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Central Bank Says Savings Necessary in the Long Run

Ljubljana, 06 March (STA) - Banka Slovenije highlighted on Tuesday the need for consolidation of public finances despite the lowering of domestic demand that it entails in the short term. Austerity is necessary for sustainability of public finances and economic growth, and for maintaining the country's credit ratings, the bank said.

The governing board of the central bank discussed the financial data for Slovenia for the last quarter of 2011, when GDP contracted by 0.7% compared to the quarter before and by 1.5% year-on-year.

The board agreed that a fall in the economic activity of most eurozone members coupled with the deepening of the eurozone debt crisis in the second half of last year caused a drop in exports and industrial output in Slovenia.

Austerity measures, further increases in unemployment and uncertainty surrounding future economic trends as well as reduction in labour costs, which are crucial measures for restoring competitiveness, contributed to a drop in domestic spending.

As the government plans to bring the budget deficit down from last year's 4.3% of GDP to 3% this year, the cutting of public expenditure and more efficient budget planning are essential, the bank said.

The consolidation of public finances will further decrease domestic demand in the short term, but this is a necessary move if Slovenia is to have sustainable public finances, economic growth and if it is to retain its credit ratings, the governing board stressed.

It added that banks, whose access to foreign sources of financing is decreasing, had introduced stricter conditions for giving out loans to businesses.

The new package of measures by the European Central Bank, including two three-year loans to banks with favourable interest rates, has boosted confidence on the financial markets, but the gradual recovery of the eurozone expected in the second half of the year will nevertheless largely depend on the success of public financial consolidation in individual members, according to Banka Slovenije.

As regards to the annual inflation rate, which rose to 2.8% in February, slightly above the eurozone average of 2.7%, the central bank said that the increase had been brought about by short-term increases in the prices of services and energy. The bank expects inflation to fall in the coming months.

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