IMF Urges Pension, Budget Reform

Ljubljana, 16 March

A delegation of the International Monetary Fund (IMF) has urged Slovenia to undertake "substantive reforms of the pension system sooner than later" in order to ensure its sustainability. "If nothing is done now to improve the parameters of the system, calculations show that the system would be completely unsustainable by 2050," the head of the delegation, Piritta Sorsa, said at the end of the annual IMF mission on Friday.

Sorsa noted that Slovenia had one of the most rapidly ageing populations and the pension system was very generous compared to other European countries.
There are plans for reforming the system, for example by raising the retirement age and putting in place an active ageing policy, but "more needs to be done".
According to Sorsa, Slovenia must look at the the amount of benefits and the indexation of pensions, as well as develop private pensions.
"The minimum guaranteed returns [for private pension funds] discourage people from saving, as returns are not very good. If this is lifted, pension fund managers might take more risk, which would increase returns."
At the same time, there is a need to accumulate more public savings to cover future pension liabilities, she said.
Overall Slovenia is doing well, Sorsa said, but euro membership brings new challenges. "Maintaining prudent fiscal and wage policies, and increasing economic flexibility and productivity, will be key to ensuring that the economy can continue to grow without building up inflationary pressures."
According to her, if wages grow faster than productivity, Slovenia could eventually "lose competitiveness and fall into a low-growth trap."
The IMF mission therefore recommended a "tighter than budgeted fiscal stance for 2007-08", underpinned by reforms in rigid spending. This would also help improve the flexibility of fiscal policy, create room for capital spending and accommodate the recent reduction in taxes.
Streamlining measures need to be targeted on inefficient expenditure to ensure the quality of public services in which implementation of performance budgeting will be important.
Sorsa also called for the further privatisation of the banking sector, which she said would "increase efficiency and enhance transparency."
She lauded the government's "ambitious plan for privatisation in 2007, which includes the Slovenska industrija jekla steel group and the telco Telekom Slovenije, which the IMF "supports very much".
Asked about the low level of incoming foreign direct investment (FDI), Sorsa said foreign investors were still facing a lot of red tape and a rigid labour market with a relatively costly labour force.
However, the promised one-stop-shop for the setting up of company could go a long way towards eliminating administrative barriers, and a solution for rigid labour regulations could also be found quickly if Slovenia wants to accept more foreign investors.
Finance Minister Andrej Bajuk said in his response that the warnings were nothing new. "We are grateful for them...We are aware of the challenges. We are convinced that Slovenia is on track and that no issues would arise in the short term," Bajuk told the press later in the day.
Slovenian public finances are in good shape, however the state has decided to invest into infrastructure. These investments cannot be postponed, Bajuk added.
Slovenia allocated 0.4% of its GDP for investments into railroads in 2007, a further 0.5% in 2008 and 0.2% in 2009.
Furthermore, additional spending caused by Slovenia's upcoming EU presidency and implementation of the Schengen regime would amount to 0.45% of GDP in 2007 and 0.2% of the GDP in 2008.
The country is also aware of long-term challenges such as a more flexible budget, development of the financial system and the reform of the pension system.
He added that the country's growth was high, but no inflation pressures were recorded. "Slovenia is reaping what it had sown in the past years," Bajuk said.

IMF Urges Pension, Budget Reform

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