http://farm3.static.flickr.com/2142/2271557944_e6a81a0c22.jpg

Was wondering how I can make this look slimmer.

I've tried photoshop's liquify but it affects the wall behind as well. I'm thinking I have to do some shadow blending, but how?

Extract the person from the background to a separate layer and use one of many tools to slim them. Then either replace the background wall with another one or strech / clone the wall to extend over the area that will be left blank after you slim the person.
Regards, Murray

Okay, that'd help with slimming the left side, but how can I remove all the folds on the front naturally?

You can use the clone tool or patch tool or combination thereof. I did this example in just a few minutes using Liquify to reshape the edges and one swoosh with the clone tool to lessen the crease along the waist.
Regards, Murray