent)

*Source: IMF staff compilation from the Slovak Republic country chapter (figures, tables, and notes as presented).*

### Annex I. Exposures to the War in Ukraine

### Annex I. Exposures to the War in Ukraine

### Overview
- Main channels of impact: energy and other supply chain disruptions, higher commodity prices, refugee flows, subdued demand for exports from lower growth of trading partners, lower confidence, and higher uncertainty.
- Direct non-energy trade links with Russia and Ukraine are limited, but Slovakia is highly reliant on energy imports from Russia, including for industrial activities, making it vulnerable to potential restrictions on energy trade.

### Refugees
- More than 440,000 refugees arrived in Slovakia by end-May, equivalent to over 8.1 percent of the local population.
- Over 78,000 people requesting temporary protection status.
- Government actions:
  - Facilitated border crossing.
  - Provided financial support to refugees.
  - Promptly amended legislation to allow refugees access to public services and the labor market.

### Direct trade and financial exposure
- Slovakia’s direct gross and value-added exports to Russia and Ukraine amount to only 2.4 and 1.6 percent of total exports respectively.
- The war will weigh indirectly through lower demand of other trading partners.
- Financial exposures to Russia and Ukraine are limited; banks’ operations have been smooth.

### Energy supplies
- Slovakia relies almost exclusively on Russian imports for three key sources of energy: natural gas, oil, and nuclear fuel.
- Short-run vulnerability: highly vulnerable to disruptions in Russian natural gas supplies given limited substitutability in the short-run.
- Near-term steps taken: boosting stockpiles of nuclear fuel and LNG imports.
- Medium-term plans:
  - Expand nuclear energy.
  - Diversify natural gas sources.
  - Develop other renewable energy sources (e.g., geothermal, hydrogen, biomethane).
  - Update technology to utilize renewable fuels.

### Supply chains and commodity prices
- Key vulnerable inputs: palladium, nickel, and inert gases (heavily sourced from Russia and Ukraine and key inputs in car manufacturing).
- Potential impacts:
  - Prolonged or new supply chain breakdowns would be particularly disruptive for Slovakia.
  - Sharp rise in commodity prices is eroding household real disposable incomes and possibly depressing firm profits, which could weigh on consumption and investment.
  - High energy prices could hamper production of some of the more energy intensive manufacturing sectors, which account for roughly one-tenth of Slovakia’s manufacturing turnover.

*Source: Annex I. Exposures to the War in Ukraine (from the Slovak Republic IMF country report).*

### Annex IV. Risk Assessment Matrix

### Annex IV. Risk Assessment Matrix

### Global risks
- Russia’s invasion of Ukraine leads to escalation of sanctions and other disruptions  
  - Relative Likelihood: High  
  - Expected Impact: Sanctions on Russia are broadened to include oil, gas, and food sectors. Russia is disconnected almost completely from the global financial system and large parts of the trading system. This, combined with Russian countersanctions and secondary sanctions on countries and companies that continue business with Russia, leads to even higher commodity prices, refugee migration, tighter financial conditions, and other adverse spillovers, which particularly affect LICs and commodity-importing EMs.  
  - Country-specific note for Slovakia: High — Slovakia is highly vulnerable to the war in Ukraine given its geographical proximity, high reliance on energy imports from Russia, and high integration in global value chains. Further sanctions that may curtail Russia’s energy exports to Slovakia could weigh on economic activity, given the limited substitutability of Russian natural gas in the short run.  
  - Policy Response: 
    - Deploy additional discretionary fiscal support to accommodate the cost of the refugee influx and other war-related spending needs.  
    - Secure alternative energy supplies and develop contingency plans in case of gas supply shortages (e.g., extend inter-country solidarity agreements, incentivize energy efficiency).

- Outbreaks of lethal and highly contagious Covid-19 variants  
  - Relative Likelihood: Medium  
  - Expected Impact: Rapidly increasing hospitalizations and deaths due to low vaccine protection or vaccine-resistant variants force more social distancing and/or new lockdowns. This results in extended supply chain disruptions and a reassessment of growth prospects, triggering capital outflows, financial tightening, currency depreciations, and debt distress in some EMDEs.  
  - Country-specific note for Slovakia: Medium — Low level of vaccination in Slovakia implies potentially high impact though risks would be mitigated by Slovakia’s policy space. Extended containment measures could lead to prolonged uncertainty and require the downsizing of some sectors of the economy. This sets back the recovery and potentially leads to a rise in bankruptcies and the need for reallocation of resources towards less contact-intensive industries.  
  - Policy Response:
    - Ramp up vaccination efforts, maintain public health measures and ensure adequate resources for the health system.  
    - Use available fiscal space to provide targeted support to vulnerable households and affected but viable businesses when needed.

