## _cr07226

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---

### Executive summary — background and recent performance
- Real GDP growth accelerated to 8¼ percent in 2006, driven by productivity gains and buoyant exports.
- Exports increased sharply; external current account deficit narrowed slightly to 8¼ percent of GDP in 2006 from 8½ percent of GDP in 2005. Over four-fifths of the deficit was covered by foreign direct investment (FDI) inflows.
- Employment gains concentrated in construction and market services; unemployment fell to 13 percent in 2006, while long-term unemployment remained around 8 percent of the labor force.
- Real wage increases moderated and lagged productivity gains; profit share in value added of non-financial enterprises rose to nearly 18 percent in 2006 from 13¾ percent in 2005.
- HICP inflation: 5 percent (year-on-year) in July-August 2006, declining to 2 percent in February-March 2007, influenced by world energy prices and regulated utility price changes (October 2005 increases, January 2007 decreases).
- Credit growth eased slightly in 2006; lending mainly funded by domestic deposits and predominantly in domestic currency.

### Exchange rate, monetary policy, and reserves
- ERM2 and euro adoption:
  - Slovakia entered ERM2 in November 2005 and aims to adopt the euro in January 2009.
  - Maastricht inflation criterion seems within reach.
- Exchange rate and interventions:
  - Considerable strengthening of the koruna since October 2006 produced persistent appreciation pressures.
  - NBS raised key policy rate by 175 basis points to 4.75 percent in the first three quarters of 2006.
  - NBS intervened heavily in FX markets during 2006; central parity revalued by 8.5 percent to Sk35.44 in mid-March 2007.
  - Since parity revaluation, koruna held around 6 percent above new central parity; policy rate lowered by 50 basis points in two steps since end-March 2007.
- Reserves:
  - Gross official reserves declined in 2006 due to capital outflows and interventions; reserve position improved in 2007 owing to interventions countering appreciation pressures.

### Macroeconomic outlook and staff projections
- Real GDP growth projections (staff):
  - 2007: 8¾ percent.
  - 2009: 7 percent (moderation thereafter).
- Growth drivers:
  - Commencement of production and capacity increases in export-oriented projects (notably automotive and electronics).
  - Increased downstream integration with domestic supply chains, capital deepening, and technological enhancements sustaining productivity growth.
  - Investment buoyed by strong profits and FDI-financed projects; private consumption supported by real wage increases, employment gains, and favorable expectations from prospective euro adoption.
- Current account (percent of GDP) — staff projections:
  - 2006: -8.3
  - 2007: -5.3
  - 2008: -4.2
  - 2009: -3.5
- Alternative risks to outlook:
  - Upside: higher consumption if real wage increases and credit-financed demand exceed assumptions; falling household saving propensity.
  - Downside: significant slowdown in major markets and higher oil prices.

### Inflation and monetary policy guidance
- Inflation projections:
  - NBS projections considered realistic by staff: end-2007 (1.6 percent) and end-2008 (1.9 percent).
  - NBS later lowered end-2007 projection to 1.3 percent.
- Factors damping inflation: regulated utility price decreases of January 2007.
- Upside inflation risks: higher consumer spending with zero slack and wage pressures from tight labor market.
- Staff recommendations to NBS:
  - Use policy instruments to limit opportunities for one-way bets in the foreign exchange market.
  - Given favorable inflation outlook, lower policy interest rates.
  - Communicate that the terminal conversion rate could be different from the prevailing market rate.

### Fiscal stance, framework, and staff recommendations
- 2006 fiscal outcome and composition:
  - General government deficit: 3.4 percent of GDP in 2006 (better than 4.2 percent budget target but higher than 2.8 percent in 2005).
  - Fiscal stimulus in 2006 (accounting for net transfers from the EU): 1½ percent of GDP.
  - Tax and nontax revenues and social insurance contributions exceeded budget by about 2 percent of GDP; gains offset by higher outlays on goods and services, increased entitlements for pensions and health, and larger transport subsidies.
- 2007–09 budget framework objectives:
  - Meet the Maastricht fiscal deficit criterion in 2007; consolidate thereafter.
  - General government deficit (including second pillar pension costs) targets: 2.9 percent of GDP in 2007, with consolidation of ½ percent of GDP annually to 1.9 percent of GDP in 2009.
  - Taking into account net transfers from the EU, framework implies a marginally contractionary stance annually.
  - Consolidation to rely mainly on reduction in expenditure in relation to GDP; planned higher spending on health care, pensions, other social spending, and agriculture.
  - VAT on medicine and medical devices lowered from 19 percent to 10 percent; standard deductions reduced for higher income earners.
- Staff recommendations:
  - Pursue a more ambitious fiscal consolidation than envisaged in the budget framework to ensure comfortable margins for Maastricht criteria and to counter appreciation pressures.
  - Save revenue overperformance and adhere to nominal expenditure ceilings; additional consolidation need not require scaling back budgeted expenditure if revenues exceed budgeted levels.
  - Strengthen fiscal management of local governments and improve policy coordination across government levels.
  - Prioritize capital expenditure to achieve social welfare goals, increase long-term growth potential, and widen discretionary fiscal scope.
- Fiscal numbers presented (series across years as in source):
  - Fiscal balance, including second pillar pension costs: -4.2 -3.4 -2.9 -2.4 -1.9
  - Fiscal balance, excluding second pillar pension costs: -2.9 -2.3 -1.8 -1.3 -0.7
  - Primary fiscal balance, excluding second pillar pension costs: -1.3 -1.4 -0.2 0.2 0.7
  - Cyclically adjusted primary fiscal balance: -1.4 -1.5 -0.4 0.2 0.7
  - Net transfers from the EU: 1.3 0.4 0.8 1.0 1.3
  - Fiscal impulse including the impact of net transfers from the EU 1/: 2.4 1.5 -0.6 -0.4 -0.2
  - Memorandum — Real GDP growth (percent) 2/: 5.4 8.3 7.4 5.2 5.1

### Local government fiscal management and EU funds absorption
- Local government issues:
  - 2006 municipal fiscal slippage election-related; authorities judge recurrence risk small for 2007.
  - Local fiscal rules based on ceilings related to debt stock are currently non-binding; do not prevent revenue overperformance funding additional spending nor ensure automatic stabilizers operate.
  - No satisfactory mechanism for monitoring local government fiscal developments.
- Staff recommendations:
  - Amend local government fiscal rules to strengthen expenditure control and enhance fiscal flexibility; use moral suasion in the interim to avoid borrowing beyond budgets and to save revenue overperformance.
- EU funds drawdown:
  - Drawdown fell short of budgeted levels; Slovakia compares favorably in overall absorption but poorly in utilization of cohesion funds.
  - Authorities noted legislation on land acquisition and construction permits hinders EU funds drawdown for infrastructure and needs urgent review.

### Public debt and medium-term sustainability
- General government debt:
  - End-2006: 30¾ percent of GDP.
  - Under structural deficit trend in latest Convergence Program update, debt ratio projected to decline by 7¾ percentage points to 23 percent of GDP by 2012.
- Vulnerabilities:
  - Public debt within safe range for an emerging market and below Maastricht limit.
  - Aging-related fiscal pressure anticipated mainly from 2020 onward.
  - Debt vulnerability to changes in inflation, interest rates, and exchange rate judged low.

