Country brief 2006 Updated September 2006
Slovenia is a high-income country with a gross national income per capita of $17,290 in 2005 (Atlas Method). With a population of 2 million, the country is strategically located at the crossroads between Eastern and Western Europe and is endowed with highly skilled human capital. It ranks among the most successful transition economies and is perhaps the most developed among the new members of the European Union. Slovenia is set to become the first among the new EU member states of Central and Eastern Europe and the Baltics to adopt the euro in January 2007.
Slovenia’s high income levels are in part the result of very high pre-transition standards of living, the highest among all transition economies. The country's GDP per capita in purchasing power standards in 2005 stood at 81 percent of current EU members and was higher than Portugal’s.
Slovenia joined the World Bank in 1993. The Bank has focused primarily on providing policy advice and support for institution-building rather than on high-volume lending. Since the inception of the program in the country, five projects for a total amount of $178 million have been approved by the World Bank’s Board of Directors.
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Economy
Developments since transition
Slovenia’s relative prosperity has been a key factor in the country’s approach to reform, which has differed substantially from other Central and Eastern European (CEE) countries. It has followed a gradualist and consensual approach to change, frequently postponing many key structural reforms. While this approach has worked well for Slovenia so far, the country’s competitiveness is slowly eroding, making the need for deep economic reforms more urgent.
The slow pace of reform and reluctance toward foreign participation in key areas has contributed to a relatively low incidence of foreign direct investment (FDI), with the average net FDI equivalent to about 1.2 percent of GDP in 1997-2005. This is despite a major change that took place in 2002, when the share of net FDI to GDP reached almost 7 percent. Nonetheless, FDI inflows to Slovenia in recent years are small compared with the other economies of CEE – in 2005 net FDI was 0.2 percent of GDP. Scant FDI inflows deprive the economy of an important mechanism to speed up the upgrading of production capacities.
The Slovene economy has achieved solid growth—averaging 3.9 percent from 1997-2005—while avoiding the major macroeconomic imbalances that characterized most other transition economies in the region. Tight fiscal and monetary policies have contributed to remarkable stability, allowing the economy to enjoy both external and internal equilibrium with balanced fiscal budgets and open foreign trade.
Since 1996, the country has enjoyed single-digit inflation and maintained a nearly balanced current account. Unemployment rates, which have been below the average for the region, have stayed around 6.9 percent since 1997.
Recent economic performance
Economic performance in 2005 was strong. Real GDP growth reached 3.9 percent, driven by an upswing in net foreign demand. Despite close-to-potential economic growth, average inflation in 2005 fell to 2.5 percent. This was mainly achieved by wage guidelines being set to lag productivity growth, by the smoothing of oil price increases through excise tax rates, and by a stable exchange rate.
The fiscal deficit in 2005 stayed low at 1.7 percent of GDP thanks to a surplus in municipalities’ operations due to one-off revenues, and lagged implementation of EU-related transfers and expenditures. The current account deficit remained low at 1.1 percent of GDP in 2005 thanks to improved balance on both goods and services accounts.
Slovenia is set to join the euro-zone from January 1, 2007.
Challenges ahead
While the near-term outlook remains benign, Slovenia faces important medium term challenges. To overcome these challenges, the country should tackle four major tasks:
Maintain neutral fiscal stance in 2006 to contain inflation risks. The imminent loss of the exchange rate instrument puts a premium on fiscal and income policies to sustain a balanced expansion in the near term.
Deal with the challenges of an aging population while improving the flexibility and efficiency of public spending. As part of this, the planned reduction of the progressive income tax needs to be accompanied by revenue and expenditure reforms.
Speed up the implementation of policies that boost productivity growth and increase labor flexibility and participation. Slovenia’s productivity growth lags behind that of its regional competitors, reflecting Slovenia’s high income level as well as weak FDI and technological spillovers. Labor participation is also relatively low among the older and younger working-age populations. Therefore, efforts are needed to raise labor utilization by lowering marginal tax rates, improving the targeting of social benefits, and reducing incentives for early retirement. Simplifying business regulations and reducing constraints that create labor market rigidities would increase efficiency and attract FDI.
Enhance bank supervision to guard against market and credit risks. The rapid increase in credit amid competition for market share has exposed banks to higher credit risks, especially as interest rates in the euro zone are set to rise.
Back to Top World Bank Program and Move to Donor Status
Program to date
- Landmark Projects
- More projects
Slovenia is well prepared to manage its remaining development challenges and, on March 17, 2004, the country 'graduated' from being a recipient of the Bank's financial and technical assistance to being a donor as well as an important development partner with the Bank. In terms of recent and planned activities, in May 2006 the World Bank conducted two financial sector corporate governance assessments. These covered the insurance and collective investment fund sectors. A corporate governance assessment of the banking sector is also planned.
As a partner, Slovenia can still receive limited technical assistance over the next year. After that, work will need to be on a fully reimbursable basis, as is the case for other non-borrowing member countries.
Impact on the ground
A Real Estate project successfully upgraded the legal and regulatory framework for real estate transactions, and put in place the infrastructure to ensure a more efficient land administration system, more optimal spatial planning, an effective land use monitoring system, and a mass appraisal system for effective property taxation all meeting EU requirements.
Read moreProvided invaluable contribution to the dissemination of global experience and best practice models to CEF member countries through the conduct of technical courses and programs at the CEF.
Benchmarked country’s reforms and institution-building efforts against internationally recognized best practice standards through the joint IMF/World Bank Financial Sector Assessment Program (FSAP).
Health service delivery has been modernized as noted by clearly visible provider uptake of hospital payment reforms and quality of care improvements.
Real estate registration has significantly accelerated with Bank financial and technical assistance; 44 registry offices have been computerized significantly reducing the backlog of registrations. This is most noteworthy since the number of transactions have been rapidly increasing.
Air pollution reduced. Under a Bank-financed project, about 6,500 households and about 65 boilerhouse operators obtained fuel conversion loans to convert heating and hot water systems from polluting fuels to cleaner fuels.
Water supply and sewerage systems for the Istria and Slovene coast have been upgraded.
The Country Aggregate Report provides more lending data for Slovenia
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World Bank Office in Slovakia:
Ms. Tunde Buzetzky
Operations and Communications Analyst
tbuzetzky@worldbank.org
Tel.: (421-2) 5752 6724
Fax: (421-2) 5752 6701
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