Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with the Slovak Republic and endorsed the staff appraisal without a meeting on a lapse of time basis. [2]
Economic growth accelerated to 2 percent in 2024 from 1.4 percent in 2023. Private consumption was the main driver fueled by positive real wage growth, the extension of energy support, and more generous pensions. Meanwhile, an increase in public consumption partially offset a slowdown in EU-funded public investments from record-highs in 2023. Net exports remained weak on lackluster demand for Slovak exports, particularly from key trading partner Germany, coupled with a rebound in imports. Inflation has declined from record-highs in early 2023 but increased in the second half of 2024 and into 2025.
Growth is forecast to decline to 1.8 percent in 2025 due to the impact of the envisaged fiscal consolidation before increasing to 2.1 percent in 2026. Inflation is projected to rise temporarily to 4.1 percent in 2025 on higher indirect taxes, before moderating to 3.1 percent in 2026 and reaching the 2 percent target by early-2027.
Executive Board Assessment
In concluding the 2025 Article IV consultation with Slovakia, Executive Directors endorsed the staff's appraisal, as follows:
The Slovak economy is recovering despite significant headwinds. The economy slowed sharply in 2022-23, but growth accelerated to 2.0 percent in 2024, outpacing that in the euro area. While inflation has declined from record-highs in 2023, it increased in 2024H2 due to higher global food price inflation. Weak external demand and fiscal consolidation imply that economic growth is projected to moderate to 1.8 percent in 2025, before rising to 2.1 percent in 2026. 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.
The government's ambitious fiscal consolidation targets for 2025-28—implying a cumulative reduction in the deficit of about 3.5 percentage points of GDP—are commensurate with the scale of Slovakia's fiscal challenges. 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. If revenues in 2025 appear to be falling short of targets the authorities should limit the resulting increase in the deficit by saving as much as possible of the contingency buffer. Beyond 2025, the authorities' medium-term fiscal structural plan aims to bring the fiscal deficit close to 2 percent of GDP by 2028. Staff projections suggest that these targets, if met, 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.
Further deficit-reducing measures will have to be enacted to achieve the targeted consolidation beyond 2025. These measures should be consistent with Slovakia's long-term growth and climate objectives, while protecting the most vulnerable in society. Staff estimates suggest an additional 3.1 percent of GDP in fiscal savings will be needed over the next three years. Prioritizing expenditure-based measures would result in a more balanced fiscal consolidation given the reliance on revenue-based measures so far. In particular, there is scope to implement already-identified Value for Money initiatives (e.g. a reduction in subsidies) and improve the targeting of social spending. Also, there may be room to trim departmental budgets and reduce public sector wage growth, though this should be done cautiously to avoid unintended cuts in service delivery. On the revenue side, plans to counter tax evasions and increase tax compliance are welcome. In addition, there is scope to raise property taxes and reduce the number of items subject to reduced VAT rates. Temporary energy support measures to households should not be extended beyond 2025. In addition, the authorities should replace the FTT with alternative revenue sources, while phasing out the bank levy as planned.
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 avoids inconsistencies and streamlines the budget process but continued focus on the long-term fiscal outlook (beyond the horizon used for the EU fiscal framework) remains useful given Slovakia's medium-term fiscal challenges. Slovakia's strong and independent Council for Budgetary Responsibility can help by monitoring the impact of government policies on the long-term sustainability of public finances. In addition, the debt brake should be reformed before it comes into effect in 2026 to avoid the risk of a disruptive fiscal consolidation.
The financial sector appears resilient to stress, reflecting a healthy level of buffers and profitability, though some risks remain. The residential real estate market and the office segment of the commercial real estate (CRE) market remain potential sources of vulnerability. That said, solvency and liquidity stress tests indicate that banks have sufficient capital to withstand severe macro-financial shocks and that banking system is resilient to funding and market liquidity shocks. The current macroprudential stance is broadly appropriate, but the policy framework could be further developed over the medium term by adopting a positive neutral countercyclical capital buffer (CCyB) and by closing leakages and refining the borrower-based measures. Financial resilience could be bolstered by strengthening the supervision of LSIs as well as the crisis management framework.
Slovakia needs structural reforms to diversify its economy, sustain productivity growth, increase the labor force, and further reduce carbon emissions. To improve resilience and sustain productivity growth the authorities should intensify efforts to promote innovation and enhance ALMPs to facilitate the 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 which are critical for startups. An aging population requires policies to increase the size and quality of the labor force, including more vocational education and training, improved child and elderly care, and further efforts to integrate and retain migrants. To further reduced greenhouse gas emissions, Slovakia should move expeditiously to fully implement the ETS II scheme for road transport and buildings and could consider gradually raising environmental levies in these sectors until the scheme becomes operational in 2027. Finally, sustained efforts to strengthen governance, reduce vulnerabilities to corruption, and enhance judicial independence would help lift the economy's resilience and growth potential.
| Table 1. Slovk Republic: Summary of Economic Indicators, 2020–30 |
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] Management has determined it meets the established criteria as set out 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.
