Republic of Slovenia - Staff Concluding Statement of the 2021 Article IV Mission
IMF News, March 19, 2021
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- Published: March 19, 2021
Key policy priorities
- Maintain fiscal support until the recovery is entrenched.
- Continue to closely monitor and support, as appropriate, nonfinancial corporations and banks exposed to COVID-affected sectors.
- Facilitate a smooth reallocation of labor across sectors to minimize the economic and social costs of the pandemic.
- Plan to accelerate the digital transformation and investment in green technologies to boost productivity and competitiveness.
The COVID-19 crisis and policy responses
- Eight packages of stimulus and intervention measures adopted to date, including:
- Wage subsidies (in case of temporary layoffs or shorter working hours, and to compensate increase in minimum wage).
- Temporary income support to vulnerable groups.
- Basic monthly income for self-employed.
- A subsidy to cover fixed costs.
- Tax and loan deferrals.
- Health workers bonus.
- Guarantees and subsidized loans.
- Bank of Slovenia actions (as part of the Eurosystem) included supervisory, regulatory, and macroprudential measures and extension of ECB measures for banks under the single supervisory mechanism to all banks and savings banks in Slovenia.
- Outcomes of the measures:
- Real GDP fell by 5.5 percent in 2020.
- Wage compensations for temporary lay-offs, subsidies for shorter work hours, and basic monthly incomes preserved jobs and mitigated a larger labor-market downturn.
- Loan moratoria, state guarantees, subsidized loans, and Bank of Slovenia actions helped avoid a cascading wave of bankruptcies and safeguarded financial stability and liquidity.
Economic outlook and risks
- Growth projections:
- Real GDP is projected to grow by 3.7 percent in 2021.
- Real GDP is projected to grow by 4.5 percent in 2022.
- Drivers of the recovery:
- Consumption and investment, with investment benefiting from EU funds and strong recovery in manufacturing on external markets.
- Timing:
- Even with support measures, output is estimated to return to its pre-crisis level sometime in 2022.
- Key downside risks:
- Potential for new variants of the virus to appear.
- Disruption to the vaccination campaign.
- Turbulence in international financial markets.
Fiscal policy: sustainably supporting the recovery
- Near-term:
- Fiscal policy needs to remain strongly supportive until the recovery is entrenched.
- The 2021 budget plan appropriately maintains support to fight the COVID-19 crisis.
- Assess effectiveness of measures deployed so far and adjust where necessary; targeting and efficiency are key.
- Medium-term:
- Once recovery is entrenched, repurpose support toward “building forward better” and re-establish policy space.
- Emergency relief measures can be phased out and support switched toward “building a better economy.”
- Large fiscal deficits will need to be brought down gradually to rebuild room for fiscal policy maneuver.
- Additional fiscal measures will be needed in the medium term; phase-out alone is unlikely to restore ample policy space.
- Public investment:
- Support for ambitious increase in capital outlays in the 2021 budget (supported by Next Generation and Cohesion Policy EU instruments).
- Execution risks need mitigation; improving public investment management is critical.
- Safeguards needed: robust selection criteria, effective and transparent procurement, project management, and oversight.
- Fiscal framework:
- Credibility of the medium-term fiscal framework should continue to be supported by fiscal rules.
- Fiscal consolidation should not start until after output broadly recovers to its pre-crisis level and downside risks abate, but planning should begin now.
Financial sector policy: safeguarding financial stability and reviving credit growth
- Banking sector position and risks:
- Banks entered the crisis with comfortable liquidity and capital positions, but risks to financial stability have risen.
- Overall credit growth has continued to stagnate; corporate lending declining.
- Households accumulated precautionary and forced savings; low interest rates dented bank profitability.
- Non-performing loans (NPL) in COVID-sensitive sectors have begun to rise, raising risk of cliff effects when loan moratoria end.
- Liquidity and regulatory capital positions have so far hovered comfortably above requirements, but risks have grown.
- Policy recommendations:
- Continue risk-based monitoring of banks’ asset quality; focus on banks with lower capital base and those exposed to COVID-sensitive sectors and SMEs.
- Require banks to continually assess borrowers’ creditworthiness until conditions normalize.
- Welcome Bank of Slovenia’s periodic stress tests and enhanced monitoring of NPLs; continue efforts to prepare banks for high NPL levels.
- Continue frequent reviews of macroprudential measures to balance financial stability and credit needs.
- Maintain engagement with banks on risky, non-collateralized consumer loans; consider requiring high and prompt provisioning for such loans.
- Exit from support:
- Phase out schemes gradually to avoid cliff-edge effects; tighten eligibility to better target viable or potentially viable companies in hard-hit sectors.
- Normalize and clearly communicate prudential standards as recovery strengthens so problem assets can be dealt with timely.
- Strengthen the insolvency regime to facilitate swift repair of bank balance sheets.
Structural policies: inclusive, smart, and greener growth
- Labor market and skills:
- Use active labor market policies to assist worker transitions: training, job search services, and reducing hiring costs for firms.
- Shift focus from protecting jobs to facilitating reallocation and upskilling as recovery entrenches.
- Strengthen social safety nets for those unable to return to work.
- Digitalization:
- Authorities identify digitalization as a key investment area.
- EU Recovery and Resilience Facility (RRF) and EU Cohesion policy funding provide an opportunity to accelerate digital transformation.
- Priorities: improve digital infrastructure, invest in education and skills, and create an enabling regulatory and incentive environment.
- Green transition:
- Combine investment in green projects (supported by the RRF) with strengthened taxation of polluting industries, especially transport.
- Reconsider tax exemptions in transportation within a transport development and low carbon transition strategy.
- Emphasize sustainable mobility and increase the share of clean energy; consider supporting these efforts with proceeds from carbon taxation.
Mission and engagement
- An IMF team conducted virtual meetings during March 8-19, 2021.
- Mission led by Mr. Bernardin Akitoby.
- Meetings included Bank of Slovenia Governor Boštjan Vasle, Minister of Finance Andrej Šircelj, President Robert Polnar and members of the parliamentary committee on finance and monetary policy, other senior officials, private sector representatives and labor unions.
- The mission thanked the authorities for their assistance, hospitality, and constructive discussions.
Staff Concluding Statement of the 2021 Article IV Mission — Republic of Slovenia, March 19, 2021.