- De-anchoring of inflation expectations in the U.S. and/or advanced European economies  
  - Relative Likelihood: Low/Medium for EA; Medium for USA  
  - Expected Impact: Worsening supply-demand imbalances, higher commodity prices (in part due to war in Ukraine), and higher nominal wage growth lead to persistently higher inflation and/or inflation expectations, prompting central banks to tighten policies faster than anticipated. The resulting sharp tightening of global financial conditions and spiking risk premia lead to lower global demand, currency depreciations, asset market selloffs, bankruptcies, sovereign defaults, and contagion across EMDEs.  
  - Country-specific note for Slovakia: Medium — Tightening financial conditions weaken growth prospects. Higher risk premium for sovereigns reduces fiscal space to provide policy support. The risk will be mitigated by Slovakia’s membership in the euro area, the role of the euro as a reserve currency, and the potential back-stop from the EU and the ECB.  
  - Policy Response:
    - A coordinated monetary policy response will be needed at the euro area level.  
    - Continue to extend debt maturity to reduce roll-over needs in the event of an increase in premiums.  
    - Accelerate absorption of available EU funds to finance public spending.  
    - Provide liquidity support to viable firms and recalibrate macro-prudential policies as necessary to ensure the smooth flow of credit.

- Geopolitical tensions and deglobalization  
  - Relative Likelihood: High  
  - Expected Impact: Intensified geopolitical tensions, security risks, conflicts, and wars cause economic and political disruptions, fragmentation of the international monetary system, production reshoring, a decline in global trade, and lower investor confidence.  
  - Country-specific note for Slovakia: High — Slovakia is highly vulnerable to the war in Ukraine given its geographical proximity, high reliance on energy imports from Russia, and high integration in global value chains. A retreat from multilateralism and globalization would significantly impact Slovak growth potential given its export dependence and integration in the global value chains of select industrial products (e.g. cars).  
  - Policy Response:
    - Participate in European policy responses.  
    - Accelerate structural reforms, including by leveraging EU funds, to boost productivity and competitiveness, move up value chains and diversify export products and destinations.  
    - Invest in human capital and effective labor market policies to facilitate needed reallocation of resources.  
    - Engage in support for the multilateral rules-based trade system and advocate trade liberalization.

- Widespread social discontent and political instability  
  - Relative Likelihood: High  
  - Expected Impact: Social unrest fueled by increasing prices and shortages of essentials, rising inequality, inadequate healthcare, financial and social scars from the prolonged pandemic, and heavier household debt burdens amid rising interest rates trigger political instability, capital outflows, higher unemployment, and slower economic growth.  
  - Country-specific note for Slovakia: Medium — Rising food and energy prices amid continued tensions due to the pandemic and a depressed global economy increase tensions in society, challenging policymaking.  
  - Policy Response:
    - Provide targeted support to the most vulnerable groups, including through ALMPs to ensure inclusive recovery.  
    - Accelerate policies to facilitate the reallocation of factors of production while providing an adequate social safety net.

- Rising and volatile food and energy prices  
  - Relative Likelihood: High  
  - Expected Impact: Commodity prices are volatile and trend up amid supply constraints, war in Ukraine, export restrictions, and currency depreciations. This leads to short-run disruptions in the green transition, bouts of price and real sector volatility, food insecurity, social unrest, and acute food and energy crises (especially in EMDEs with lack of fiscal space).  
  - Country-specific note for Slovakia: High — A sharp rise in commodity prices would transmit to consumer prices, reducing real disposable income of households and weighing on consumption. Higher energy prices would also depress firms’ profit margins and deter investment.  
  - Policy Response:
    - Provide targeted, timely, and temporary transfers to vulnerable households and viable firms to cushion the impact of commodity price spikes.  
    - Incentivize domestic food production.

- Abrupt growth slowdown in China  
  - Relative Likelihood: Medium  
  - Expected Impact: A combination of extended Covid-19 lockdowns, rising geopolitical tensions, a sharper-than-expected slowdown in the property sector, and/or inadequate policy responses result in a sharp slowdown of economic activity, with spillovers affecting other countries through supply chain disruptions, trade, commodity-price, and financial channels.  
  - Country-specific note for Slovakia: Medium — A growth slowdown in China could weigh on Slovakia’s exports, particularly in the auto sector, through other intermediate destinations.  
  - Policy Response:
    - Use fiscal space if necessary to support economic activity, with an eye on measures that also boost the supply potential of the economy, e.g. investment in human capital, green and digital infrastructure, and stronger spending on R&D to boost productivity growth and move up value chains.