### Labor market, wages, and regional issues
- Recent policy moves and concerns:
  - Minimum wage increased by 10 percent in October 2006; government manifesto calls for further increases relative to average wage.
  - Authorities considering formula-based minimum wage guidelines; staff urged retaining discretion and a cautious stance.
  - Staff preference: an earned income credit for low-income workers rather than further minimum wage increases.
- Collective bargaining law amendment:
  - Made sectoral wage agreements binding for all enterprises in the sector; challenged at the Constitutional Court.
  - Staff noted likely adverse effects on smaller enterprises, reduced regional wage differentiation, and potential to exacerbate competitiveness pressures amid rapid appreciation.
  - Authorities indicated individual firms could seek waivers on socio-economic grounds and plan a tripartite Social Pact including wage moderation.
- Labor code reform:
  - Draft aims to increase employee protection and align with European social model; does not have full political backing and faces opposition from employers and major FDI-supported enterprises.
- Regional disparities:
  - Three regions in central and eastern Slovakia have unemployment around 20 percent with small employment growth.
  - ALMP schemes less effective in lagging regions; authorities plan new ALMP tools from January 2008, targeted investment incentives, increased regional infrastructure investment, and tertiary/vocational education improvements supported by EU contributions.
- Staff recommendations on labor market:
  - Consider introducing an earned income credit for low-income workers to stimulate job creation and incentives to work.
  - Ensure labor code amendments do not raise labor costs or reduce labor market flexibility.
  - Avoid further large minimum wage increases to prevent wage drift harming low-skilled employment.

### Financial sector, banking soundness, and supervision
- Banking system:
  - "Almost entirely foreign-owned" and currently healthy.
  - FSAP update found banks adequately capitalized, profitable, and with high asset quality.
  - Stress tests indicate resilience to a range of adverse shocks.
  - Continued rapid credit growth increased banks’ exposure to credit risk and vulnerability to economic cycle swings.
  - NBS officials consider banks’ risk management practices generally adequate.
  - Recommendation: Closely monitor loan portfolios and tighten prudential requirements if necessary.
- Supervision and Basel II:
  - NBS unified supervision of entire financial sector in 2006.
  - Non-bank financial sector small but growing; risk-based forward-looking supervision operational.
  - FSAP update determined NBS well prepared for Basel II implementation from January 2007.
  - Recommendation: Strengthen cooperation and information exchange with home country supervisors and develop coordinated remedial arrangements for problem banks.
  - Recommendation: Address remaining gaps in anti-money laundering regime timely, considering MONEYVAL recommendations.
- Financial soundness indicators (selected series as presented):
  - Regulatory capital to risk-weighted assets: 21.3; 22.4; 18.7; 14.8; 13.0
  - Regulatory Tier I capital to risk-weighted assets: 18.5; 21.6; 18.9; 15.0; 14.2
  - Nonperforming loans to gross loans 1/: 7.9; 3.7; 2.6; 5.0; 3.2
  - Return on assets (after tax): 1.2; 1.2; 1.2; 1.2; 1.3
  - Return on equity (after tax): 11.5; 10.8; 11.9; 16.9; 16.6
  - Foreign currency-denominated loans (percent of total loans): 17.1; 20.7; 22.8; 28.2; 27.1

### External sector and debt dynamics
- Current account (US$ millions, 2002–06): -1,959; -1,971; -3,298; -4,090; -4,562
- Current account (percent of GDP): -8.0; -6.0; -7.8; -8.6; -8.3
- Exports f.o.b. (US$ millions): 14,478; 21,843; 27,621; 32,026; 41,696
- Imports f.o.b. (US$ millions): -16,629; -22,480; -29,157; -34,476; -44,778
- Gross official reserves (US$ million, end-period): 9,196; 12,149; 14,912; 15,480; 13,364
- Gross external debt (US$ millions, end-period): 13,107; 18,090; 23,764; 27,052; 32,206
- Gross external debt (percent of GDP): 49.4; 50.4; 52.4; 59.9; 55.6
- Short-term external debt (original maturity, US$ millions): 4,237; 7,782; 10,448; 15,202; 15,556
- Official reserves to short-term debt (percent, remaining maturity basis): 128.9; 114.7; 107.4; 92.9; 78.0
- Staff assessment: external debt sustainability not a concern in baseline; external debt-to-GDP projected to decline by about 13 percentage points to 43 percent in 2012. Under adverse scenario, debt would settle around 63 percent of GDP over the medium term.

### Statistics, data quality, and Fund relations (selected)
- Membership and Fund accounts:
  - Quota: 357.50 100.00 (SDR / Million; %Quota)
- ERM2 and exchange rates:
  - Joined ERM2 on November 28, 2005 at central parity Sk 38.455 per euro.
  - Central parity revalued to Sk 35.4424 per euro effective March 19, 2007.
  - Exchange rate: Sk 33.667 per euro on April 27, 2007.
- Data ROSC and SDDS:
  - 2004 Data ROSC: integrity, methodological soundness, and reliability satisfactory, with shortcomings in data revision policy.
  - SDDS subscription since 1996; observes or exceeds related standards.
- Timeliness (typical lags):
  - Foreign exchange reserves: a week or less.
  - Monthly state budget implementation: a day.
  - Consumer prices, reserve money, broad money, interest rates: 10 days to a month.
  - Foreign trade data: two months.
  - Other fiscal, balance of payments, national accounts data: about three months.
- Main remaining statistical issues:
  - Weaknesses in data on prices and volumes of imports and exports.
  - Lack of timely data on general government operations.
  - Slow compilation cycle for annual national accounts and lack of proper benchmarking of quarterly data.
  - Need for improved measurement of inward portfolio investment and more timely information on publicly guaranteed external debt.

### Executive Board findings and concluding recommendation
- Directors commended strong economic performance and commitment to euro adoption in January 2009.
- Key challenges highlighted: satisfying ERM2 exchange rate stability, enhancing fiscal and labor market flexibility, and continuing structural reforms.
- Policy recommendations emphasized:
  - More ambitious fiscal consolidation; save revenue windfalls and adhere to expenditure ceilings.
  - Use monetary policy and communications to limit one-way FX bets; consider lowering policy rates prudently given inflation outlook.
  - Wage moderation and caution on extending sectoral wage agreements and large minimum wage increases.
  - Strengthen bank supervision cooperation with home-country supervisors; monitor credit growth and bank loan quality.
- Recommendation: It is recommended that the Article IV consultation with Slovakia remain on the standard 12-month cycle.

