{
  "title": "Slovak Republic: Staff Concluding Statement of the 2017 Article IV Mission",
  "publication": "IMF News, February 1, 2017",
  "sourceUrl": "https://www.imf.org/en/news/articles/2017/02/01/ms020117-slovak-republic-staff-concluding-statement-of-the-2017-article-iv-mission",
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  "summary": "Slovakia is described as an economic success story: \"Twenty years of sustained economic convergence has lifted real incomes to more than 70 percent of the European Union average.\"",
  "publishDate": "2017-02-01",
  "sections": [
    {
      "heading": "Economic performance and outlook",
      "content": "- Slovakia is described as an economic success story: \"Twenty years of sustained economic convergence has lifted real incomes to more than 70 percent of the European Union average.\"\n- Economic growth:\n  - The economy grew by an estimated 3.3 percent last year.\n  - Growth is expected to remain at 3.3 percent this year.\n  - In the medium-term, higher investment in the automotive sector is projected to accelerate growth.\n- Labor market and inflation:\n  - Rising employment, low inflation, and rapid household credit growth boosted consumption.\n  - The economy is operating at close to its full potential; unemployment rate has returned to its pre-crisis level.\n  - Supply of available, highly-skilled workers nearly exhausted; labor market began to absorb lower-skilled individuals and those coming off long spells of unemployment.\n  - Tight labor markets pushed up wages even as average productivity growth slowed.\n- Investment and EU funds:\n  - Low absorption of EU funds, reflecting the beginning of the new programming period, dampened investment and imports."
    },
    {
      "heading": "Risks and vulnerabilities",
      "content": "- External and political risks:\n  - The United Kingdom’s plans to exit the European Union increase uncertainty and could affect Slovakia through slower growth in key trading partners.\n  - Europe’s political calendar in 2017 (elections in the Netherlands, France, and Germany) adds to uncertainty.\n  - Strong external fundamentals along with moderate public indebtedness and financing needs provide a cushion against possible external shocks.\n- Domestic financial risks:\n  - Rapid growth of credit to households is a potential domestic risk, particularly if the labor market falters following a negative external shock.\n- Long-term challenges:\n  - Productivity growth has nearly halved since 2008.\n  - With population aging, a further slowdown in productivity is likely unless countered by structural reforms.\n  - Regional disparities: gains heavily concentrated in the Bratislava region; underdeveloped infrastructure, lower educational attainment, and low labor mobility have held back the Eastern and Central regions.\n  - Pension and health care spending is projected to grow by one-third between 2013 and 2060, roughly 4.5 percent of GDP.\n  - Lower productivity growth and further openings of the Pillar II pension system could further aggravate rising pension expenditures."
    },
    {
      "heading": "Fiscal stance and policy recommendations to create fiscal space",
      "content": "- Recent fiscal developments:\n  - Overall fiscal balance improved in 2016.\n  - The headline deficit narrowed to an estimated 2 percent of GDP largely driven by much lower EU funds absorption due to the start of a new programming period.\n- 2017–2019 budget and risks:\n  - The 2017-2019 budget relies on lower capital expenditure, modest revenue measures, and an intention to contain growth in public sector wages and social benefits to reach a balanced budget by 2019.\n  - The mission notes pressures to increase wages in a tight labor market and demand for higher social spending could undermine the objective.\n- Mission recommendations to support fiscal consolidation:\n  - Spend more effectively:\n    - Support the authorities’ “value for money” initiative as a first step toward a comprehensive spending review.\n    - Savings identified through reviews should, at least in part, be used to support consolidation rather than fully reallocated within the same sector.\n    - Any revenue over-performance should be allocated transparently.\n  - Enhance tax efficiency:\n    - Increasing Slovakia’s value-added tax efficiency to the EU average could produce an additional 0.9 percent of GDP in revenues.\n    - A compliance strategy underpinned by further tax administration reforms would complement recent legal and administrative measures.\n    - Establishing a well-defined corporate income tax base and targeting compliance efforts on sectors with highest evasion rates would support revenue gains.\n  - Broaden the tax base:\n    - Convergence of property and environmental tax collections to EU average levels would entail:\n      - Basing the property tax on market values instead of surface area;\n      - Removing the zero-rate applied to inheritance when property is held for more than five years; and\n      - Increasing environmental taxes.\n    - These measures could produce added revenues of up to 2 percent of GDP.\n- Use of fiscal space:\n  - These measures will create space to address regional disparities and population aging.\n  - A comprehensive strategy to reduce regional disparities will require sizable investment in infrastructure and human capital.\n  - Improving education quality in poorer regions will require stronger commitment and additional resources beyond small-scale initiatives currently supported by EU funds.\n- Pension and health sector recommendations:\n  - Steady implementation of the 2012 pension reforms is imperative; successful implementation is projected to reduce pension expenditures through 2030 before aging dynamics drive expenditures up.\n  - Additional measures to ease fiscal burden could include:\n    - Linking social contributions to annual rather than monthly income;\n    - Indexing pensions awarded upon retirement to inflation and the retirement age to life expectancy more closely.\n  - Recourse to Pillar II openings should be avoided.\n  - In health care, advance efforts to centralize procurement and restructure the hospital network to meet evolving needs of an aging population in a cost-effective manner.\n- Fiscal Responsibility Act and cash management:\n  - Any modification to the Fiscal Responsibility Act should be carefully considered.\n  - To strengthen cash management, modifications to allow government cash balances to be netted out from gross debt can be considered when assessing performance relative to the debt ceiling.\n  - The introduction of any escape clause for investment spending should be avoided.\n  - For the 2014-20 EU programming period, focus on identifying priority infrastructure projects that facilitate investment and increased labor mobility in under-developed regions, establish clear selection criteria, and follow competitive procurement."
