Implementing Financial, Structural Reforms Key to Slovenia's Recovery

Economy suffering from recession, tight bank credit, indebted companies

Clean-up of bank balance sheets is needed urgently

Continued fiscal consolidation, pension and labor market reforms crucial

“Prompt action to address problems in the financial sector, consolidate public spending, and reform the labor market is essential to resolve the current crisis and lay the groundwork for future growth in Slovenia,” said Antonio Spilimbergo, IMF mission chief for Slovenia.

After achieving independence in 1991, Slovenia grew steadily, achieving the highest level of income among transition countries. In 2004, the country joined the European Union, and in 2007, it adopted the euro. But the reform agenda was left unfinished.

During the global economic crisis, the economy suffered the sharpest GDP decline in the euro area, excluding Greece. Real GDP contracted by more than 8 percent following a sharp decline in external demand. The significant tightening in external credit forced banks to limit access to domestic loans, and a construction and housing price boom came to an abrupt end.

Speaking to IMF Survey, Spilimbergo discussed the economic outlook, the most pressing issues facing Slovenia, and the policy actions needed to get the country out of its deep recession.

IMF Survey: What is the outlook for Slovenia’s economy? Are the problems in the eurozone having a big impact?

Spilimbergo: Slovenia is affected by the euro area slowdown, possibly more than other countries, because of preexisting weaknesses. While Slovenia was one of the European countries with the highest rates of growth before the crisis, it failed to implement pension and labor market reforms and restructure its financial sector. The crisis magnified these weaknesses, and currently there is a negative feedback loop of recession, bank deleveraging, and corporate distress, which is bringing down economic growth. The government recognizes the challenges it faces to break this loop and the need for steadfast implementation of reforms.

We are projecting that GDP will contract by around 2.2 percent in 2012 and by around 1 percent in 2013. This is because banks will continue deleveraging, and fiscal consolidation will cause a temporary negative drag on economic growth—all this in an environment of sluggish external demand. But we expect that growth will resume in the second half of 2013.

IMF Survey: What are the most pressing issues facing the economy right now?

Spilimbergo: The...