IMF Executive Board Concludes 2022 Article IV Consultation with Slovak Republic
IMF News, June 30, 2022
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- Published: June 30, 2022
Outlook and near-term macroeconomic assessment
- Growth rebounded to 3.0 percent in 2021, but recovery was impeded by resurgent infection waves and supply chain disruptions.
- The shock of the war in Ukraine is hitting Slovakia before it had fully recovered from the pandemic, with output and employment still slightly below pre-crisis levels as of end 2021.
- The war in Ukraine will dampen the recovery given Slovakia’s geographical proximity, heavy reliance on energy imports from Russia, and high integration into global value chains.
- Projections:
- Growth in 2022 is projected to slow to 2.2 percent.
- Inflation averaging 10 percent in 2022–23.
- Growth is expected to rebound to 3.5 percent in 2023, supported by large EU funds inflows.
- Uncertainty is exceptionally high, with key risks tilted to the downside, especially stronger spillovers from the war, disruptions in energy supply, and protracted supply chain breakdowns.
Executive Board assessment — summary of risks and external position
- The war’s effects are already being felt through surging commodity prices, input shortages, subdued confidence, weaker global demand, and heightened energy security risks.
- Slovakia is experiencing acute humanitarian impacts: more than 440,000 Ukrainian refugees have crossed the Slovak border.
- Assessment of external position:
- Slovakia’s external position in 2021 is assessed to be moderately weaker than fundamentals and desirable policies.
Fiscal policy guidance and recommendations
- Immediate policy priority: mitigate the economic fallout of the war and minimize the humanitarian crisis.
- Fiscal flexibility:
- Fiscal policy needs to be flexible and ready to adjust, while avoiding adding to inflationary pressures.
- Automatic stabilizers should be allowed to operate fully.
- The budget could be revised to reprioritize spending and accommodate possibly higher spending (refugees, energy security, targeted support).
- Targeted support:
- Targeted and time-bound transfers to vulnerable households are recommended to cushion the effect of rising commodity prices; these are 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 buffers:
- Rebuilding fiscal buffers should 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 given high EU fund inflows.
- A credible medium-term consolidation path would require spelling out concrete measures.
- Revenue and expenditure measures:
- Significant progress in reducing the VAT gap is welcome and should be sustained.
- Raising real estate and environmental taxation could yield sizable revenue.
- Stepped-up implementation of value for money measures will help realize saving potential identified in spending reviews.
- Fiscal framework and pension reforms:
- Recent reforms to the fiscal framework and the pension system could significantly strengthen public finances.
- 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 other elements of ongoing fiscal reforms require further consideration: constraints on the overall tax burden limit fiscal policy’s ability to respond to shocks; the parental bonus would entail fiscal costs before savings from other pension reform elements are realized.
Financial sector and macroprudential policy
- Banking sector resilience:
- The banking sector has weathered the pandemic well, but close monitoring, enhanced supervision, and careful calibration of financial sector policies are warranted.
- Financial sector supervision (including AML/CFT supervision) should continue to closely monitor asset quality, assess risks related to the war and its spillovers, and calibrate stress tests accordingly.
- Countercyclical and macroprudential measures:
- Adjusting the CCyB may be warranted if there are clear signals that the strong credit cycle continues, but authorities should be ready to change course if downside risks materialize.
- Continue exploring additional measures to address housing market vulnerabilities, such as capital-based measures on mortgage exposures (including minimum risk weights and targeted use of a sectoral systemic risk buffer).
- To address specific pockets of vulnerability (e.g., rise in mortgages with maturities beyond borrowers' retirement age), adjusting borrower-based measures would be appropriate.
Energy security, climate policy, and structural reforms
- Energy security priorities:
- Immediate focus: mitigate effects of a potential Russian gas shut-off by securing alternative energy sources, accelerating inventory buildup, collaborating at the EU level, and contingency planning.
- Authorities’ plans for higher investment in renewables and improved energy efficiency are welcome and should be accelerated where possible.
- Climate policy:
- Accelerating the green transition will improve energy security and reduce greenhouse gas emissions.
- Slovakia could consider introducing explicit carbon taxation once energy prices have subsided.
- Structural reforms and investments:
- Structural reforms and investments to accelerate green and digital transformation will support resilient, inclusive, and sustainable growth.
