Slovakia - Staff Concluding Statement of the 2021 Article IV Mission
IMF News, May 18, 2021
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- Published: May 18, 2021
Overview and Outlook
- Publication date: May 18, 2021.
- Context: Slovakia entered the COVID-19 pandemic "from a position of strength" with effective policy support that "limited the economic fallout."
- 2020 outcome: "The output contraction of 4.8 percent in 2020"—milder than the Euro Area average.
- 2021–2022 projection: "Real GDP growth could reach 4.7 percent this year and accelerate further in 2022."
- Key uncertainties and scenario drivers:
- The pace of vaccination versus virus waves/variants.
- Large stimulus packages in the US and EU could lift growth above projections.
- New virus waves or variants could slow activity.
- Policy priority: Continued fiscal support until the recovery is well entrenched; increasingly targeted measures to facilitate resource reallocation and strengthen potential; begin rebuilding fiscal buffers once recovery is firmly in place.
Fiscal Policy — findings and recommendations
- Current stance and 2021 plans:
- The Stability Program envisages "an appropriately supportive fiscal stance," with higher allocations for health, the First Aid scheme, support to selected sectors and buffers for pandemic-related contingencies.
- Transition guidance as recovery gains traction:
- Shift from broad-based emergency support to targeted measures that prevent erosion of the economy’s potential.
- Examples of targeted policies:
- Active labor market policies: "well-targeted hiring subsidies, training, and reskilling."
- Targeted solvency support to viable firms, especially SMEs in hard hit sectors.
- If activity surprises on the upside: "save the unspent reserves for pandemic-related contingencies."
- Medium-term fiscal sustainability:
- Rebuild fiscal buffers when a robust expansion is firmly in place to "create room for policy maneuver and accommodate rising aging-related spending."
- Begin planning now to provide a credible medium-term fiscal path by "laying out concrete measures."
- Revenue-side options: "Strengthening tax efficiency and raising real estate and environmental taxation."
- Expenditure-side options: "fully implementing savings measures identified in spending reviews."
- Importance of timely and effective absorption of EU funds: noted as "a challenge for Slovakia in the past."
- Institutional reforms:
- Envisaged amendments to the Constitutional Act on Budgetary Responsibility and elements of pension reform are "critical to help reestablish fiscal space and strengthen public finances."
- Policy instruments to be introduced (and encouraged for prompt implementation):
- "Multiannual expenditure ceilings" to ensure buildup of fiscal buffers.
- "Relinking retirement age to life expectancy" and "minimizing the cost of the parental bonus" for pension sustainability.
- The authorities committed to introducing expenditure ceilings and restoring the link between retirement age and life expectancy in the Recovery and Resilience Plan; the mission "supports their prompt implementation."
Financial Sector Policies — findings and recommendations
- Current banking system assessment:
- The banking sector is "profitable, liquid and well-capitalized."
- Micro and macroprudential measures have limited systemic risk during rapid household financial deepening.
- "Problems with repayment after the end of loan moratoria are relatively low and non-performing loans continue to decline."
- Mission analysis suggests "insolvency risks in some segments of the corporate portfolio have increased" and risk of a wave of bankruptcies when support measures expire.
- Concerns: "Persistently rapid mortgage growth," "growing household indebtedness," and "rising real estate prices"—require continued vigilance.
- Policy recommendations:
- Maintain liquidity support through guaranteed loans to ensure adequate credit supply to the corporate sector.
- Assess and adjust conditionality of schemes to encourage take-up by banks and businesses.
- Be prepared to:
- Release the countercyclical capital buffer, or
- Relax regulatory requirements for retail lending, if downside risks materialize.
- Prudential flexibility should be "carefully withdrawn once the pandemic is under control," with supervisors ensuring sound provisioning.
- Macroprudential stance and capital buffers:
- The macroprudential stance is "broadly adequate" and stress tests suggest the banking system "has sufficient capital to withstand a wide range of shocks."
- Authorities could consider using new flexibility under Capital Requirements Directive (CRD V) and "explore a targeted use of the systemic risk buffer" to address risks from real estate market exposures.
Structural Reforms — findings and recommendations
- Objectives: Limit long-term effects of the crisis and set the stage for "robust, sustainable, and inclusive growth" by facilitating resource reallocation, investing in human and physical capital, and boosting productivity.
- Labor market and human capital:
- The labor market has shown resilience but impacts were uneven across workers and regions.
- Recommended measures for affected groups: "lifelong learning, training, reskilling, and hiring subsidies."
- Active labor market policies can limit rises in long-term unemployment.
- Insolvency and business environment:
- Effective restructuring mechanisms and insolvency frameworks will support resource reallocation and improve the business environment.
- Recovery and Resilience Plan proposals in this area (e.g., "insolvency processes digitalization, early warning systems and specialization of courts") are welcome.
- Productivity, innovation, and public sector efficiency:
- Slovakia's education quality "falls short relative to EU peers."
- Investments in "research, innovation, and digitalization are lagging."
- Productivity is hindered by "an uncertain regulatory environment, and perceived gaps in governance, and more broadly, public sector efficiency."
- The Recovery and Resilience Plan and NGEU funds aim to address these challenges and accelerate the "digital and green transformation" of the economy.
- Timely and effective execution of investments and unwavering implementation of reforms could "lift the economy’s potential and reignite income convergence."
Closing
- The mission thanks the authorities and counterparts "for the candid, constructive and insightful dialogue and productive collaboration."
Source: Slovakia - Staff Concluding Statement of the 2021 Article IV Mission (May 18, 2021).