*Source: IMF staff report — _cr07226 (Executive Summary, Informational Annexes, and related sections) — Staff Report for the 2007 Article IV Consultation with the Slovak Republic_*

### Executive Summary

### _cr07226 - Executive Summary

### Background and recent performance
- Slovakia has become one of Central Europe’s strongest economic performers over the past few years, driven by productivity gains and buoyant exports.
- Real GDP growth accelerated to 8¼ percent in 2006, supported by strong productivity gains.
- Exports increased sharply; the external current account deficit narrowed only slightly to 8¼ percent of GDP in 2006 from 8½ percent of GDP in 2005. Over four-fifths of the deficit was covered by foreign direct investment (FDI) inflows.
- Employment gains were concentrated in construction and market services. The unemployment rate fell sharply to 13 percent in 2006, though long-term unemployment remained stuck at around 8 percent of the labor force.
- Despite strengthening demand for labor, real wage increases moderated and lagged productivity gains; the share of profit in value added of non-financial enterprises rose to nearly 18 percent in 2006 from 13¾ percent in 2005.
- HICP inflation reached 5 percent (year-on-year) in July-August 2006 but declined thereafter to 2 percent in February-March 2007. Inflation developments reflected world energy prices and the unwinding of base effects from large regulated utility price increases in October 2005 and decreases in regulated prices in January 2007.
- Credit growth eased slightly in 2006; lending is mainly funded by domestic deposits and is predominantly in domestic currency.

### Exchange rate, monetary policy, and reserves
- Slovakia entered ERM2 in November 2005 and is well poised to adopt the euro in 2009; the Maastricht inflation criterion seems within reach.
- Considerable strengthening of the koruna since October 2006 produced persistent appreciation pressures.
- The National Bank of Slovakia (NBS) raised its key policy interest rate by a total of 175 basis points to 4.75 percent in the first three quarters of 2006.
- The NBS intervened heavily in foreign exchange markets during 2006 to stem depreciation and later to counter appreciation pressures. In mid-March 2007 the central parity was revalued by 8.5 percent to Sk35.44 (below the prevailing market rate).
- Since the parity revaluation the NBS has held the koruna at around 6 percent above the new central parity and has lowered its policy rate by 50 basis points in two steps since end-March 2007.
- Gross official reserves declined in 2006 owing to capital outflows and interventions; the reserve position improved in 2007 owing to interventions aimed at countering appreciation pressures.

### Fiscal stance and public finances
- The general government deficit was 3.4 percent of GDP in 2006 (better than the 4.2 percent targeted in the budget but higher than the 2.8 percent outturn in 2005).
- Accounting for net transfers from the EU, the fiscal stimulus in 2006 amounted to 1½ percent of GDP.
- Collections of tax and nontax revenues and social insurance contributions exceeded budgeted levels by about 2 percent of GDP, owing to stronger-than-expected growth in bases and one-time special factors; gains were offset by higher outlays on goods and services, increased entitlements for pensions and health benefits, and larger subsidies to the transport sectors.
- The 2007–09 budget framework aims at meeting the Maastricht fiscal deficit criterion in 2007 and achieving further fiscal consolidation thereafter.

### Challenges and policy priorities
- Key challenges: satisfy the test of exchange rate stability under ERM2; ensure greater fiscal and labor market flexibility to absorb asymmetric shocks in the monetary union; and continue structural reforms to sustain growth and address high unemployment and regional inequalities.
- Appreciation pressures pose risks to competitiveness and could complicate meeting the ERM2 exchange rate stability test if investor sentiment shifts suddenly.
- Rising share of non-discretionary expenditure would reduce budgetary flexibility.
- Recent labor market policy initiatives could increase wage drift and undermine wage flexibility, potentially eroding competitiveness for small and medium-sized exporters if rapid appreciation continues.

### Authorities’ views
- Authorities prioritize euro adoption while committing to socially inclusive growth.
- They recognize merits of a stronger counter-cyclical fiscal policy but point to political commitments to devote additional resources to social welfare goals.
- Labor market policies are aimed at spreading gains from growth to low-income workers.
- Authorities expressed concern about the rapid pace of exchange rate appreciation and the risk of an overly strong conversion rate on euro adoption.

### IMF staff views and recommendations
- Staff attribute the impressive economic performance to the implementation of prudent policies.
- Staff recommended a more ambitious fiscal consolidation given the strong growth outlook and the need to fend off appreciation pressures.
- Staff noted that competitiveness remains satisfactory thus far but warned that further rapid appreciation of the koruna could be disruptive for small and medium-sized exporters.
- Staff recommended the NBS use its policy instruments to limit opportunities for one-way bets in the foreign exchange market, and lower policy interest rates given the improving inflation outlook.

### Macroeconomic outlook and projections (staff)
- Staff project real GDP growth to rise to 8¾ percent in 2007 and to moderate to 7 percent in 2009.
- Main growth drivers: commencement of production and capacity increases in export-oriented projects (notably automotive and electronics), increased downstream integration with domestic supply chains, capital deepening, and technological enhancements sustaining productivity growth.
- Investment buoyed by strong profits and FDI-financed projects in the pipeline; private consumption supported by real wage increases, employment gains, and favorable expectations from prospective euro adoption.
- Staff project the current account balance (in percent of GDP) to improve from -8.3 in 2006 to -5.3 in 2007, -4.2 in 2008, and -3.5 in 2009.

*Source: IMF staff report — _cr07226 - Executive Summary_*

### 0.9 percent of GDP.

### _cr07226 - 0.9 percent of GDP.

### Growth and external outlook
- Growth is foreseen to strengthen in 2007 and remain positive in subsequent years, fueled by growing exports of cars and electronics products.
- External current account deficit is projected to narrow progressively to about 3½ percent of GDP in 2009—less upbeat than the official and consensus forecasts.
- Staff’s growth outlook is subject to balanced risks:
  - Upside risks: higher consumption if real wage increases and demand-side impetus financed by bank credit are greater than assumed; falling household saving propensity; stronger domestic demand could raise the current account deficit above staff projections.
  - Downside risks: a significant slowdown in major markets and higher oil prices.
- Euro adoption: there should be no negative implications for the euro adoption goal if economic growth turns out lower than the staff projection since the budget is based on conservative growth assumptions.

### External debt and financial account
- External debt sustainability is not a concern in the baseline:
  - External debt relative to GDP is projected to decline by about 13 percentage points to 43 percent in 2012.
  - Even under the most adverse scenario, the debt would settle at around 63 percent of GDP over the medium term.
- Slovakia is likely to remain an attractive destination for foreign investors and record large surpluses in the financial account.
- Anticipated rise in corporate saving is likely to limit debt financing.

### Inflation and monetary policy
- Barring major shocks, inflation is likely to moderate in the near term and meet the Maastricht reference rate.
  - NBS’s inflation projections considered realistic by staff: end-2007 (1.6 percent) and end-2008 (1.9 percent).
  - Subsequent to the mission, in April, the NBS lowered the end-2007 inflation projection to 1.3 percent, taking into account recent price developments.
- Regulated utility price decreases of January 2007 will significantly dampen inflation.
- Projections are subject to uncertainties: world energy prices, domestic impact, and movements in the nominal exchange rate.
- Upside inflation risks: higher consumer spending with zero slack in the economy, and wage pressures from a tighter labor market.
- Staff recommendations to NBS:
  - Use policy instruments to limit opportunities for one-way bets in the foreign exchange market.
  - Given favorable inflation outlook, lower policy interest rates.
  - Communicate that the terminal conversion rate could be different from the prevailing market rate.

