RESTRICTED
WORLD TRADE WT/BOP/R/15
7July1996
ORGANIZATION(96-2687)
Committee onBalance-of-Payments Restrictions
REPORT ONTHE 1996 CONSULTATION WITH THE SLOVAK REPUBLIC
1. TheWTO Committee onBalance-of-Payments Restrictions consulted withtheSlovak Republic
on24and25June1996. Theconsultations wereheldunder theChairmanship ofMr.P.Witt(Germany)
andinaccordance withtheterms ofreference, pursuant toArticle XII:4(b) ofGATT 1994 andthe
Understanding ontheBalance-of-Payments Provisions ofGATT 1994. TheInternational Monetary
Fund wasinvited toparticipate intheconsultation inaccordance withArticle XV:2 ofGATT 1994.
2. TheCommittee hadbefore itthefollowing documents:
Basic Document supplied bytheSlovak Republic WT/BOP/12
Background Paper bytheSecretariat WT/BOP/W/12
IMF, Slovak Republic: Selected Background Issues, 15August, 1995
Supplementary Background Material fortheWTO, 30May, 1996
Opening statement bytheRepresentative oftheSlovak Republic
3. Theopening statement oftherepresentative oftheSlovak Republic isattached asAnnex I.
Statement made bytheRepresentative oftheInternational Monetary Fund
4. Thestatement made bytherepresentative oftheInternational Monetary Fund isattached as
Annex II.
Discussion intheCommittee
(i) Balance-of-payments position andprospects; alternative measures torestore equilibrium
5. Members oftheCommittee noted that,despite some weakening inthefirstfewmonths of1996,
reserves were stillatacomfortable level, afterhaving nearly doubled between theendof1994 and
1995. Thetrade balance haddeteriorated primarily asaresult ofnon-recurring factors andshould be
seenasatemporary aberration notreflective ofthetrend. Itwasrecalled thatArticle XII:2 states that
measures shallnotexceed those necessary "toforestall theimminent threat, ortostop,aserious decline
inmonetary reserves". OneMember pointed outthatrising imports wereanatural phenomenon in
thecontext ofeconomic growth andliberalization.
(ii) System, method andeffects ofrestrictions
6. Members recalled that,since thesurcharge hadbeeninforce since 1994, Slovakia hadneither
adhered toitsdeclared intention toeliminate thesurcharge bytheendof1994 nor,attherequest of
theCommittee during the1995 consultations, by30June1996. While thelowering ofthesurchargeWT/BOP/R/15
Page2
from10to7.5percent,witheffect from1July1996, waswelcomed, thisfellshortoftheGovernment 's
previously stated intention toprogressively reduce thesurcharge to7.5percentattheendof1995,
to5percentfrom1July1996, to3percentfrom1October andtoremove thesurcharge bytheend
of1996. Itwasnoted thatthesurcharge applied toonly13percentofimports, norhadimports of
those goods beenthecause ofthecurrent tradedeficit; inaddition, according totheSecretariat Report
fortheTrade Policy Review inDecember 1995, thesurcharge hadaprotective effect onconsumer
goods industries.
(iii) Replies bySlovakia
7. TherepresentativeofSlovakiaexpressedhisappreciationfortheCommittee'spositiveperception
ofeconomic developments inSlovakia sincetheprevious consultation. Henoted thattherewasaclear
request fromtheCommittee toeliminate theimport surcharge, based interaliaontheconsiderations
offinancial policy outlined intheIMFstatement. Heemphasised thatSlovakia hadbeenoneofthe
firsttransition economies toestablish thestructures ofamarket economy fromtheoutset andstressed
thepriority being given toexport-oriented policies. Recalling hisinitial statement concerning reversals
inthebalance ofpayments andoverall developments inthetransformation process, hereiterated his
Government 'sintention tocarry outare-evaluation oftherateofimport surcharge inthelightofthe
situation attheendof1996.
