IMF Executive Board Concludes 2025 Article IV Consultation with Slovak Republic
IMF News, March 24, 2025
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- Published: March 24, 2025
Executive summary and Board action
- The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Slovak Republic and endorsed the staff appraisal without a meeting on a lapse of time basis.
- Press Release No. 25/073; March 24, 2025; IMF Communications Department; MEDIA RELATIONS, PRESS OFFICER: Boris Balabanov; Phone: +1 202 623-7100; Email: MEDIA@IMF.org.
- Management determined the lapse-of-time procedure meets established criteria in Board Decision No. 15207 (12/74): (i) there are no acute or significant risks, or general policy issues requiring a Board discussion; (ii) policies or circumstances are unlikely to have significant regional or global impact in the near term; and (iii) the use of Fund resources is not under discussion or anticipated.
Economic performance and outlook
- Recent developments:
- Economic growth accelerated to 2 percent in 2024 from 1.4 percent in 2023.
- Private consumption was the main driver, supported by positive real wage growth, the extension of energy support, and more generous pensions.
- Public consumption increased and partially offset a slowdown in EU-funded public investments from record-highs in 2023.
- Net exports remained weak due to lackluster demand for Slovak exports, particularly from Germany, and a rebound in imports.
- Inflation declined from record-highs in early 2023 but increased in the second half of 2024 and into 2025.
- Forecasts:
- Growth is forecast to decline to 1.8 percent in 2025 and increase to 2.1 percent in 2026.
- Inflation is projected to rise temporarily to 4.1 percent in 2025 on higher indirect taxes, moderate to 3.1 percent in 2026, and reach the 2 percent target by early-2027.
- Risks and external assessment:
- Adverse demographic trends and lower productivity growth weigh on the medium-term outlook.
- Risks are tilted to the downside and include intensifying trade policy uncertainty and a slowdown of EU funds disbursements resulting from concerns over governance and institutional quality.
- Slovakia’s external position is assessed to be broadly in line with fundamentals.
Fiscal assessment and policy recommendations
- Fiscal stance and targets:
- The government’s fiscal consolidation targets for 2025-28 imply a cumulative reduction in the deficit of about 3.5 percentage points of GDP.
- The 2025 budget targets a reduction in the headline deficit to 4.7 percent of GDP, from a projected 5.8 percent of GDP in 2024.
- Fund staff’s more conservative macroeconomic forecasts imply an overall deficit of 5.0 percent of GDP in 2025, but the projected structural tightening is broadly in line with the budget.
- The authorities’ medium-term fiscal structural plan aims to bring the fiscal deficit close to 2 percent of GDP by 2028.
- Staff projections suggest meeting these targets will reverse the increase in the deficit over the past two years and put public debt on a downward path by the end of the projection period.
- Additional consolidation needed:
- Staff estimates suggest an additional 3.1 percent of GDP in fiscal savings will be needed over the next three years to achieve the targeted consolidation beyond 2025.
- Recommendations on composition and sequencing:
- Prioritize expenditure-based measures to achieve a more balanced consolidation given the reliance on revenue-based measures so far.
- Implement already-identified Value for Money initiatives (e.g. a reduction in subsidies) and improve the targeting of social spending.
- Consider trimming departmental budgets and reducing public sector wage growth cautiously to avoid unintended cuts in service delivery.
- On the revenue side, counter tax evasion and increase tax compliance; consider raising property taxes and reducing the number of items subject to reduced VAT rates.
- Temporary energy support measures to households should not be extended beyond 2025.
- Replace the FTT with alternative revenue sources, while phasing out the bank levy as planned.
- Fiscal framework and institutions:
- Safeguarding Slovakia’s strong fiscal framework is essential for the credibility of the consolidation effort.
- Aligning Slovakia's national expenditure ceiling framework with the new EU fiscal rules is advised, while continuing focus on the long-term fiscal outlook beyond the EU fiscal framework horizon.
- Slovakia’s Council for Budgetary Responsibility can help monitor long-term sustainability.
- The debt brake should be reformed before it comes into effect in 2026 to avoid the risk of a disruptive fiscal consolidation.
Financial sector resilience and macroprudential policy
- Financial sector soundness:
- The financial sector appears resilient to stress, reflecting a healthy level of buffers and profitability, though some risks remain.
- Potential vulnerabilities include the residential real estate market and the office segment of the commercial real estate (CRE) market.
- Solvency and liquidity stress tests indicate that banks have sufficient capital to withstand severe macro-financial shocks and that the banking system is resilient to funding and market liquidity shocks.
- Macroprudential and supervisory recommendations:
- The current macroprudential stance is broadly appropriate.
- Further development of the policy framework is recommended over the medium term by:
- Adopting a positive neutral countercyclical capital buffer (CCyB).
- Closing leakages and refining borrower-based measures.
- Bolster financial resilience by strengthening supervision of LSIs and enhancing the crisis management framework.
Structural reforms and governance priorities
- Productivity and diversification:
- Intensify efforts to promote innovation and enhance Active Labor Market Policies (ALMPs) to facilitate movement of workers across sectors.
- Deepening the European single market would allow innovative firms to leverage economies of scale and facilitate cross-border flows of capital including venture capital critical for startups.
- Labor force and demographic challenges:
- Policies to increase the size and quality of the labor force are needed, including more vocational education and training, improved child and elderly care, and further efforts to integrate and retain migrants.
- Climate and environmental policy:
- To further reduce greenhouse gas emissions, move expeditiously to fully implement the ETS II scheme for road transport and buildings and consider gradually raising environmental levies in these sectors until the scheme becomes operational in 2027.
- Governance and rule of law:
- Sustained efforts to strengthen governance, reduce vulnerabilities to corruption, and enhance judicial independence would help lift the economy’s resilience and growth potential.
Notable figures and dates
- Growth: 1.4 percent in 2023; 2 percent in 2024; forecast 1.8 percent in 2025; 2.1 percent in 2026.
- Inflation: projected 4.1 percent in 2025; 3.1 percent in 2026; 2 percent target by early-2027.
- Fiscal targets and gaps:
- Projected headline deficit: 5.8 percent of GDP in 2024 (projected).
- 2025 budget target: 4.7 percent of GDP.
- Staff-implied overall deficit for 2025: 5.0 percent of GDP.
- Cumulative deficit reduction targeted for 2025-28: about 3.5 percentage points of GDP.
- Medium-term aim: fiscal deficit close to 2 percent of GDP by 2028.
- Additional fiscal savings needed: 3.1 percent of GDP over the next three years.
- Institutional timing:
- Debt brake to come into effect in 2026.
- ETS II scheme operational target: 2027.
Source: Press Release No. 25/073, IMF Communications Department, March 24, 2025.