### Local risks
- Extended global supply chains disruptions  
  - Relative Likelihood: High  
  - Expected Impact: Persistent disruptions in the production and shipment of components caused by lockdowns and logistical bottlenecks continue until 2023. This leads to shortages of intermediate and final consumer goods, growth slowdowns, and price surges, compounded by the passthrough from currency depreciations in vulnerable countries.  
  - Country-specific note for Slovakia: High — Input shortages continue to disrupt the industrial sector. Car manufacturers in particular continue to suspend shifts due to shortages of semiconductors and other key inputs, with important macro implications given the auto sector dominant role in the economy.  
  - Policy Response:
    - Participate in EU wide initiatives.  
    - Manage risk through supply diversification.  
    - Leverage EU funds to invest in education and upskilling strategies that take into account rapidly changing skill demands and could help affected workers reallocate.  
    - Boost spending on R&D and increase its efficiency to lower dependence on foreign suppliers and move up the value chains.

- Disorderly migration flows  
  - Relative Likelihood: Medium  
  - Expected Impact: Different than expected migration flows from Ukraine, and/or different than anticipated costs per migrant, and/or success in assimilating migrants and integrating them into local labor markets result in unanticipated net fiscal costs and alters potential output.  
  - Country-specific note for Slovakia: Medium — Migration flows from Ukraine will increase short-term fiscal costs, while boosting aggregate demand. Medium term, successful integration of refugees could raise potential output by a much-needed expansion of labor supply given Slovakia’s rapidly aging population.  
  - Policy Response:
    - Revise near-term fiscal plans, as needed, to accommodate the cost of the refugee influx and other war-related spending needs.

- Property market downturn  
  - Relative Likelihood: Medium  
  - Expected Impact: A sharp decline in housing prices would weaken household balance sheets and would affect financial stability with adverse effects on lending and growth.  
  - Country-specific note for Slovakia: High — Sharp reversal in the real estate market after years of rapid price growth could deteriorate the quality of banks’ credit portfolio leading to tighter credit conditions, given banks’ large exposure to housing mortgages. The negative wealth effect and weaker consumer confidence would weigh on consumption.  
  - Policy Response:
    - Continue close monitoring of financial conditions and recalibrate macro-prudential policies as needed.  
    - Adjust financial sector regulations to maintain the flow of credit.

- Auto sector fails to adjust to shift to electric vehicles and increased automation  
  - Relative Likelihood: Low/Medium  
  - Expected Impact: Increasing automation erodes Slovakia’s competitive advantage as a source of low-cost skilled industrial labor. Slovakia’s competitiveness is further deteriorated by the limited fragmentation in electric car production processes, curtailing the scope for supply-chain-based expansion.  
  - Country-specific note for Slovakia: High — Loss of competitiveness and shrinking market share of Slovak auto exports threaten the country’s growth model, lowering potential growth and wages.  
  - Policy Response:
    - Use EU funds to invest in education and upskilling strategies that take into account rapidly changing skill demands.  
    - Boost spending on R&D and increase its efficiency to move up value chains.

*Source: Annex IV. Risk Assessment Matrix (as provided).*

### 6.      Debt sustainability analysis risk assessment (heat map). The heat map highlights risks

### 6. Debt sustainability analysis risk assessment (heat map). The heat map highlights risks

### Heat-map summary and key vulnerabilities
- Large total external financing requirements: "56 percent of GDP in 2021".
- High short-term external debt is the main driver of external financing needs.
- National Bank of Slovakia (NBS) short-term external debt composition:
  - "Currency and deposits" liabilities (influenced mainly by transactions of other central banks or other institutions participating in Target 2) account for about half of the total short-term external debt.
  - "Loan" liabilities of the NBS account for "8 percent of the short-term external debt" and are connected mainly with repurchase agreements, reflecting the active investment policy of the NBS.
- Intra-company FDI loans constitute "16 percent of total short-term external debt" and tend to be more stable.
- Public debt held by non-residents: "54 percent" of public debt is held by non-residents; risk mitigated by the important role of institutional investors, which tend to be more long-term investors.
- ECB holdings through public sector purchase program: amount to about "42 percent of total government debt (84 percent of government external debt)" — ECB plays a backstop role.