8. Following further consultations withhisGovernment, therepresentative oftheSlovak Republic
circulated aletter from theMinister ofFinance, stating thatthesurcharge would beeliminated with
effect from 1January 1997. TheCommittee welcomed thisdevelopment.
Conclusions
9. TheCommittee recognized Slovakia 'smacro-economic achievements since1994, inparticular
thestrong improvement ineconomic performance during 1994 and1995. Itnoted that,while there
hadbeenadeterioration inthetradeandcurrent account balances inrecent months, suchadeterioration
could beascribed tosome non-recurring factors, tocapacity constraints inexport sectors, andtostrong
demand forimports resulting from economic growth andrestructuring. TheCommittee noted that
theoverall reserves position improved considerably in1995 andremained atthesame levelthrough
thefirstfivemonths of1996.
10. TheCommittee noted thatSlovakia 'simport surcharge hadbeeninforce since 1994, andthat,
despite theimprovement initsreserves position, Slovakia hadnotfulfilled itsprevious undertakings
totheWTO. TheCommittee recalled once again thatbalance-of-payments measures should be
temporary, andthattheyshould notbeusedforfiscal orprotective purposes. TheCommittee expressed
itsstrong concern overthecontinuing useoftheimport surcharge. Inaddition, theCommittee stated
itsobjection totheapplication ofthesurcharge onaselective basis. Itnoted thestatement bytheIMF
that"ifaccompanied bytheintroduction oflessdistortionary taxes, phasing outofthesurcharge is
unlikely tocreate major problems inthebudget".
11. TheCommittee concluded thattherewasnoimminent threat ofaserious decline inSlovakia 's
monetary reserves. Itconsidered thattheimport surcharge could notbejustified bythebalance-of-
payments provisions oftheGATT 1994, andtherefore thatitshould beeliminated. TheCommittee
welcomedthedecisionoftheGovernmentofSlovakia,dated25June1996,committingitselftoeliminate
thesurcharge witheffect from1January 1997, andtodisinvoke theprovisions ofArticle XIIofGATT
1994 atthesame time.WT/BOP/R/15
Page3
ANNEX I
Statement bytheRepresentative ofSlovakia
Itisagreat honour andprivilege formetohavethisopportunity totakethefloorforthefirst
timeonbehalf oftheSlovak Republic onconsultations intheWTO Committee onBalance ofPayments
Restrictions.
Before thestartofmyintroductory statement Iwould liketoapologize forthelatesubmission
ofthebasicdocument. Thisfacthasbeencaused mainly byanticipated reversed developments insome
macro-economic indicators requesting careful consideration, onwhich Iwould liketoelaborate later
oninamore detailed fashion.
Now, letmefocus onmacroeconomic development registered fromthelastconsultations held
inJulylastyear. Slovak realGDP grew by7.4percentin1995, ledmainly bycontinuing growth
ofexports aswellasbydomestic demand. ThisGDP growth inthesecond consecutive year, while
showing theelements ofrecovery, should behowever, taken inthebroader context ofitssharp decline
inprevious years. Inrealterms itmeans thatincomparison with1989 GDP reached 89%which is
still11%lower level. Thisclearly indicates complexity andcontroversy oftheoverall transformation
process inoureconomy. Although predictions ofGDPdevelopment in1996arenotindicating serious
reversed trend, thelevelof1989 willnotbereached yet.Inflation ratewasfurther consolidated and
inthefirstquarter ofthisyearreached onmonthly basisof6.2%. Some stabilization trend isregistered
alsoinunemployment rate,which ishowever stillmore than12%.
State budget development in1995 hasimproved, butstilladeficit amounting to8.3billion
Slovak crowns wasrecorded. Current figures which areshowing adeficit of4.4billion Slovak crowns
confirm toalargeextent theexisting continuing trend. Nevertheless, Government policy inthisarea
isaimed totighten financial flows andtaxdiscipline asapartofmodifying financial policy from
restrictive toanexpansionary onewithstabilization anddevelopment features. Current taxation level
isinthiscontext considered asutmost.