### Fiscal policy framework, projections, and staff recommendations
- Authorities’ stated objectives:
  - Priority on euro adoption and commitment to socially inclusive growth.
  - Fiscal consolidation is a key objective; increases in social spending to be within deficit targets.
  - Additional revenues from faster growth likely intended for social welfare goals.
- 2007–09 budget framework envisages:
  - General government deficit (including the second pillar pension costs) of 2.9 percent of GDP in 2007 and consolidation thereafter of ½ percent of GDP annually to 1.9 percent of GDP in 2009.
  - Taking into account net transfers from the EU, this implies a marginally contractionary stance every year.
  - Consolidation to rely mainly on reduction in expenditure in relation to GDP.
  - Planned higher expenditure on health care, pensions, other social spending, and agriculture.
  - VAT rate on medicine and medical devices lowered from 19 percent to 10 percent; standard deductions reduced for higher income earners.
- Staff recommended a more ambitious fiscal consolidation than envisaged in the budget framework to ensure Maastricht criteria are met by comfortable margins and sustainably.
  - Strategy for additional consolidation does not necessarily require scaling back budgeted expenditure—revenues likely to exceed budgeted levels if growth outperforms.
  - Staff encouraged authorities to save revenue overperformance and adhere to nominal expenditure targets.

- Fiscal numbers (as presented):
  - Fiscal balance, including second pillar pension costs: -4.2 -3.4 -2.9 -2.4 -1.9
  - Fiscal balance, excluding second pillar pension costs: -2.9 -2.3 -1.8 -1.3 -0.7
  - Primary fiscal balance, excluding second pillar pension costs: -1.3 -1.4 -0.2 0.2 0.7
  - Cyclically adjusted primary fiscal balance: -1.4 -1.5 -0.4 0.2 0.7
  - Net transfers from the EU: 1.3 0.4 0.8 1.0 1.3
  - Fiscal impulse including the impact of net transfers from the EU 1/: 2.4 1.5 -0.6 -0.4 -0.2
  - Memorandum item — Real GDP growth (percent) 2/: 5.4 8.3 7.4 5.2 5.1
  - Note 1/: Change in the cyclically adjusted primary balance plus the change in net transfers from the EU. Receipts from the EU budget generally have counterparts on the expenditure side; receipts are expansionary since they do not withdraw resources from the private sector like normal revenue. Payments to the EU raise the measured deficit but do not increase domestic demand.
  - Note 2/: For 2006, forecast of the 2006-08 budget framework. For 2007-09, forecast of the 2007-09 budget framework.
- Staff urged saving revenue overperformance to ensure a better fiscal outturn and to adhere to nominal expenditure ceilings.

### Local government fiscal management and EU funds absorption
- Local government concerns:
  - Slippage in municipal fiscal performance in 2006 was election related; risk of recurrence in 2007 considered small by authorities.
  - Fiscal rules for local governments are based on ceilings related to debt stock, currently non-binding; do not prevent revenue overperformance funding additional spending or ensure automatic stabilizers operate.
  - No satisfactory mechanism for monitoring local government fiscal developments.
  - Staff recommended amending local government fiscal rules to strengthen expenditure control and enhance fiscal flexibility; suggested moral suasion in the interim to avoid borrowing beyond budgets and to save revenue overperformance.
- EU funds drawdown:
  - Drawdown has fallen short of budgeted levels.
  - Slovakia compares favorably with neighbors in overall absorption of EU funds but fares poorly in utilization of cohesion funds.
  - Authorities noted current legislation on land acquisition and construction permits hinders drawdown of EU funds for infrastructure projects and needs urgent review.

### Public debt and medium-term sustainability
- Public debt:
  - General government debt at end-2006: 30¾ percent of GDP.
  - Debt is within a safe range for an emerging market and below the Maastricht limit.
  - Assuming the structural deficit trend specified in the latest Convergence Program update, the debt ratio is projected to decline by 7¾ percentage points to 23 percent of GDP by 2012.
  - Aging-related fiscal pressure anticipated only in the longer term, from 2020 onward.
  - Vulnerability of debt to changes in inflation, interest rates, and the exchange rate is low.

### Wage and labor market issues
- Recent initiatives to address income inequality could increase wage drift and reduce wage flexibility:
  - Minimum wage increased by 10 percent in October 2006; government manifesto calls for further increases relative to average wage.
  - Authorities considering formula-based guidelines for minimum wage increases; staff urged retaining discretion and a cautious stance.
  - Staff noted an earned income credit for low-income workers would be preferable to further minimum wage increases to guarantee a minimum living standard without negative demand for labor effects.
- Collective bargaining law amendment (reversal of 2004 reform):
  - Made sectoral wage agreements binding for all enterprises in the sector.
  - Opposition parties and employer groups have petitioned the Constitutional Court.
  - Staff noted the amendment would be particularly painful to smaller enterprises, reinforce negative effects of rapid exchange rate appreciation, and reduce scope for regional wage differentiation.
  - Authorities stated individual firms could seek a waiver on socio-economic grounds and plan a tripartite Social Pact including wage moderation.
- Labor code reform:
  - Draft legislation aims to increase employee protection and align to the European social model; does not have full backing of junior coalition partners and may change; employers’ associations and major FDI-supported enterprises oppose it.
- Regional disparities and unemployment:
  - Three regions in central and eastern Slovakia have seen small employment growth and unemployment around 20 percent.
  - Active labor market policy (ALMP) schemes have been less effective in the three lagging regions.
  - Authorities plan new ALMP tools from January 2008, new investment incentives targeted at underdeveloped regions, increased investment in regional infrastructure and transport, and improvements in tertiary and vocational education supported by EU contributions.

_This summary is based solely on the content of the provided IMF document._

### 31.      The banking system, which is almost entirely foreign-owned, is currently

### _cr07226 - 31.      The banking system, which is almost entirely foreign-owned, is currently

### Banking system: health and risks
- The banking system is "almost entirely foreign-owned" and is currently healthy.
- A recent FSAP update mission found that banks are adequately capitalized and profitable, and asset quality remains high (Table 9).
- Stress tests indicate that banks remain resilient to a range of possible adverse shocks.
- Continued rapid credit growth has increased banks’ exposure to credit risk and their vulnerability to swings in the economic cycle.
- NBS officials deemed risk management practices of banks to be generally adequate.
- Recommendation: Closely monitor bank loan portfolios and tighten prudential requirements if necessary.

### Supervision, non-bank sector, and Basel II readiness
- In 2006, the NBS unified supervision of the entire financial sector.
- The non-bank financial sector is relatively small but growing rapidly.
- NBS officials indicated that the risk-based forward-looking approach of supervision was now fully operational in the non-bank financial sector.
- The FSAP update mission determined that the NBS is well prepared to cope with the challenges resulting from the implementation of the Basel II supervision framework from January 2007.
- NBS officials regularly interacted with home country supervisors at different levels, but acknowledged the importance of improving coordination further.
- Recommendation: Strengthen cooperation and exchange of information with home country supervisors and develop arrangements for coordinated remedial actions for dealing with problem banks.
- Recommendation: Address remaining gaps in the anti-money laundering regime in a timely fashion, taking into account the recommendations of MONEYVAL.

