WASHINGTON, DC: An International Monetary Fund mission, led by Donal McGettigan, and comprising Saioa Armendariz, Dmitriy Kovtun, Magali Pinat, and Rossen Rozenov, visited Slovenia from January 18-30, 2024, to conduct discussions on the 2024 Article IV consultation. At the end of the visit, the mission issued the following statement:
Context and Recent Developments
Slovenia’s economy recovered well from the pandemic, only to be hit by spillovers from the war in Ukraine. After a strong recovery in 2021, growth slowed in 2022 because of adverse energy price spillovers from the war in Ukraine and supply chain disruptions. Growth is estimated to have fallen further last year to less than 1½ percent, reflecting subdued consumption, the unwinding of inventories, and weaker growth in trading partners.
Severe floods in August 2023 pose new challenges. Although the impact on economic growth was minor, direct damage is estimated by the authorities at almost 5 percent of GDP, with the cost of upgrading infrastructure to be more climate resilient estimated to be much higher. The government adopted emergency relief legislation shortly after the floods to assist those affected and to start reconstruction efforts.
Despite slower growth, the labor market remains tight. Unemployment is at a historic low and labor shortages have emerged in certain sectors, relieved only by net inward migration of foreign workers. Following earlier real wage declines, nominal wage growth has begun to outpace inflation.
Inflation has fallen from earlier highs. As pressures from commodity prices abated, and as tighter monetary policy fed through to prices, inflation fell noticeably in the second half of 2023, more than halving to about 4 percent in December compared to about 3 percent in the euro area.
Outlook and Risks
Growth is expected to recover and inflation to fall further this year. Despite tighter fiscal policy, growth is expected to increase to about 2 percent in 2024, led by domestic demand, including higher flood-related investment, and by higher consumption as real wages recover. Growth should return to its potential of about 2½-2¾ percent over the medium term as private consumption and euro area trading partners gather strength. Under the assumption of broadly stable commodity prices and interest rates on hold in the first half of the year, inflation is projected to decline to below 3 percent by the year and to 2 percent in 2025. The current account is expected to remain in surplus over the medium term.
Uncertainty remains high and risks appear on the downside. External risks include an intensification of regional conflicts, renewed commodity price volatility, and lower external demand. Supply chain disruptions pose additional risks but also may create opportunities for Slovenia in the event of nearshoring. Labor shortages and broader capacity constraints could affect post-flood reconstruction or undermine disinflation. Finally, new severe weather events could cause significant economic disruptions.
Fiscal Policy
A tighter fiscal stance would help reduce debt, rebuild fiscal space, and support disinflation. Given underlying increases in core public spending in recent years, age-related spending pressures, and relatively high public debt, sustained fiscal consolidation and fiscal structural reforms are needed to underpin long-term public debt sustainability. The elimination of remaining pandemic and energy measures will help such consolidation, despite additional flood-related spending. The authorities should also continue with their active debt management, which has helped to lower debt servicing costs, improve the debt profile, and allow the buildup of ample public cash buffers.
A phased and transparent approach to flood-related spending is critical. Lower-priority needs should only be addressed as labor market conditions ease. Otherwise, there is a danger of flood-related spending fueling construction cost increases rather than providing for needed rebuilding. The authorities’ transparency in handling flood-related spending—including by publishing details of publicly financed projects—is welcome given the extent of public spending.
Although ad hoc in nature, recent revenue measures to raise temporary corporate and bank taxes will help finance post-flood reconstruction. The bank tax is not ideal, including the use of bank assets as a taxation base, although the cap on the tax, set at 30 percent of banks’ pre-tax profits, is a welcome safeguard. EU grants and Slovenian Sovereign Holding profits will also support the rebuilding and upgrading of infrastructure.
Key structural fiscal reforms should be accelerated. Reforming the pension system remains a priority given the higher expected pension spending over the medium and longer term. Reforms to the retirement age, years of contributions (linked to life expectancy), and indexation would help contain pension costs. Stronger second and third pension pillars would help increase retirement savings and support capital market development. Public wage reforms—linking pay more closely to skills and performance—are also important given the high public wage bill alongside difficulties in hiring and retaining qualified staff. Reducing labor taxes while broadening the corporate and income tax bases and increasing property tax would also be helpful. Planned comprehensive reforms of the health sector should continue. Finally, building on the recommendations of the IMF’s recent Public Investment Management Assessment (PIMA), improved project preparation, evaluation, selection, and permit times would help increase public investment efficiency, which is important given the scale of public investment.
Financial Sector Policies
Banks appear in good health. Bank profitability and bank capital adequacy are strong and bank liquidity is among the strongest in the euro area. Bank of Slovenia stress test results also point to bank resilience.
Ongoing uncertainties warrant continued close monitoring of asset quality. Nonperforming loans are at historic lows, but high-interest rates increase repayment and rollover risks, particularly for firms where loans are of shorter maturity or at variable rates.
The Bank of Slovenia’s macroprudential stance is appropriate. The new positive neutral countercyclical capital buffer of one percent will help further strengthen capital buffers and strengthen the capacity of the banking system to respond to adverse shocks. The impact on financial intermediation of this measure is expected to be limited. Increased access to credit for lower-income borrowers is welcome. Finally, the reduction of the sectoral risk buffer on real estate exposures is appropriate given reduced risks in the housing market as valuation measures have softened.
Progress has been made on AML/CFT. This includes amendments to the Criminal Code; new Bank of Slovenia regulations and guidelines on related risks; guidance to banks on risk assessment; and measures to supervise virtual assets.
Structural Policies
Deeper structural reforms would help boost growth and foster greater income convergence. Convergence has slowed since the Global Financial Crisis as investment and productivity growth have fallen. Although labor contributions to growth have been strong in recent years—reflecting increased labor force participation, lower unemployment, and positive net inward migration—the limits to future such gains call for a shift to a focus on productivity growth, a key priority. Productivity would be helped by higher overall investment and by further structural reforms, supported by the EU-backed National Recovery and Resilience Plan and Cohesion policy funding. Addressing skill shortages and mismatches, improving regulatory quality, and deepening the financial sector would also help boost productivity growth.
The recent floods underscore the importance of continuing to adapt to climate change. As floods pose the highest risk, efforts should be focused on flood risk management, including zoning. On mitigation, continuing to promote investment in renewables and reducing carbon price exemptions in polluting industries would help Slovenia achieve its climate goals.
The team would like to thank the authorities for their exceptional assistance with the mission’s work and the authorities and other stakeholders for their warm hospitality and comprehensive and constructive discussions.
A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