Main objectives oftheanti-inflationary monetary policy oftheNational Bank ofSlovakia were
thefurther support ofinternal andexternal stability ofthemonetary development under theexisting
economic conditions intheSlovak Republic andsupport oftherealGDP growth. Slovakia had
introduced convertibility ofthenational currency oncurrent account under Article VIIIoftheIMF
Agreements on1October 1995. Atthesame timetheclearing agreement withtheCzech Republic
wasdismantled. TheNBS monetary programme for1996 includes features similar tothose of
programmes fortheyears 1993-1995. Toachieve these goals theNBShasemployed mainly indirect
instruments, withtheaimtoapply boththeexchange rateandinterest ratepolicies aswellassecurities
transactions andthecreation ofaprudent financial environment through banking supervision.
Current account ofthebalance ofpayments istoaconsiderable extent determined bythe
development ofthetradebalance. Thepercentage ofthemerchandise turnover fromthewhole turnover
ofthecurrent account was78% in1995. Afavourable development oftheforeign trade in1994
deteriorated later -during theyear1995. Atendency ofthegrowth ofimports wasmore dynamic
thanofexports. Thementioned trend wasfullymanifested inthefirstquarter oftheyear1996when
theexport stagnated anditsvolume wasapproximately onthelevelofthefirstquarter ofthe1995
andtheimport increased bynearly 31%. Thestagnating export isaresult ofthestructural barriers
oftheSlovak economy. Thechange ofthisphenomenon requests fortherestructuring oftheeconomy
which isconnected withhugeinvestments. These investments influence theimport ofmachinery and
technology. While intheyears 1994 and1995 thebearer ofthedynamic GDP growth wasdriven
predominantly byexports, intheyear1996thispartwastaken overbytheinvestments andthedomesticWT/BOP/R/15
Page4
demand. Bothfactors required strongly claims toimport fromabroad. theincrease ofimports which
isdetermined bythegrowth ofthedomestic demand would besignificantly higher without theimport
surcharge.
Thebalance ofservices hadakeyposition inthebalancing ofthecurrent account intheformer
period. Ontheother hand, tendency ofthefaster growth ofimports overexports wasmanifested in
theareaofthebalance ofservices too. Thisphenomena wasthereason thatthesurplus ofbalance
ofservices cannot fullycover adeficit inthetrade balance atpresent.
Development ofthetrade balance andthebalance ofservices isaprincipal determinant ofa
passive balance ofthecurrent account. Thecurrent account deficit was9.4percentoftheGDP in
thefirstquarter of1996. Inthesame period of1995 asurplus ofabout 4.3percentoftheGDP was
generated. Thistendency inthecurrent account development willcontinue alsointhenextmonths
of1996. Capital andfinancial account plays animportant roleinthefinancing ofthecurrent account.
Thedeficit ofthecurrent account intheSlovak Republic tends tobefinanced withtheforeign credits
tothebusinesses.
Theprediction ofoverall balance fortheyear1996isbased ontheprinciple thattheborrowing
through theproject financing willbecovering current account deficit while maintaining alevelofforeign
exchange reserves oftheNational Bank ofSlovakia -equal to3month 'simports oftradeandservices.
Iftheimports continued togrow further andthedeficit ofthecurrent account deepened, theexpected
inflow ofcapital would notbesatisfactory andtheNBSwould havetotakesteps anddraw foreign
credits.
TheSlovak economy hasanopenandliberal traderegime which isfurther supported byvaluable
commitments intheUruguay Round andGSPscheme. Inaddition, Slovakia hasnotapplied todate
anysafeguard orantidumping measures. Moreover, non-tariff measures arebeing applied onafew
products only.