### Staff appraisal — medium-term outlook and euro adoption
- Slovakia is reaping the benefits of sound policies over the past few years, including reforms of the tax and welfare systems, financial sector, and the labor market.
- These reforms, together with prudent macroeconomic management and large FDI inflows, supported progressive strengthening of economic growth and increasing export orientation.
- The new government’s commitment to the continuation of policies aimed at ensuring euro adoption in January 2009 has secured investor confidence.
- Near-term inflation outlook has improved and the Maastricht reference rate seems within reach.
- The 2007–09 budget framework is aimed at meeting the euro zone entry objective.
- Key challenge: Satisfy the test of exchange rate stability under ERM2, given the koruna’s evolution is influenced by Slovakia’s fundamentals and swings in regional investor sentiment.
- Key challenge: Put in place adjustment mechanisms—wage and labor market flexibility and the capacity to run countercyclical fiscal policy—prior to adopting the euro to absorb asymmetric shocks.

### Monetary policy guidance
- Monetary policy priorities have shifted to containing exchange rate appreciation and keeping the rate within the ERM2 band.
- Slovakia’s improved economic outlook and favorable prospects for euro adoption may create upward pressure on the currency with potential for overshooting and volatility.
- The koruna’s recent firming does not appear to pose a significant threat to competitiveness, but further rapid appreciation could be disruptive for small and medium-sized exporters.
- Recommendation: NBS should use its policy instruments to limit opportunities for one-way bets in the foreign exchange market.
- Recommendation: Given the favorable inflation outlook, the NBS should lower its policy rates instead of persisting with the rejection of repo bids to contain appreciation pressures.

### Fiscal policy and public expenditure
- A tighter fiscal stance than envisaged in the budget is desirable, given robust growth prospects and persistence of appreciation pressures.
- Such a strategy would facilitate achieving euro zone norms on a sustainable basis.
- Ensuring a better fiscal outturn requires safeguarding anticipated revenue overperformance due to stronger growth and adhering to original medium-term expenditure ceilings.
- Importance of strengthening fiscal management of local governments and improving policy coordination across all levels of government.
- Recommendation: Strengthen the medium-term expenditure framework to reflect policy objectives clearly and enhance fiscal flexibility.
- Note: Increased socially-oriented current spending is likely to make the public expenditure structure more rigid.
- Recommendation: Prioritize capital expenditure to achieve social welfare goals, increase long-term growth potential, and widen discretionary fiscal scope.
- Recommendation: Reduce income inequalities by channeling resources toward employment promotion and investment in infrastructure in underdeveloped regions.
- Recommendation: Eliminate bottlenecks that hinder drawdown of EU funds for infrastructure projects and create space for growing co-financing of EU-funded projects.

### Labor market issues and reforms
- Reforms implemented in 2003–04 and stronger GDP growth contributed to a pick up in the employment rate, but unemployment remains high among the low-skilled and in less-advanced regions.
- Active labor market policy schemes have been relatively ineffective in lowering unemployment in these regions and need improvement.
- Recommendation: Consider introducing earned income credit for low-income workers to stimulate job creation and increase incentive to work.
- Recommendation: Ensure that amendments to the labor code do not lead to higher labor costs or reduce labor market flexibility.
- Concern: Recent legislation that extends sectoral wage agreements to all firms in the sector is worrisome.
- Recommendation: Authorities should avoid further large increases in the minimum wage as it would lead to wage drift and may harm employment prospects of low-skilled workers.

### Financial system: summary of remaining challenges
- The financial system is in good health but faces challenges from increasing exposure of banks to credit risk.
- Given high foreign ownership of banks and the recent introduction of the Basel II framework, strengthen cooperation with home country supervisors and develop coordinated remedial arrangements.
- The extension of a risk-based approach of supervision to non-bank financial institutions is welcome.
- Recommendation: NBS is encouraged to address remaining gaps in the anti-money laundering regime, taking into account MONEYVAL recommendations.

*IMF staff appraisal as presented in the source content.*

### 41.      It is recommended that the Article IV consultation with Slovakia remain on the

### It is recommended that the Article IV consultation with Slovakia remain on the standard 12-month cycle.

### Economic indicators and real sector
- Real GDP (annual percent change, selected years/projections): 4.1; 4.2; 5.4; 6.0; 8.3; 8.8 (series presented across 2002–07 and projections).
- Output gap (in percent of potential GDP): -0.2; -0.5; -0.5; -0.3; -0.1; 0.0.
- Gross industrial output (constant prices): -1.3; 9.1; 11.5; 4.7; 9.9.
- CPI (period average): 3.3; 8.5; 7.5; 2.7; 4.5; 2.3.
- HICP (period average) 1/: 3.5; 8.4; 7.5; 2.8; 4.3; 1.8.
- Nominal wages (percent change): 9.3; 6.3; 10.2; 9.2; 8.0; 7.1.
- Real wages (percent change): 5.8; -2.1; 2.4; 6.3; 3.3; 4.7.
- Employment (ESA 95 basis, percent change): -0.5; 1.8; -0.3; 1.4; 2.3; 2.0.
- Unemployment rate (annual average, in percent, ILO): 18.6; 17.5; 18.1; 16.2; 13.3; 11.8.

### Monetary and interest rate developments
- NBS policy rate (two-week repo rate, end-of-period): 6.5; 6.0; 4.0; 3.0; 4.75.
- NBS policy rate historical series shown monthly/weekly across 2002–07 (figures and time plots).
- Local currency bond yields (10-year government bond, in percent) and credit default swap spreads (five year contracts, in basis points) presented for Visegrad-4, Nov-05 to Feb-07.

### Exchange rate and competitiveness
- Exchange rate indicators: Sk per euro (series Sep-02 to Mar-07) with central parity adjustment effective 03/19/07.
- Nominal effective exchange rate (percent change, period average) 5/: -0.6; 5.4; 4.0; 1.6; 2.6.
- Real effective exchange rate (CPI-based, period average): 0.8; 12.8; 9.2; 2.3; 6.5.
- Real effective exchange rate (ULC-based, period average): 8.9; -0.8; 8.4; -3.7; -1.7.
- Trade-weighted NEER and REER indices (1998q1=100) and relative CPI/ULC series presented for 1998–2007.

### External sector and balance of payments
- Current account balance (US$ millions, 2002–06): -1,959; -1,971; -3,298; -4,090; -4,562.
- Current account balance (in percent of GDP, memorandum): -8.0; -6.0; -7.8; -8.6; -8.3.
- Exports, f.o.b. (US$ millions): 14,478; 21,843; 27,621; 32,026; 41,696.
- Imports, f.o.b. (US$ millions): -16,629; -22,480; -29,157; -34,476; -44,778.
- Gross official reserves (US$ million, end-period): 9,196; 12,149; 14,912; 15,480; 13,364.
- Gross external debt (US$ millions, end-period): 13,107; 18,090; 23,764; 27,052; 32,206.
- Gross external debt (in percent of GDP): 49.4; 50.4; 52.4; 59.9; 55.6.
- Short-term external debt (original maturity basis, US$ millions): 4,237; 7,782; 10,448; 15,202; 15,556.
- Short-term external debt (remaining maturity basis, US$ millions): 7,133; 10,591; 13,887; 16,658; 17,129.
- Official reserves to short-term debt (percent, remaining maturity basis): 128.9; 114.7; 107.4; 92.9; 78.0.
- External debt service/Exports of goods and services (percent): 11.3; 14.3; 10.8; 11.7; 4.7.