    },
    {
      "heading": "Financial stability and macroprudential measures",
      "content": "- Banking system indicators:\n  - The banking system is stable and well capitalized.\n  - Banks are profitable despite low interest rate environment and regulatory fees.\n  - Asset quality: non-performing loans at 4.6 percent.\n  - After five years of double-digit loan growth to households, real estate loans now account for over half of total private sector credit.\n  - Household indebtedness in Slovakia is now one of the highest in central and eastern Europe.\n  - Interest rates on over 80 percent of new mortgage loans reset in less than five years.\n- Authorities’ actions:\n  - National Bank of Slovakia (NBS) tightened requirements on loan-to-value (LTV) ratios for new loans and announced a tightening of the debt-service-to-income ratio in 2017.\n  - NBS increased required capital for other significant institutions by as much as 2 percent and imposed a systemic risk buffer of up to 1 percent in 2017.\n  - NBS announced that the countercyclical buffer would rise from zero to 0.5 percent on August 1.\n  - These macro-prudential measures are intended to preserve lending standards and increase capital buffers.\n- Additional measures the mission encourages:\n  - Impose higher risk weights on mortgage loans with LTV ratios over 80 percent or on mortgage loans for investment properties, in line with the latest Basel proposals.\n  - Further lower the maximum LTV ratio, which is among the highest in the euro area, to reduce average credit risk on new loans.\n  - Eliminate preferential treatment of capital gains from housing investment to curb demand for real estate investment.\n  - Lower the bank tax to 0.1 percent as originally planned to relieve pressures on banks’ profitability."
    },
    {
      "heading": "Structural reforms to sustain convergence and productivity",
      "content": "- Productivity and competitiveness:\n  - Slowing productivity growth poses risks to long-term convergence.\n  - Slovakia increased its market share within the EU via strong cost competitiveness and early links with German automotive supply chains.\n  - Sustaining convergence requires reforms to ensure optimal and efficient use of the labor force and a better business environment.\n- Labor market policies:\n  - Current de-emphasis on activation programs in favor of measures to place the long-term unemployed into steady jobs and stimulate on-the-job training are appropriate.\n  - Efficiency savings from the ongoing expenditure review of labor market policies should help ensure value-for-money.\n  - To address skills mismatch in the Bratislava region, procedures for granting work permits to foreign workers could be simplified.\n  - In the long run, vocational training needs strengthening to ensure better skills match.\n- Business environment and governance reforms:\n  - Surveys indicate perceptions of corruption and lack of impartiality in the judiciary negatively affect views of Slovakia’s business climate.\n  - Recommended actions:\n    - Improve the efficiency, transparency, and independence of the judicial system.\n    - Enforce the ban on offering and accepting unethical advantages by government officials in the management of public property.\n    - Extend mandatory disclosure rules for public companies, government contracts, and government officials to cover local government as well.\n\nIMF Staff Concluding Statement, February 1, 2017.\n\n---\n\n\n References\n\n- Slovak Republic and the IMF\n- IMF Policy Advice -- A Factsheet\n- Mission Concluding Statements\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2017/02/01/ms020117-slovak-republic-staff-concluding-statement-of-the-2017-article-iv-mission"
    }
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    "Published: February 1, 2017",
    "Slovakia is described as an economic success story: \"Twenty years of sustained economic convergence has lifted real incomes to more than 70 percent of the European Union average.\"",
    "Economic growth:",
    "Labor market and inflation:",
    "Investment and EU funds:",
    "External and political risks:",
    "Domestic financial risks:",
    "Long-term challenges:",
    "Recent fiscal developments:",
    "2017–2019 budget and risks:",
    "Mission recommendations to support fiscal consolidation:",
    "Use of fiscal space:",
    "Pension and health sector recommendations:",
    "Fiscal Responsibility Act and cash management:",
    "Banking system indicators:",
    "Authorities’ actions:",
    "Additional measures the mission encourages:",
    "Productivity and competitiveness:",
    "Labor market policies:",
    "Business environment and governance reforms:",
    "[Slovak Republic and the IMF](http://www.imf.org/external/country/SVK/index.htm)",
    "[IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)",
    "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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