### Public sector debt baseline and projections (selected indicators)
- Nominal gross public debt (in percent of GDP): 2020: "50.8"; 2021: "59.7"; 2022: "63.1"; 2023: "61.5"; 2024: "56.3"; 2025: "54.7"; 2026: "52.3"; 2027: "52.4".
- Public gross financing needs (in percent of GDP): 2020: "6.8"; 2021: "5.5"; 2022: "6.1"; 2023: "6.4"; 2024: "7.5"; 2025: "7.4"; 2026: "8.5"; 2027: "6.9"; 2027 (another column): "7.6".
- Net public debt (in percent of GDP): 2020: "45.7"; 2021: "49.6"; 2022: "51.3"; 2023: "51.6"; 2024: "48.4"; 2025: "47.5"; 2026: "46.6"; 2027: "46.7"; 2027 (another column): "47.2".
- Real GDP growth (in percent) projections: 2020: "2.7"; 2021: "-4.4"; 2022: "3.0"; 2023: "2.2"; 2024: "3.5"; 2025: "3.8"; 2026: "3.5"; 2027: "3.2"; alternate column: "2.8".
- Inflation (GDP deflator, in percent) projections: 2020: "0.9"; 2021: "2.4"; 2022: "2.4"; 2023: "7.5"; 2024: "9.9"; 2025: "3.0"; 2026: "2.3"; 2027: "2.1"; alternate: "1.9".
- Nominal GDP growth (in percent): 2020: "3.6"; 2021: "-2.1"; 2022: "5.5"; 2023: "9.9"; 2024: "13.8"; 2025: "6.9"; 2026: "5.9"; 2027: "5.4"; alternate: "4.8".
- Effective interest rate (in percent): 2020: "3.4"; 2021: "2.4"; 2022: "2.0"; 2023: "1.7"; 2024: "1.6"; 2025: "1.6"; 2026: "1.6"; 2027: "1.5"; alternate: "1.8".
- Change in gross public sector debt (in percent of GDP, cumulative): 2020: "0.8"; 2021: "11.6"; 2022: "3.3"; 2023: "-1.6"; 2024: "-5.2"; 2025: "-1.6"; 2026: "-2.4"; 2027: "-0.2"; cumulative: "0.2"; projection cumulative: "-10.7".
- Identified debt-creating flows (in percent of GDP, cumulative): 2020: "1.4"; 2021: "11.6"; 2022: "3.8"; 2023: "-1.5"; 2024: "-5.1"; 2025: "-1.6"; 2026: "-2.3"; 2027: "-0.1"; cumulative: "0.3"; projection cumulative: "-10.4".
- Primary deficit (in percent of GDP): 2020: "1.2"; 2021: "4.4"; 2022: "5.2"; 2023: "4.3"; 2024: "2.3"; 2025: "2.0"; 2026: "2.0"; 2027: "1.8"; cumulative (projection): "14.1".
- Primary (noninterest) revenue (in percent of GDP): series includes "39.1", "39.7", "40.5", "40.0", "40.2", "37.7", "37.2", "37.1", "36.7", "22.8".
- Primary (noninterest) expenditure (in percent of GDP): series includes "40.3", "44.1", "45.7", "44.3", "42.5", "39.7", "39.1", "38.9", "38.5", "24.3".
- Automatic debt dynamics (in percent of GDP, cumulative): "0.0", "2.0", "-1.8", "-4.7", "-6.6", "-2.8", "-2.3", "-1.9", "-1.5", cumulative: "-19.8".
- Interest rate/growth differential (in percent of GDP, cumulative): "-0.1", "2.2", "-2.0", "-4.7", "-6.6", "-2.8", "-2.3", "-1.9", "-1.5", cumulative: "-19.8".
  - Of which: real interest rate contributions: "1.2", "0.1", "-0.3", "-3.4", "-4.7", "-0.8", "-0.4", "-0.4", "-0.1", cumulative: "-9.8".
  - Of which: real GDP growth contributions: "-1.3", "2.1", "-1.7", "-1.3", "-1.9", "-2.0", "-1.8", "-1.6", "-1.4", cumulative: "-9.9".
- Exchange rate depreciation contribution: "0.1", "-0.2", "0.2", "....................." (as shown in source).
- Other identified debt-creating flows (in percent of GDP): "0.3", "5.1", "0.4", "-1.1", "-0.9", "-0.8", "-2.0", "0.0", "0.0", cumulative: "-4.8".
  - Privatization/Drawdown of Deposits: "0.3", "5.1", "3.1", "-0.8", "-0.8", "-0.3", "-1.0", "0.0", "0.0", cumulative: "-2.9".
  - Contingent liabilities: "0.0" across series.
  - Other debt-creating flows (specify): series includes "(0.0", "0.0", "-2.8", "-0.3", "-0.1", "-0.5", "-1.0", "0.0", "0.0", cumulative: "-1.9".
- Residual, including asset changes (in percent of GDP): "-0.6", "0.0", "-0.4", "-0.1", "-0.1", "-0.1", "-0.1", "0.0", "0.0", cumulative: "-0.3".