### Fiscal operations and public finances
- General government overall balance (ESA 95 basis, percent of GDP): -7.7; -2.7; -3.2; -2.8; -3.4; -2.9.
- General government debt (in percent of GDP): 43.3; 42.4; 41.5; 34.5; 30.7; 29.5.
- Fiscal operations (consolidated general government, millions of koruny, 2005–09): 
  - Total revenue: 544,372; 568,793; 589,032; 624,413; 655,928; 700,264.
  - Tax revenue: 269,815; 268,803; 279,969; 306,917; 326,857; 347,824.
  - Social contributions: 186,246; 206,010; 212,520; 223,491; 234,265; 249,592.
  - Total expenditure: 576,367; 613,203; 626,201; 656,977; 680,255; 715,032.
  - Interest: 25,771; 29,660; 26,082; 35,497; 35,892; 36,186.
  - Capital spending: 64,518; 63,479; 66,665; 54,296; 54,722; 49,345.
  - Revenue loss to the second pillar pensions: 9,259; 20,200; 18,246; 20,199; 22,498; 25,012.
  - Fiscal balance (Sk millions): -41,254; -64,610; -55,415; -52,763; -46,825; -39,780.
- Fiscal ratios (percent of GDP, 2005–09): Total revenue 37.0; 37.1; 36.0; 34.8; 34.2; 34.2; Total expenditure 39.2; 40.0; 38.3; 36.6; 35.4; 34.9; Fiscal balance -2.8; -4.2; -3.4; -2.9; -2.4; -1.9.
- Public sector debt (ESA 95 basis, percent of GDP): 34.5; ...; 30.7; 29.5; 28.1; 26.2; 25.2; 24.1; 22.9 (projections to 2012 presented).

### Debt sustainability and vulnerability analysis
- External debt-to-GDP (percent): 49.4; 50.4; 52.4; 59.9; 55.6; 48.5 (2002–07 actuals and projections).
- Change in external debt (percent of GDP): -3.1; 0.9; 2.0; 7.5; -4.2; -7.2 (2002–07).
- Identified external debt-creating flows (percent of GDP): -14.3; -1.5; -5.9; -1.5; -6.4; -7.9.
- Debt-stabilizing non-interest current account (long-run): -3.3 (illustrated for the framework).
- Gross external financing need (in billions of euros, projections 2002–12): 6.9; 8.9; 12.9; 13.9; 22.4; 23.0; 23.5; 24.5; 24.9; 25.4; 26.2.
- Public sector debt dynamics (2002–12): public sector debt-to-GDP 43.3; 42.4; 41.5; 34.5; 30.7; 29.5; projected decline to 22.9 by 2012 under baseline.
- Debt-stabilizing primary balance (percent of GDP, projected): -0.6 (illustrated for 2002–12 framework).
- Stress tests presented (alternative scenarios A1, A2; bound tests B1–B6) with resulting debt ratios under shocks (tables with numeric outcomes across 2008–12).

### Financial sector and banking soundness
- Capital adequacy (Regulatory capital to risk-weighted assets): 21.3; 22.4; 18.7; 14.8; 13.0.
- Regulatory Tier I capital to risk-weighted assets: 18.5; 21.6; 18.9; 15.0; 14.2.
- Nonperforming loans to gross loans 1/: 7.9; 3.7; 2.6; 5.0; 3.2.
- Return on assets (after tax): 1.2; 1.2; 1.2; 1.2; 1.3.
- Return on equity (after tax): 11.5; 10.8; 11.9; 16.9; 16.6.
- Liquid assets to total assets: 28.9; 16.8; 13.3; 33.5; 36.5.
- Foreign currency-denominated loans (percent of total loans): 17.1; 20.7; 22.8; 28.2; 27.1.
- Foreign currency-denominated liabilities (percent of total liabilities): 15.6; 19.0; 19.3; 28.0; 22.3.

### Trade and export structure, productivity, and competitiveness
- Merchandise exports (percent change, 12-month basis in US$): 14.4; 21.8; 27.6; 32.0; 41.7.
- Market share in world imports (four-quarter moving average, 1998–2006) shown for Slovakia, Czech Republic, Hungary, Poland; indices and percent shares plotted.
- Technological composition of exports (1994–2005) shown for selected new EU members by low-tech to high-tech shares (figures provided).
- Wages, productivity, and product unit labor costs in manufacturing (1998–2006, 1998q1=100): Real product wages, productivity, and product ULC series for Slovakia and partners presented.

### Key policy implication presented
- The explicit policy recommendation at the outset: "It is recommended that the Article IV consultation with Slovakia remain on the standard 12-month cycle."
- Numerous macrofinancial indicators, fiscal metrics, external balances, and stress-test results are provided to inform ongoing surveillance on the 12-month cycle.

*Source: INTERNATIONAL MONETARY FUND, Staff Report for the 2007 Article IV Consultation—Informational Annex; Prepared by the European Department; May 18, 2007.*

### Appendix I. Slovak Republic: Fund Relations

### Appendix I. Slovak Republic: Fund Relations (As of April 27, 2007)

### I. Membership and Fund Accounts
- Membership Status: Joined: 01/01/1993; Article VIII.
- General Resources Account (SDR / Million; %Quota):
  - Quota: 357.50 100.00
  - Fund Holdings of Currency: 357.50 100.00
  - Reserve Position: 0.00 0.00
- SDR Department (SDR Million; %Allocation):
  - Holdings: 0.94 N/A

### II. Outstanding Purchases and Loans
- None

### III. Financial Arrangements
- Stand-by:
  - Approval Date: 07/22/1994
  - Expiration Date: 03/21/1996
  - Amount Approved (SDR Million): 115.80
  - Amount Drawn (SDR Million): 32.15

### IV. Projected Obligations to Fund
- None

### V. Exchange Rate Arrangement
- Domestic currency: Slovak koruna (Sk).
- ERM2 membership:
  - Joined ERM2 on November 28, 2005 at central parity Sk 38.455 per euro.
  - Central parity revalued to Sk 35.4424 per euro with effect from March 19, 2007.
  - Exchange rate stood at Sk 33.667 per euro on April 27, 2007.
- Exchange rate regime classification: pegged exchange rate within horizontal band.
- Euro adoption objective: Slovak Republic aims to adopt the euro in January 2009.
- Article VIII obligations: Accepted; maintains exchange system free of restrictions on payments and transfers for current international transactions.
- Exchange restrictions: Maintains exchange restrictions for security reasons, based on UN Security Council Resolutions and Council of the European Union Regulations, notified to the Fund (see most recently, EBD/07/38, 3/23/2007) under Executive Board Decision No. 144–(52/51).

