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Slovenia: IMF Board Urges Further Economic Reforms

Washington, 27 January 1998 (RFE/RL) -- The Board of Executive Directors of the International Monetary Fund (IMF) has told Slovenia that its recent delays in implementing structural reforms and a weakening financial situation threaten to impede further progress in reducing inflation and maintaining growth.

In it's annual review of Slovenia's economic situation, the IMF's board urged Slovenian authorities to "seize the opportunity" offered by favorable external financial circumstances to reduce inflation further, make the country's economy more efficient and flexible and to enhance Slovenia's growth potential.

According to the latest IMF statistics, Slovenia's economy (as measured by the gross domestic product or GDP) is expected to have grown by 3.7 percent in 1997. Inflation has remained "stuck" in the 7 to 11 percent range since August of 1995, says the fund, reflecting the combined effect of, among other things, price adjustments for petroleum products, electricity, and wage pressures.

The 24 Executive Directors represent all of the IMF's 181 member nations, either in groups or individually, on the board which runs the fund's daily operations.

They urged Slovenia to consider "vigorous implementation of structural reforms" along with a "rebalancing" of the policy mix toward tighter fiscal and incomes policies and away from what they describe as "overreliance" on restrictive monetary policies.

That means that priority should be given to measures to rein in the growth of spending on wages, social transfers and pensions, says the IMF board, although that should include finding ways to deliver public services more efficiently through contracting and privatization.

Moving away from restrictive monetary policies, the board said, should include steps toward greater transparency and accountability in monetary policy. It said the Bank of Slovenia should be "unequivocal in its commitment to sustained disinflation as its principal objective" and assume responsibility for working against inflation.

However, the directors added, Slovenia should proceed "gradually" with dismantling restrictions on inflows of foreign capital. They said persistent capital inflows, drawn by unusually high domestic interest rates, has posed a "serious dilemma" for monetary policy. In an effort to deal with the stubborn inflation, the central bank has continued to control the money supply, while staving off mounting currency appreciation pressure through capital inflow restrictions.

They said that domestic interest rates, while falling gradually, have remained high, partly because of a lack of competition among banks. They said those interest rates continue to induce heavy capital inflows, which the system still cannot fully absorb.

The fund directors expressed some concern over the emergence of a fiscal deficit in 1997 and urged the government to adopt a balanced budget for 1998 as quickly as possible.

The IMF directors welcomed Slovenia's progress on putting a tight rein on government wages while encouraging decentralized wage bargaining in the non-government sector. They urged Slovenia to "reinvigorate" its stalled reform process, including privatizing the remaining socially-owned enterprises and state assets and making the labor market more flexible.