### Composition of public debt and alternative scenarios (selected assumptions)
- Baseline underlying assumptions (in percent):
  - Real GDP growth (baseline): "2.2", "3.5", "3.8", "3.5", "3.2", "2.8".
  - Inflation (baseline): "7.5", "9.9", "3.0", "2.3", "2.1", "1.9".
  - Primary Balance (baseline): "-4.3", "-2.3", "-2.0", "-2.0", "-1.8", "-1.8".
  - Effective interest rate (baseline): "1.7", "1.6", "1.6", "1.6", "1.5", "1.8".
- Historical scenario assumptions:
  - Real GDP growth: "2.2", "2.0", "2.0", "2.0", "2.0", "2.0".
  - Primary Balance: "-4.3", "-1.7", "-1.7", "-1.7", "-1.7", "-1.7".
  - Effective interest rate: "1.7", "1.6", "2.1", "2.5", "2.9", "3.6".
- Constant Primary Balance scenario: Primary Balance fixed at "-4.3" across projection years.

### Stress tests (selected scenarios and parameter changes)
- Primary Balance Shock scenario underlying assumptions:
  - Real GDP growth: "2.2", "3.5", "3.8", "3.5", "3.2", "2.8".
  - Inflation: "7.5", "9.9", "3.0", "2.3", "2.1", "1.9".
  - Primary balance: "-4.3", "-3.2", "-2.9", "-2.0", "-1.8", "-1.8".
  - Effective interest rate: "1.7", "1.6", "1.6", "1.6", "1.5", "1.8".
- Real GDP Growth Shock:
  - Real GDP growth: "2.2", "0.9", "1.2", "3.5", "3.2", "2.8".
  - Primary balance: "-4.3", "-3.7", "-4.5", "-2.0", "-1.8", "-1.8".
  - Effective interest rate: "1.7", "1.6", "1.6", "1.7", "1.6", "1.9".
- Real Interest Rate Shock:
  - Effective interest rate series includes "1.7", "1.6", "2.3", "3.0", "3.7", "4.5".
- Real Exchange Rate Shock:
  - Inflation series includes "7.5", "10.3", "3.0", "2.3", "2.1", "1.9".
- Combined Shock:
  - Real GDP growth: "2.2", "0.9", "1.2", "3.5", "3.2", "2.8".
  - Inflation: "7.5", "9.3", "2.4", "2.3", "2.1", "1.9".
  - Primary balance: "-4.3", "-3.7", "-4.5", "-2.0", "-1.8", "-1.8".
  - Effective interest rate: "1.7", "1.6", "2.5", "3.3", "3.9", "4.8".
- Stress-test outputs (selected outcomes shown in figures):
  - Gross Nominal Public Debt (in percent of GDP) and Public Gross Financing Needs (in percent of GDP) tracked across baseline and shocks for 2022–2027; percentile bands (10th-25th, 25th-75th, 75th-90th) shown for predictive distributions.

### External debt sustainability and bound tests (selected figures and indicators)
- Baseline: External Debt (in percent of GDP) series includes 2017–2027 with values: 2017: "108.4"; 2018: "115.0"; 2019: "112.7"; 2020: "120.5"; 2021: "137.0"; 2022: "133.5"; 2023: "124.7"; 2024: "122.7"; 2025: "121.2"; 2026: "121.0"; 2027: "121.9".
- Change in external debt (in percent of GDP): "15.9", "6.6", "-2.3", "7.7", "16.5", "-3.5", "-8.7", "-2.1", "-1.5", "-0.2", "1.0".
- Debt-stabilizing non-interest current account (percent of GDP): "-4.7".
- Identified external debt-creating flows (sum) series: "-4.3", "-4.7", "-4.3", "2.6", "-2.1", "1.7", "-0.9", "-2.5", "-2.8", "-3.2", "-3.3".
- Current account deficit, excluding interest payments (percent of GDP): series includes "0.0", "0.4", "1.6", "-1.8", "0.7", "3.3", "2.1", "1.0", "0.3", "-0.4", "-1.0".
- Exports and Imports (in percent of GDP) series (selected): Exports around "90.2", "99.1", "92.7", "80.5", "98.0", "92.8", "86.8", "86.5", "86.4", "86.2", "85.9". Imports around "88.5", "98.3", "92.6", "78.4", "97.2", "94.7", "87.4", "86.0", "85.3", "84.6", "83.8".
- Automatic debt dynamics contribution (percent): series shows negative contributions in projection years, e.g., "-1.5", "-3.0", "-3.4", "-3.1", "-2.8", "-2.2".
- Residual, including change in gross foreign assets (in percent of GDP): "20.2", "11.3", "2.0", "5.1", "18.7", "-5.3", "-7.8", "0.4", "1.3", "2.9", "4.2".
- External debt-to-exports ratio (in percent): "120.2", "116.1", "121.7", "149.7", "139.8", "143.8", "143.7", "141.8", "140.3", "140.3", "142.0".
- Gross External Financing Need (in billions of US dollars): "40.4", "60.0", "70.4", "65.0", "77.7", "99.4", "105.9", "114.9", "122.0", "128.7", "135.5".
- Gross External Financing Need (in percent of GDP): "40.4", "58.9", "67.4", "58.0", "70.7", (additional percent-of-GDP values for later years shown in figures).
- Key macroeconomic assumptions underlying baseline (selected historical averages and projections):
  - Real GDP growth historical average and projections: historical "3.0", "3.8", "2.6", "-4.4", "3.0"; projections "2.2", "3.5", "3.8", "3.5", "3.2", "2.8".
  - GDP deflator in US dollars (change in percent) series includes "13.6", "-1.9", "0.1", "12.1", "-4.9", "-0.1", "8.5", "7.8", "11.4", "4.1", "3.3", "2.8", "2.4".
  - Nominal external interest rate (in percent) series includes "2.3", "1.8", "1.6", "1.4", "1.1", "2.2", projections near "0.8", "1.0", "0.9", "0.8", "0.8", "0.8", "0.9".
  - Growth of exports and imports (US dollar terms, in percent) historical and projected series shown in tables.
- Scenario with key variables at their historical averages projects external debt rising to "164.5" (percent of GDP) by 2027 under that scenario (series shows trend to "164.5").