### VI. Article IV Consultation (2007)
- Consultation period: Bratislava during February 28–March 13, 2007.
- Authorities met: Minister of Finance Počiatek, NBS Governor Šramko, Minister of Economy Jahnátek, other senior government and NBS officials, parliamentarians, representatives of financial institutions, think tanks, trade unions and employers’ association.
- Mission composition:
  - Mission chief and staff: Messrs Banerjee (head), Konuki, Dalgic (all EUR), and Lugaresi (FAD expert).
  - Participants: Messrs Kiekens (Executive Director for Slovakia), Jakoby (Advisor to the Executive Director for Slovakia), Rosenberg, and Tirpak (both from Regional Representative Office in Warsaw).
- Communications: Joint press briefing held at end of mission. Mission’s concluding statement published on the IMF website. Authorities agreed to publication of the staff report.
- Previous consultation: Concluded on March 20, 2006 (IMF Country Report No. 06/119). Chairman’s summing up circulated as SUR06/33.

### VII. FSAP Participation and ROSCs
- FSAP:
  - FSAP concluded with completion of the 2002 Article IV consultation on August 7, 2002 (missions in February 2002 and April 2002). FSSA report published (IMF Country Report No. 02/198).
  - FSAP update mission: December 2006. FSSA update report to be circulated with staff report for the 2007 Article IV Consultation.
- ROSCs:
  - Fiscal ROSC issued August 2002 (IMF Country Report No. 02/189); updates: August 2003 (IMF Country Report No. 03/236) and March 2005 (IMF Country Report No. 05/73).
  - Data ROSC issued May 2005 (IMF Country Report No. 05/161).

### VIII. Technical Assistance (2000–2007) — summary by department and timing
- MFD:
  - February 2000: Mission on pros and cons, and modalities of moving to an inflation targeting framework, operational issues (money markets and policy instruments), and dealing with potential problems posed by capital inflows for monetary operations.
  - December 2001: Long-term resident expert on banking supervision.
  - May 2002: Two missions on inflation modeling.
- FAD:
  - April 2000: Tax administration.
  - February 2001: Tax administration (follow-up).
  - April 2001: Public Finance Management (follow-up).
  - August 2001: Tax administration: installation of resident expert to advise on establishment of Large Taxpayer Unit (LTU).
  - August 2001–August 2002: Regular visits by FAD consultant on establishment of LTU.
  - December 2001: Tax administration follow-up, tax investigation/fraud issues.
  - June 2002: Mission to prepare Report on the Observance of Standards and Codes (ROSC), Fiscal Transparency Module.
  - February 2003: Tax policy.
  - March 2003: Tax administration.
  - May 2003: Expenditure policy.
- STA:
  - February 2000: National accounts and price statistics.
  - March 2001: Multisector mission.
  - July 2003: Government finance statistics.
  - February–March 2004: Data ROSC Mission.
- Note: See Appendix I of IMF Country Report No. 05/71 for technical assistance during 1991–99.

### IX. Resident Representative Post
- None (closed at end-April 2004).

*Appendix II. Slovak Republic: Statistical Issues*

### X. General assessment of statistical provision
- Coverage, periodicity, and timeliness: Adequate for surveillance purposes.
- Recent improvements: Significant data improvements in recent years, particularly in national accounts.
- 2004 Data ROSC mission findings: Integrity, methodological soundness, and reliability satisfactory, despite shortcomings in data revision policy.
- Main remaining issues:
  - (i) weaknesses in the data on prices and volumes of imports and exports;
  - (ii) a lack of timely data on the general government operations;
  - (iii) slow compilation cycle of the annual national accounts and lack of proper benchmarking of quarterly data.
- SDDS subscription: Subscribes since 1996 and observes or exceeds all related standards.

### XI. Timeliness and public access
- Data publication policy: Authorities generally follow a free and open data publication policy.
- Release practices: Data promptly released to news services and published in monthly and quarterly statistical publications and on the Internet according to a pre-announced schedule.
- Typical lags for core surveillance variables:
  - foreign exchange reserves: a week or less;
  - monthly state budget implementation data: a day;
  - consumer prices, reserve money, broad money, and interest rates: 10 days to a month;
  - foreign trade data: two months;
  - other fiscal, balance of payments, and national accounts data: about three months.
- Reconciliation issue: 2004 data ROSC mission reported difficulties in fully reconciling the balance of payments with the national accounts, monetary, and government finance statistics.

### XII. Real sector and prices
- National accounts progress: Significant progress in compilation.
- Remaining weaknesses:
  - Quarterly national accounts data on expenditures exhibit weaknesses.
  - Significant statistical discrepancy between supply side and demand side.
  - Outstanding issue: Compilation of reliable price deflators for imports and exports to enable decomposition into volume and price changes.
  - Unit value trade price indices: Published with long delays and not appropriately adjusted for quality changes.
- Retail and consumption measurement concerns:
  - Chain stores not fully captured in surveys; retail sales and consumption might be biased (especially compared to VAT receipts).
  - Wage statistics might be biased.
- Public enterprises: It would be useful if line ministries produced systematic accounts of the financial positions of public enterprises under their purview.

### XIII. Fiscal sector
- General government statistics:
  - Compiled annually in accordance with ESA95 and disseminated on the Ministry of Finance (MOF) website.
  - Semi-annual reporting on general government net lending/borrowing on ESA95 basis in accordance with the EU acquis communautaire.
- Treasury and accounting:
  - Monthly reconciliation of government operations above and below-the-line restricted to state budget transactions on a cash basis.
  - Modern treasury system operating since January 2004; improved fiscal control and public debt management by allowing recording of expenditures at planning and commitment stages.
- MOF compilation standards:
  - Converted fiscal accounts to ESA95 standards.
  - Compiles Government Finance Statistics according to GFSM 2001 analytical framework.
  - Data available and disseminated on a cash basis for 1996–05, and on an accrual basis for 2003–05.

### XIV. External sector
- Balance of payments:
  - Monthly balance of payments provided in a timely manner.
  - Compiled and disseminated quarterly on a cumulative basis during the year; dissemination on a cumulative basis does not follow best practice.
- International reserves reporting:
  - Weekly reports of gross international reserves are timely.
  - NBS revised in 2002 its methodology for reporting foreign exchange reserves to include valuation of gold at market prices and to change reporting of repo operations and gold swaps.
  - Reporting of foreign exchange reserves by commercial banks revised to include selected long-term assets in “foreign exchange reserves.” Banks now report arbitrage transactions accurately.
  - Improvements made in reporting nonresidents’ claims and liabilities in domestic currency.
- Remaining problem areas:
  - (i) measurement of inward portfolio investment;
  - (ii) need for more detailed and timely information on publicly guaranteed external debt;
  - (iii) more timely reporting of information on external debt, including short-term debt;
  - (iv) recording of most interest payments on a cash basis;
  - (v) need to improve data compilation on the composition of exports.

