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LJUBLJANA, Oct 1 (Reuters) - The Bank of Slovenia has cut its growth forecasts for the small euro zone country as it struggles to avoid an international bailout, saying the economy would shrink by 1.8 percent in 2012 and 0.7 percent in 2013.
It also urged the government to raise value-added-tax (VAT) from the current 20 percent in order to cut the budget deficit to below 3 percent of GDP in 2013 from about 4.2 percent this year.
"Uncertainties remain high because it is not clear how the world economy will change and how the domestic situation will develop," Governor Marko Kranjec, who also sits on the ECB's governing council, told a news conference.
The central bank in April forecast a GDP decline of 1.2 percent this year and growth of 0.6 percent next year. The government last week put this year's economic decline at 2.0 percent, with another contraction of 1.4 percent seen in 2013.
The bank sees average 2012 annual inflation at 2.9 percent compared to 2.3 percent forecast in April, expecting it to slow to 2.3 percent next year.
Kranjec also said Slovenian banks, burdened by rising bad loans, would find it easier to borrow money from the ECB and international markets once their balance sheets are cleared, but disagreed with the government on how to achieve that.
The government plans to form a company, DUTB, that would take over bad loans from state banks in exchange for state- guaranteed bonds. The central bank believes it would be cheaper for the state to simply provide fresh capital for the banks.
Parliament is expected to adopt a law establishing DUTB on Tuesday, hoping it would end the growing credit crunch. The banks' bad loans now reach some 6.4 billion euros or 17.5 percent of the GDP.
The central bank expects Slovenia's economy to return to growth and expand 0.8 percent in 2014, based on export growth, while domestic spending would continue to fall in 2013 and 2014 amid budget cuts and rising unemployment.
(Reporting By Marja Novak; Editing by Zoran Radosavljevic; and by Patrick Graham)
Keywords: SLOVENIA GDP/