### Risk-assessment heat-map methodology (notes and benchmarks)
- External financing requirement definition: "the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period."
- Long-term bond spread benchmark: "400 and 600 basis points for bond spreads".
- External financing requirement benchmarks: "17 and 25 percent of GDP".
- Change in the share of short-term debt benchmarks: "1 and 1.5 percent".
- Public debt held by non-residents benchmarks: "30 and 45 percent".
- Heat-map cell coloring rules:
  - For gross financing needs benchmark of 20%: cell highlighted green if benchmark is not exceeded under specific shock or baseline; yellow if exceeded under specific shock but not baseline; red if benchmark is exceeded under baseline; white if stress test not relevant.
  - For debt burden benchmark of 85%: cell highlighted green if below lower risk-assessment benchmark; red if above upper risk-assessment benchmark; yellow if between benchmarks; white if not relevant.
- Market perception indicators: bond spread noted as "68 bp" (figure context) and other benchmark comparisons shown in figures.
- Percentiles and predictive density bands shown for gross nominal public debt projections (10th-25th, 25th-75th, 75th-90th).

### Policy measures: Introducing expenditure ceilings (Annex VI, selected provisions and assessment)
- Legislative action:
  - "In March 2022, the Slovak parliament approved amendments to the budgetary law that introduce expenditure ceilings (RRP milestone for 2021Q4)."
  - Multi-annual expenditure ceilings had been a constitutional provision since 2011 but not implemented; in March 2022 ceilings were passed as an ordinary law.
- Design and calibration:
  - Expenditure limits set in nominal terms and based on minimum required structural balance change linked to long-term fiscal sustainability indicators.
  - Required consolidation: "0.5 (or 0.25) percent of GDP in structural balance" if long-term sustainability risks are high/medium (or low).
  - Ceilings cover "more than 80 percent of general government spending."
  - Exclusions from ceilings: i) expenditure driven by economic cycles (e.g., unemployment benefits) and one-off expenditures; ii) general government debt service; iii) local government expenditures; iv) EU-related expenditures including co-financing.
  - Ceilings initially set for the four-year parliamentary term but initially cover only "2023 and 2024" (remaining years of current government) and are described as "an experiment and not legally binding."
  - Escape clause: can be triggered if a decline in quarterly GDP is observed and annual GDP is expected to decline — allows government to increase spending. Specific break rules: if annual GDP is expected to fall by less/more than "3 percent," there is a "1-year/2-year break from the spending ceilings."
  - Recalibration rules: spending ceilings recalculated if revenue forecast by Tax Revenue Forecast Committee differs by "3 percent of GDP" from assumption used in ceilings.
  - In the first year after escape clause, there is a "50 percent 'discount' to the required consolidation" (example: if required consolidation is "0.5 percent of GDP," first year lowered to "0.25 percent of GDP").
- Governance and enforcement:
  - The Slovak Council for Budget Responsibility (CBR) to calculate expenditure ceilings, review compliance, assess fulfillment, update ceilings regularly, and publish methodology (methodology needs to be agreed with the ministry of finance).
  - Updated spending ceilings need approval by two parliamentary committees (budget and economic affairs).
  - Correction mechanism: if government does not comply with the spending limit for one year, the spending limit will be lowered in the following year.
  - Political enforcement: if the government breaks the ceiling for two years in a row and by more than "1 percent of GDP," the government must ask the parliament for a vote of confidence.
- Policy assessment:
  - Implementing binding multi-year expenditure ceilings is expected to strengthen fiscal discipline and improve medium-term budget performance.
  - Expected benefits include enhancing credibility of fiscal consolidation plans, supporting countercyclical fiscal policy, curtailing excessive expenditure growth in pre-election years, strengthening top-down budgeting, encouraging better baseline and policy bottom-up costing, shifting budget culture toward quality and affordability of policies, improving public investment management, and fostering better integration of spending reviews/Value for Money initiatives.
  - Giving the CBR a greater role is expected to improve fiscal transparency and governance.