*Appendix I. Slovak Republic: Fund Relations (As of April 27, 2007) — Source document provided.*

### 9. Monetary statistics are of good quality, and are reported on a timely basis to the

### _cr07226 - 9. Monetary statistics are of good quality, and are reported on a timely basis to the Fund.

### Monetary statistics: quality and compliance
- The 2004 data ROSC mission found that the two sets of monetary data compiled by the National Bank of Slovakia (NBS)—the national monetary statistics (NMS), for internal use, and the harmonized monetary statistics (HMS), submitted to international organizations—are broadly in line with the IMF Monetary and Financial Statistics Manual.
- Exceptions identified:
  - Treatment of government’s foreign liabilities: previously treated as part of NBS foreign liabilities in the NMS, with a counterpart adjustment in NBS claims on the government. The authorities changed this treatment to exclude government foreign liabilities from NBS foreign liabilities.
  - Exclusion of money market funds from the NMS: authorities started including these funds as a memorandum item in the NMS.
  - Market valuation is not applied to certain financial instruments under both the NMS and HMS.

### Timeliness and data dissemination (selected entries from the Table of Common Indicators)
- Exchange Rates: Date of latest observation 05/05/2007; Date received 05/05/2007; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation 03/31/2007; Date received 04/11/2007; Frequency M / Reporting M / Publication M.
- Reserve/Base Money: Date of latest observation 03/31/2007; Date received 04/11/2007; Frequency M / Reporting M / Publication M.
- Broad Money: Date of latest observation 03/31/2007; Date received 04/11/2007; Frequency M / Reporting M / Publication M.
- Central Bank Balance Sheet: Date of latest observation 04/10/2007; Date received 04/20/2007; Frequency of Data 10 Day / Frequency of Reporting 10 Day / Frequency of Publication 10 Day.
- Consolidated Balance Sheet of the Banking System: Date of latest observation 03/31/2007; Date received 04/11/2007; Frequency M / Reporting M / Publication M.
- (The table records methodological soundness and accuracy/reliability assessments using O, LO, etc., as per the 2004 ROSC findings.)

### Macroeconomic context and implications for monetary policy
- 2006 economic outcomes:
  - Real GDP growth accelerated to 8¼ percent supported by strong productivity gains.
  - External current account narrowed only marginally to 8¼ percent of GDP, with much of the external deficit covered by inflows of foreign direct investment.
  - Unemployment fell sharply to 13¼ percent.
  - Harmonized consumer price inflation reached 5 percent in July-August 2006 and declined subsequently to 2 percent in February-April 2007.
- Monetary policy actions and exchange rate developments:
  - NBS raised its policy interest rate in four steps by a total of 175 basis points during the first three quarters of 2006.
  - In July 2006 the NBS intervened heavily in the foreign exchange market when the koruna dropped below central parity under ERM2.
  - From October 2006 onward appreciation pressures emerged; in mid-March 2007 the central parity was revalued by 8.5 percent with EU approval.
  - Following declining inflation in Q1 2007 and judged low upside risks, the NBS lowered its policy rate by 50 basis points in two steps since late March.

### Executive Board findings and policy recommendations
- Overall assessment:
  - Directors commended Slovakia’s strong economic performance and welcomed commitment to ensuring euro adoption in January 2009.
  - Directors concurred that Slovakia is well poised to adopt the euro, but highlighted challenges: satisfying ERM2 exchange rate stability, enhancing fiscal and labor market flexibility, and continuing structural reforms.
- Fiscal policy:
  - Recommended a more ambitious fiscal consolidation than envisaged in the 2007–2009 budgetary framework to ensure consistency with the Maastricht deficit limit, contain potential re-emerging inflationary pressures, and counter currency appreciation pressures.
  - Called on authorities to save revenue windfalls and adhere to existing medium-term expenditure ceilings.
  - Stressed bolstering fiscal management of local governments and improving policy coordination across government levels.
  - Highlighted the importance of strengthening the medium-term expenditure framework; welcomed background work to increase spending efficiency and streamline public administration; called for efforts to increase efficiency and contain costs in the health care system.
  - Recommended greater emphasis on infrastructure spending and on employment promotion in underdeveloped regions.
- Monetary and exchange-rate policy:
  - Encouraged the NBS to conduct policy and communications to limit opportunities for one-way bets in the foreign exchange market.
  - Some Directors saw scope for prudently lowering the policy interest rate given favorable inflation outlook; others urged caution because the economy was operating at or near full capacity and interest rate spread to the euro area was already low.
- Labor market and wages:
  - Emphasized wage moderation and flexibility in wage-setting to restrain inflation and maintain competitiveness.
  - Expressed concern about legislation extending sectoral wage agreements to all firms and cautioned against further large increases in the minimum wage.
  - Recommended improving effectiveness of active labor market policy schemes and ensuring labor code amendments would not raise labor costs or reduce labor market flexibility.
  - Encouraged consideration of introducing an earned-income tax credit for low-income workers to enhance job creation and incentives to work.
- Financial sector and supervision:
  - Welcomed finding that Slovakia’s financial system is generally sound and resilient, while urging continued efforts to enhance supervision.
  - Called for close monitoring of banks’ loan portfolios given rapid credit growth and increased banks’ exposure to credit risks.
  - Recommended strengthening cooperation with home country supervisors because of high foreign ownership of banks.
  - Commended strengthening of the regime against money laundering and terrorism financing and encouraged expeditious action to address remaining gaps.

### Key statistics (selected from the report)
- Real GDP: 2006 8.3 percent (2007 projection 8.8 percent).
- Output gap (in percent of potential GDP): 2006 -0.1; 2007 0.0.
- CPI (period average): 2006 4.5; 2007 projection 2.3.
- HICP (period average): 2006 4.3; 2007 projection 1.8.
- Unemployment rate (annual average, ILO): 2006 13.3 percent; 2007 projection 11.8 percent.
- General government balance (in percent of GDP): 2006 -3.4; 2007 projection -2.9.
- General government debt (in percent of GDP): 2006 30.7; 2007 projection 29.5.
- Broad money (percent change): 2006 15.3.
- Credit to enterprises and households (percent change): 2006 22.9.
- NBS policy rate (two-week repo rate, end-of-period): 2006 4.75.
- Merchandise exports (in billions of U.S. dollars): 2006 41.7; 2007 projection 53.2.
- Merchandise imports (in billions of U.S. dollars): 2006 44.8; 2007 projection 55.4.
- Current account balance (in billions of U.S. dollars): 2006 -4.6; 2007 projection -3.7.
- Official reserves, end-period (in billions of U.S. dollars): 2006 15.5; 2007 projection 13.4.
- Gross external debt, end-period (in percent of GDP): 2006 32.2; 2007 projection 33.9.
- Nominal effective exchange rate (percent change, period average): 2006 2.6.
- Real effective exchange rate, CPI-based (percent change, period average): 2006 6.5.
- GDP (current prices, Sk billions): 2006 1,636; 2007 projection 1,822.

*Source: IMF staff report and Public Information Notice on the 2007 Article IV Consultation with the Slovak Republic (as reflected in the provided content).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07226.pdf_