Public Information Notice: IMF Concludes 2003 Article IV Consultation with the Republic of Slovenia
IMF News, April 25, 2003
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- Published: April 25, 2003
Background
- EU accession scheduled for May 2004.
- Sustained real convergence in per capita income to around 70 percent of the EU average; nominal convergence stalled with inflation stuck at about 8 percent since 1997.
- Prudent macroeconomic policies and gradualist structural reform supported strong growth in the 1990s.
- High domestic saving ratio and sound fiscal position limited external imbalances.
- Foreign direct investment was limited until 2000; manufacturing restructured, raised productivity, and remained export-oriented.
- Capital account transactions fully liberalized; significant fiscal and financial sector reforms implemented, though important challenges remain.
Recent developments (2001–02)
- Economic growth slowed to around 3 percent in 2001-02 due to weak external environment and subdued domestic demand.
- Export performance:
- Export growth slowed as EU demand weakened, partially offset by rapid expansion of exports to southeastern Europe and Russia.
- Exports gained market shares in non-EU countries in 2001-02.
- External position:
- With imports growing more slowly than exports and terms of trade improving, the external current account swung into surplus in 2001 and strengthened further in 2002.
- Foreign direct investment increased sharply to the equivalent of about 9 percent of GDP in 2002.
- Inflation and wages:
- Disinflation progress slower than envisaged, partly owing to large increases in indirect taxes, oil prices, and non-oil administered prices.
- Wage pressures lessened in 2002; real wage increases receded below productivity growth.
- Monetary and financial conditions:
- Real interest rate on 60-day tolar bills exhibited sharp swings, turning negative briefly in late 2001.
- Tolar depreciated vis-à-vis the euro continuously at varying rates, around a decelerating trend path.
- Privatization receipts of the government were deposited in the Bank of Slovenia (BoS); rest of inflows largely sterilized through open market operations.
- Base money growth in 2002 was limited to 8.6 percent.
- Domestic credit growth to the private sector and corporate borrowing abroad slowed significantly.
- Fiscal developments:
- General government deficit remained slightly below 1.5 percent of GDP since 2000.
- 2001 experienced expenditure overruns; 2002 budget pressure arose from revenue shortfalls due to weak domestic demand.
- Government responded with expenditure cuts and upward revision of the fiscal deficit target.
- Structural reforms and privatization:
- De-indexation: as of July 2002, financial contracts with maturity less than one year ceased to be indexed to inflation.
- Thirty-nine percent of Nova Ljubljanska Banka (NLB) sold to foreign investors.
- Privatization of Nova Kreditna Banka Maribor and Telecom postponed.
Projections and risks (2003–04)
- Growth:
- Growth expected to pick up only slightly in 2003 due to uncertainties about EU recovery strength and higher international oil prices.
- Real GDP growth projected at 3.8 percent for 2004, based on continued European recovery and strong pickup in private consumption.
- Current account:
- Likely to remain in surplus of about 1.8-2 percent of GDP in 2003-04.
- Fiscal:
- Two-year rolling budget subject to risks; deficit targets of 1.2 percent of GDP in 2003 and 0.9 percent in 2004 are unlikely under present policies.
- Inflation forecasts:
- BoS announced inflation forecasts of 5.3 percent for end-2003 and 3.5 percent for end-2004.
- IMF staff projection for end-2004 suggests an outcome of around 4.8 percent unless policies are tightened further.
Executive Board assessment — findings and policy recommendations
- Commendations and overview:
- Directors commended prudent macroeconomic management, sustained real convergence in the 1990s, and meeting Maastricht fiscal criteria.
- Noted full fiscal consolidation broadly on track, comfortable foreign exchange reserves, strong foreign investment inflows, and productivity-driven export competitiveness.
- Main policy challenge:
- Given EU accession in May 2004 and limited disinflation since 1997, priority is to lower inflation and inflation expectations while entering ERM2 at a viable exchange rate.
- Indexation:
- Widespread indexation (wages, pensions, financial contracts) identified as key factor behind sticky inflation.
- Directors encouraged authorities and social partners to eliminate indexation mechanisms to speed up disinflation.
- Monetary policy and exchange rate:
- Sustained monetary policy efforts needed to achieve disinflation.
- Directors saw scope for lowering inflation by accepting a stronger tolar, given strong external current account position.
- Recommended BoS forecast and monitor a core inflation measure that excludes administered prices, indirect taxes, and oil prices.
- Suggested treating inflation goals as targets rather than projections to build credibility.
- Administered prices:
- Cost-push factors should be tackled vigorously.
- Welcomed enhanced coordination between government and BoS on administered price adjustments.
- Warned that caps on administered price increases should not substitute for policy tightening or lead to losses for service providers.
- Fiscal policy:
- Endorsed medium-term fiscal goal of attaining close to structural balance before adopting the euro.
- Noted deficit targets for 2003-04 might not be achieved under present policies; initial adverse fiscal effect of EU accession uncertain.