*Source: IMF staff (1svkea2022001 - 6. Debt sustainability analysis risk assessment (heat map). The heat map highlights risks).*

### Annex VII).

### Annex VII. Strengthening Fiscal Governance

### Overview
- Slovakia will receive €6.3 billion in grants (or over 6.9 percent of 2020 GDP) over 2021–26 under the Recovery and Resilience mechanism; these funds are additional to transfers under the 2014–20 and 2021–28 Multiannual Financial Frameworks.
- Strengthening fiscal governance and improving public sector spending efficiency are essential to maximize these resources and could significantly raise Slovakia’s potential output.
- Improvements in revenue efficiency are essential to strengthen public finance over the medium run.
- This annex draws on the 2022 Fiscal Transparency Evaluation (FTE), the 2019 Public Investment Management Assessment (PIMA), and the 2018 Tax Administration Diagnostic Assessment Tool (TADAT).

### Public Investment Management
Findings and progress
- The 2019 PIMA suggested a broadly effective framework with room for improvements in project selection, procurement practices, and oversight of state-owned enterprises (SOEs).
- PIMA recommendations included creation of an integrated pipeline of major projects monitored by a dedicated central unit and a specialized unit to strengthen financial oversight of major SOEs (annual budgets and investment plans).
- An Investment Authority (IA) was established within the Ministry of Finance (MoF) Value for Money Unit to streamline project preparation, increase project quality, and monitor projects in all phases.
- Feasibility studies and cost-benefit analyses are required for all projects above EUR 40 million (and above EUR 10 million in the IT area).
- In November 2020, the IA’s mandate was extended to review all projects above EUR 1 million.
- In 2021 the IA evaluated more than 250 projects with a total cost of EUR 6.3 billion and identified potential savings of over EUR 800 million (IMF, 2022).

Procurement
- An amendment to the Public Procurement Act recently entered into force aimed at improving procurement by:
  - speeding and simplifying procurement processes;
  - aligning domestic regulations with EU directives;
  - ensuring contractors’ and suppliers’ rights;
  - improving procurement controls by automating contract evaluation and award;
  - extending the use of e-procurement and ensuring efficient collection and analysis of data.
- The 2019 PIMA noted weak administrative capacity and anticompetitive practices; while most large procurements were open and transparent, uncompetitive practices persisted and external audits and Public Procurement Office reporting could be improved.
- The reform also fulfills Recovery Resilience Plan (RRP) commitments and could help speed up EU funds absorption.

SOE oversight
- Around half of SOEs were loss making in 2020.
- Total SOE liabilities are 5.7 percent of GDP as of 2020.
- Transfers between the government and SOEs are disclosed.
- SOEs carry out half of public investment in Slovakia.
- Recommendation: establish a specialized unit to strengthen financial oversight of major SOEs, including review of annual budgets and investment plans, to improve public investment efficiency.

### Tax Administration
Findings and progress
- The 2018 TADAT assessment identified strengths and weaknesses and recommended strengthening and broadening audits across core tax areas, upskilling audit staff, identifying and assessing taxpayer non-compliance risks, improving dispute resolution, and enhancing communication with taxpayers.
- Focus on VAT collection has led to significant progress: the VAT gap declined from the 2012 peak of 35 percent to 12.1 percent in 2021, an 18-year historic low, though still higher than the EU average (10.3 percent).
- The reduction in the VAT gap resulted from efforts to eliminate inactive corporations from the business register, a more effective auditing strategy (in line with TADAT recommendations), measures to support voluntary tax compliance, lower sales in the gastronomic sector, and an increase in on-line shopping during the pandemic.

E-invoicing and electronic registers
- Electronic cash registers (eKasa) introduced in 2020 should help improve tax collection and further reduce the VAT gap, although the impact is difficult to gauge amid the Covid-19 pandemic.
- Authorities plan to introduce an e-invoicing system in 2024, requiring businesses to send all electronic invoices directly to the tax administration.
- Recommendation: the e-invoicing introduction should be part of a broad package of measures and backed by a robust and credible tax administration, especially in audit and enforcement, to effectively reduce VAT and CIT frauds and mistakes.

### Fiscal Transparency
Findings
- The 2022 FTE finds Slovakia has relatively strong institutions supporting fiscal transparency; most aspects of fiscal reporting, budgeting, and risk management are in line with good or advanced practices in IMF’s Fiscal Transparency Code.
- Areas needing improvement include budget process, rules, and control; external auditing; fiscal reporting; and analysis and monitoring of fiscal risks.

