March 29 (SeeNews) - Slovenia is enjoying a fourth consecutive year of steady economic growth backed by improved financial stability and a strengthened external position but challenges remain, the International Monetary Fund (IMF) said.
Slovenia's public debt has declined from its peak but remains high, bank balance sheets have been strengthened, but the NPLs of SMEs are proving stubborn, and the economy’s potential growth rate is low, the IMF said in a statement on Tuesday, following an Article IV Mission.
The IMF projects 3% GDP growth in 2017 backed by private consumption, continuing employment and wage growth. However, it cautioned that growth rates will be less favorable over the medium term and constrained by adverse demographic trends and sluggish total factor productivity growth.
Banks’ capital position is strong, and liquidity ample, the lender said, adding that the steady decline in NPL ratios has strengthened bank balance sheets.
The IMF commented, however, that despite these successes, important challenges remain.
"Slovenia’s GDP and employment remain below their pre-crisis levels. Bank recapitalisations and the two recessions since 2008 nearly quadrupled public debt by 2015. Fiscal consolidation since 2011 has relied on a mix of structural reforms and one-off measures, with the latter now being reversed," it said.
Slovenia should introduce a credible reform-based fiscal strategy to lower public debt, continue to supervise and regulate vigilance to help maintain financial stability, introduce further labor market reforms and turn to privatization to support higher growth, the lender noted.
The IMF expressed confidence in the country's plan to eliminate the budget’s structural deficit by 2020 and maintain this level afterwards to reduce debt to 60 percent of GDP by 2026, but added that further consolidation requires substantial additional reforms.
"In our view, additional structural adjustment of 1.8% of GDP by 2020 over what current policies would yield is needed to achieve the authorities’ target," it advised.
The IMF also said the country should work on designing a sustainable public wage system that motivates employees, implement further pension reforms and put in place further health and education reforms, all of which will facilitate further sustainable consolidation and create room for growth-friendly fiscal policies.
"In this context, the 2017 budget leaves room for improvement despite the targeted reduction in the headline deficit," the lender also said. It recommended Slovenia maintain the 2017 structural primary balance at its 2016 level and save the interest windfall.
The lender insisted that Slovenia's 'bad bank' DUTB should have complete independence from all kinds of political interference to maximize the return on large legacy NPLs. In addition, it noted that although bank privatization plans are encouraging, some concerns remain.
"The privatisation of the two remaining large state banks (NLB and Abanka) is of key importance to ensure that they operate on commercial principles and transfer technology and management systems that could help them expand into new activities and reduce costs," the IMF noted, but said that it remains concerned about the plan to privatize NLB with the restriction that no private investor can have higher ownership than the state’s 25 percent.
"Dropping the restriction would allow strategic investors to take a controlling stake and further improve the bank’s performance," it advised.
Furthermore, the IMF called on a sustained privatization effort to improve governance and raise the economy’s productivity, adding that Slovenia should step up the sale of Telecom Slovenije and other companies currently slated for privatisation.