- Urged return in 2004 to previously planned pace of fiscal adjustment.
- Recommended medium-term expenditure restraint focus early on wages and social transfers.
- Priorities: lower public sector wage increases, maintain freeze on public sector hiring, eliminate wage indexation.
- Commended measures to contain public sector wage increases below economy-wide increases and welcomed a social agreement linking wages to the average EU inflation rate.
- Encouraged keeping the cost of the new wage structure within the budgeted wage bill for 2004.
- Suggested further pension savings by indexing pensions to inflation instead of to wages.
- Urged determined pursuit of planned health care reforms.
- Structural reforms and privatization:
- Welcomed significant strides and encouraged maintaining momentum.
- Supported initiatives to reduce the state's role in steel and energy sectors and accelerate privatization generally.
- Financial sector:
- Considered banking system generally sound.
- Welcomed progress on the authorities' financial sector action plan, strengthening BoS's ability to manage risks.
- Stressed importance of monitoring rising foreign currency borrowing by enterprises to contain credit risks.
- Observed increased competition from foreign bank entry; encouraged enhancing competitiveness of Nova Kreditna Banka Maribor through private capital infusion.
- Endorsed de-indexation of short-term financial contracts in mid-2002 and banks' initiative to offer long-term instruments at nominal rates.
- Encouraged elimination of indexation of all financial instruments at an early date.
Selected economic indicators — key figures (1999–2004, as presented)
- Real GDP (annual percent change): 1999: 5.2; 2000: 4.6; 2001: 3.0; 2002: 2.9; 2003 (Proj.): 3.2; 2004 (Proj.): 3.8.
- Domestic demand (annual percent change): 1999: 9.1; 2000: 1.1; 2001: 0.5; 2002: 2.2; 2003 (Proj.): 3.1; 2004 (Proj.): 4.0.
- Consumer prices (period average): 1999: 6.1; 2000: 8.9; 2001: 8.4; 2002: 7.5; 2003 (Proj.): 5.7; 2004 (Proj.): 5.0.
- Consumer prices (end of period): 1999: 8.0; 2000: 7.0; 2001: 7.2; 2002: 5.3; 2003 (Proj.): 4.8.
- Wages, nominal all sectors (annual percent change): 1999: 9.6; 2000: 10.6; 2001: 11.9; 2002: 9.8; 2003 (Proj.): 7.8.
- General government balance (percent of GDP): 1999: -0.6; 2000: -1.4; 2001: -2.9; 2002: -1.2; 2003 (Proj.): -0.9.
- General government debt (percent of GDP): 1999: 24.9; 2000: 25.8; 2001: 27.5; 2002: 28.4; 2003 (Proj.): 26.3.
- Base money (percentage change, end-period): 1999: 16.4; 2000: 21.4; 2001: 8.6.
- Credit to the private sector (percentage change, end-period): 1999: 25.0; 2000: 18.4; 2001: 18.3; 2002: 11.1.
- Rate on 60-day BoS bills (percent): 1999: 7.1; 2000: 8.2; 2001: 10.4; 2002: 8.3.
- Merchandise exports (millions of U.S. dollars): 1999: 8,623; 2000: 8,808; 2001: 9,343; 2002: 10,473; 2003 (Proj.): 12,149; 2004 (Proj.): 13,208.
- Merchandise imports (millions of U.S. dollars): 1999: -9,858; 2000: -9,947; 2001: -9,962; 2002: -10,716; 2003 (Proj.): -12,364; 2004 (Proj.): -13,471.
- Current account balance (millions of U.S. dollars): 1999: -698; 2000: -548; 2001: 31; 2002: 375; 2003 (Proj.): 476; 2004 (Proj.): 441.
- Gross official reserves (millions of U.S. dollars): 1999: 3,168; 2000: 3,196; 2001: 4,397; 2002: 7,064; 2003 (Proj.): 8,230; 2004 (Proj.): 8,945.
- External debt (percent of GDP, end-period): Total: 1999: 26.9; 2000: 34.3; 2001: 35.7; 2002: 41.5; 2003 (Proj.): 37.9; 2004 (Proj.): 38.4.
- External debt service (millions of U.S. dollars): 1999: 840; 2000: 1,012; 2001: 1,652; 2002: 1,820; 2003 (Proj.): 2,014; 2004 (Proj.): 2,310.
- Tolars per euro (end-period): 1999: 197.3; 2000: 211.5; 2001: 221.4; 2002: 230.3.
- Nominal effective exchange rate (1998Q1=100, period average): 1999: 96.8; 2000: 90.6; 2001: 85.0; 2002: 81.8.
- Real effective exchange rate, CPI based (1998Q1=100, period average): 1999: 103.0; 2000: 102.1; 2001: 101.1; 2002: 102.8.
Public Information Notice: IMF Concludes 2003 Article IV Consultation with the Republic of Slovenia — April 25, 2003. IMF EXTERNAL RELATIONS DEPARTMENT, Public Affairs, Media Relations.