- These should be coupled with human capital investments, education reforms, and effective labor market policies to strengthen labor supply in a rapidly aging society and ensure benefits of growth accrue to all.
- Reforms to improve institutional quality, strengthen governance, and innovation would raise efficiency and productivity.
- Slovakia’s Recovery and Resilience Plan outlines sizable investments and reforms; successful execution would raise living standards and lift the economy’s potential.
Key statistics and projections (Table 1. Slovak Republic: Summary of Economic Indicators, 2020 − 23)
- Real GDP:
- 2020: -4.4
- 2021: 3.0
- 2022: 2.2
- 2023: 3.5
- Domestic demand:
- 2020: -5.3
- 2021: 3.6
- 2022: 2.8
- Public consumption:
- 2020: 0.9
- 2021: 1.9
- 2022: 3.4
- 2023: 3.8
- Private consumption:
- 2020: -1.5
- 2021: 1.4
- 2022: 1.6
- Gross fixed capital formation:
- 2020: -11.6
- 2021: 0.6
- 2022: 8.4
- 2023: 7.3
- Exports of goods and services:
- 2020: -7.4
- 2021: 10.2
- 2022: 2.1
- 2023: 4.9
- Imports of goods and services:
- 2020: -8.4
- 2021: 11.1
- 2022: 4.3
- Potential Growth:
- 2020: 0.8
- 2021: 1.0
- 2022: 1.8
- Output gap:
- 2020: -4.1
- 2021: -2.2
- 2022: -1.8
- 2023: -0.5
- Prices:
- Inflation (HICP):
- 2020: 2.0
- 2021: 10.6
- 2022: 9.8
- Inflation (HICP, end of period):
- 2020: 5.0
- 2021: 11.2
- 2022: 8.0
- Core inflation:
- 2020: 2.4
- 2021: 5.7
- GDP deflator:
- 2020: 7.5
- 2021: 9.9
- Employment and wages:
- Employment:
- 2020: -0.6
- 2021: 1.1
- 2022: 1.3
- Unemployment rate (Percent):
- 2020: 6.6
- 2021: 6.8
- 2022: 6.4
- 2023: 6.2
- Nominal wages:
- 2020: 3.7
- 2021: 8.8
- Public Finance, General Government:
- Revenue:
- 2020: 39.9
- 2021: 40.7
- 2022: 40.1
- 2023: 40.2
- Expenditure:
- 2020: 45.3
- 2021: 46.8
- 2022: 43.4
- Overall balance:
- 2020: -5.5
- 2021: -6.1
- 2022: -5.2
- 2023: -3.1
- Primary balance:
- 2020: -4.3
- 2021: -2.3
- Structural balance (Percent of potential GDP):
- 2020: -1.7
- 2021: -3.4
- 2022: -2.9
- General government debt:
- 2020: 59.7
- 2021: 63.1
- 2022: 61.5
- 2023: 56.3
- Monetary and Financial Indicators (Percent):
- Credit to private sector (Growth rate):
- 2020: 4.8
- 2021: 7.6
- 2022: 8.9
- 2023: 11.8
- Government 10-year bond yield 1/:
- 2020: -0.1
- 2021: -0.04
- Balance of Payments (Percent of GDP):
- Trade balance (goods):
- 2020: -2.7
- 2021: -1.4
- Current account balance:
- 2020: 0.3
- 2021: -2.0
- 2022: -4.5
- 2023: -3.2
- Gross external debt:
- 2020: 120.5
- 2021: 137.0
- 2022: 133.5
- 2023: 124.7
- Saving and Investment Balance:
- Gross national savings:
- 2020: 19.2
- 2021: 19.4
- 2022: 18.3
- 2023: 20.1
- Private sector:
- 2020: 21.2
- 2021: 22.3
- 2022: 18.7
- Public sector:
- 2020: -0.4
- Gross capital formation:
- 2020: 18.9
- 2021: 21.4
- 2022: 22.8
- 2023: 23.2
- Memo Item:
- Nominal GDP (Millions of euros):
- 2020: 92,079
- 2021: 97,123
- 2022: 106,746
- 2023: 121,428
IMF Communications Department. Press Release No. 22242. June 30, 2022.