Specific issues and recommendations
- Enhance institutional setup and fiscal rules for medium-term budgeting and oversight of budget execution.
- Conduct regular strategic review of tax expenditures.
- Improve central oversight of public corporations and analysis of specific fiscal risks, including long-term risks to the health fund.
- Align the external audit process with accepted international practices.

Budget forecasting and medium-term framework
- The fiscal outturn shows a systematic optimism bias in the medium-term budget framework (MTBF).
- The annual Draft Budget Plan (DBP) presents the MTBF covering three years. During 2012 to 2016, the draft budget consistently underestimated both revenue and expenditure forecasts, resulting in an optimism bias for the overall fiscal balance.
- Budgets repeatedly contained risks of revenue shortfall for certain items that often materialized.
- The government’s tax revenue forecasts are assessed and validated by the independent Tax Revenue Forecasting Committee. Since 2021, forecasts prepared by the Committee have been expanded to include selected items of non-tax revenues.
- On expenditure, budgets for the first year constitute binding spending ceilings; budgets for the two outer years are only indicative with limited participation of line ministries in outer-year discussions.
- Systematic deviation between forecasts and actual outturn suggests outer-year estimates have little influence on preparation of the next annual budget.
- The 2020–22 MTBF and the 2021–23 MTBF noted consolidation needs in outer years but did not spell out specific measures to achieve consolidation.
- Recommendation: forthcoming introduction of multiannual expenditure ceilings (see Annex VI) will help address this issue.
- Recommendation: reform the legislative framework for budget approval and enhance parliament’s oversight role on budget execution, including authorization of in-year virements and stronger relationships between the parliament, the Supreme Audit Office, and the Council for Budget Responsibility (CBR).

### Judicial Reforms and Governance
Findings and progress
- Constitutional amendment on judicial reforms passed in December 2020: changes to the Constitutional Court and the Judicial Council, set-up of a new Supreme Administrative Court, and introduction of property checks for all judges.
- Government efforts to fight corruption have led to investigations and prosecutions of high-level corruption cases.
- The reform of the judicial map aims to improve efficiency, including increased court specialization.
- The 2021 EC Rule of Law Report praised continued efforts to improve justice system independence, integrity, quality, and efficiency, but noted slow progress in preventing corruption and failed attempts to regulate lobbying; it called for more stakeholder and civil society involvement in the legislative process.
- A recent GRECO report shows Slovakia has satisfactorily implemented only two out of twenty-one GRECO recommendations on preventing corruption among top executive functions and members of the police force.
- Recommendation: more actions are needed to address outstanding GRECO recommendations, including an operational corruption prevention action plan, conflicts of interest measures, and asset declarations.

### Statistical Issues
Findings on data coverage and quality
- Coverage, periodicity, and timeliness of data provided to the Fund are adequate for surveillance purposes.
- Slovakia subscribed to the Special Data Dissemination Standard (SDDS) Plus on September 16, 2019, and observes or exceeds all related standards.
- National accounts follow ESA 2010.
- Compilation of general government statistics is in line with ESA 2010; monthly reconciliation of government operations above and below the line is restricted to state budget transactions on a cash basis; quarterly reconciliation of general government operations above and below the line and a financial balance sheet on an accrual basis are available within 85 days after the end of the quarter.
- External sector statistics follow BPM6 and official BPM6 basis data are available back to 2004.
- Monetary statistics use the ECB reporting framework and are reported to the IMF through a “gateway” arrangement with the ECB.
- Slovakia reports all core and encouraged financial soundness indicators (FSIs) for deposit takers except for large exposures and spread between highest and lowest interbank rate; also reports two FSIs for other financial corporations and one FSI for real estate markets.
- Slovakia reports some key series and indicators of the Financial Access Survey (FAS), including two indicators of the United Nations’ Sustainable Development Goals.

Key numeric indicators (as stated)
- €6.3 billion in Next Generation EU grants over 2021–26 (or over 6.9 percent of 2020 GDP).
- Feasibility studies and cost-benefit analyses required for all projects above EUR 40 million and above EUR 10 million in the IT area; IA mandate extended to review all projects above EUR 1 million.
- IA evaluated more than 250 projects in 2021 with total cost EUR 6.3 billion and potential savings of over EUR 800 million.
- Around half of SOEs were loss making in 2020; total SOE liabilities are 5.7 percent of GDP as of 2020; SOEs carry out half of public investment.
- VAT gap declined from 35 percent in 2012 to 12.1 percent in 2021; EU average VAT gap is 10.3 percent.
- Slovakia subscribed to SDDS Plus on September 16, 2019.
- Quarterly accrual-based general government financial balance sheet available within 85 days after the end of the quarter.

*Source: IMF staff report — Annex VII. Strengthening Fiscal Governance.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1svkea2022001.pdf_