May 15 (SeeNews) - Slovenia has entered a fourth year of steady economic recovery following decisive measures by the authorities to address a looming banking crisis in 2013, but deeper reforms are needed to address fiscal and financial vulnerabilities, the International Monetary Fund (IMF) said on Monday.
"Output and employment have risen considerably. The external position has strengthened, reflecting robust exports and strong tourism. The financial system has substantially improved in the past few years", the IMF said in a statement, following the conclusion of Article IV consultations.
The IMF projects 3% GDP growth in 2017 backed by rising domestic demand and continuing strong exports. Inflation is expected to hover around 2%, with core inflation gradually rising toward this level, the IMF noted.
"The external current account surplus will start declining on the strength of domestic demand and higher international energy prices", the IMF said. "Over the medium term, economic growth will converge to the estimated potential GDP growth rate of 1.75-2.0 percent. This low potential growth rate can be raised by policies to increase investment, reduce labor skills mismatches, and boost total-factor productivity growth".
The Fund advised Slovenia to focus its policy agenda toward rebuilding macroeconomic buffers and fostering broad-based and sustainable growth.
On the fiscal front, the global lender said that in order for the Slovenian authorities to eliminate the structural budget deficit by 2020 and maintain that level afterwards, as planned, they will need to implement substantial new fiscal reforms.
"Implementation of plans to complete the resolution of non-performing bank loans to small and medium enterprises (SMEs) and privatize major banks will support investment and growth, as will measures to improve the functioning of Slovenia’s labor market and step up privatization", the IMF explained.
Although the IMF executive board welcomed Slovenia’s steady economic recovery fostered by decisive restructuring of ailing banks and prudent macroeconomic policies after the 2013 crisis, they emphasized the need to address outstanding fiscal and financial vulnerabilities by rebuilding fiscal buffers and completing the repair of bank and corporate balance sheets.
"Stepping up structural reforms, particularly to improve labor market functioning and accelerate privatization, would enhance efficiency and support medium-term growth", the IMF noted.
The IMF also encouraged the authorities to generate the needed budget savings with structural fiscal reforms. They noted that measures aimed at enhancing the sustainability of the pension and public wage systems, rationalizing health care and education spending, and reviewing the real estate tax system would alleviate pressures on public finances, achieve efficiency gains, and create room for raising public investment.
The Fund welcomed the authorities’ intentions to proceed with the privatization of the two large state banks, and noted that attracting high-quality strategic investors would facilitate business model adjustments to reduce pressures on profitability in the current low interest rate environment.
It cautioned, however, that the authorities’ intention to maintain a controlling equity stake in the largest bank could reduce investor interest.