Restructuring process intheSlovak economy hasmade progress, however, itsdynamism is
notsatisfactory anditisstillnegatively influenced byprevious patterns inindustry. Export performance
depends extensively onseveral dominant companies, which areproducing mostly semi-finished products
orproducts withlowvalue added. Export share ofthese companies iscurrently unfavourably high
amounting to44%. Thissituation isachallenge fortheindustrial andtrade policy oftheSlovak
Government which isreflected initspriority programme inthisarea. Intheshort term period
restructuring process willleadtoatemporary decrease inexport dynamism onthecontrary tothe
expected growth ofimports which would consequently deteriorate theoverall trade balance of
developments withimpacts tobalance ofpayments position.
TheSlovak Government feelstobebound byitsinternational commitments foractive and
effective cooperation withothercountries. Reversed developments insome keyelements ofthebalance
ofpayments andoftrade balance inparticular have ledtheGovernment tocareful andcomplex
consideration ofthepossible impact ofphasing outtheimport surcharge on30June1996. Inthis
context andinthecontext ofadopted conclusions atthelastconsultations theSlovak Government was
notinaposition toabolish theimport surcharge completely, however, itadopted acommitment to
reduce itsrateto7.5%. Further re-evaluation oftherateapplied independence withtheactual situation
inspecific macro-economic results ofthisyearwillbecarried outthoroughly.WT/BOP/R/15
Page5
Finally, Iwould liketothank youMr.Chairman anddistinguished representatives foryour
kindattention. Iwishtoexpress mystrong belief thatwilltakeintoyouresteemed consideration an
explanation ofoureconomic situation initscomplexity, thatwillbereflected inthefinalconclusions
oftheCommittee.WT/BOP/R/15
Page6
ANNEX II
Statement bytheIMFRepresentative
Overthe12months sincethelastConsultation oftheWTO Committee, Slovakia hascontinued
withtheliberalization ofitsbalance ofpayments transactions, bothinthecurrent andcapital accounts.
Significantly, onOctober 1,1995 theauthorities accepted theobligations ofArticle VIIIunder the
Fund'sArticles ofAgreement, signalling fullconvertibility ofthecurrent account. Slovakia continues,
however, toavailitself ofa10percentimport surcharge onconsumer goods.
Sinceitsindependencein1993,theSlovakRepublichasmadesignificantprogressinitseconomic
management andperformance. Growth hasbeenstrong andinflation hasfallen steadily, supported
bytightfiscalpoliciesandcontinuingenterpriserestructuring.Thebalanceofpaymentsalsostrengthened
through 1995. However, since thebeginning ofthisyearseveral favourable trends havesubsided,
andinsome cases reversed. Theprecautionary stand-by arrangement, which wasapproved bythe
Executive Board oftheIMFinJuly1994, expired inMarch 1996. AnArticle IVconsultation mission
isscheduled tovisitBratislava inOctober 1996.
Overview ofEconomic Developments
In1994 theSlovak economy initiated arecovery afterseveral years ofsteep decline. Real
GDP roseby5percent, ledbyagrowth ofover20percentinexports. Inflation fellfrom 25per
centatend-1993 tolessthan12percentatend-1994. Theexternal current account improved bymore
than10percentage points ofGDP, toasurplus equivalent toalmost 6percentofGDP, andofficial
foreign exchange reserves rosetotheequivalent ofover3months ofimports ofgoods andservices
fromabout 1month atend-1993. Thisperformance wassupported byatightfiscal policy--the fiscal
deficit declined to1.3percentofGDP from over7percentin1993.
GDP growth accelerated further in1995to7.4percent,withdomestic demand replacing net
exports asthemainsource ofgrowth. Theexternal current account again registered asurplus, equivalent
to3.8percentofGDP, which together withasurplus inthecapital account ledtoafurther increase
ofUS$1.7 billion inforeign currency reserves, bringing them toalevelequivalent to4.4months of
imports ofgoods andservices. Inflation continued todecline, reaching 7.2percentbytheendof
theyear,oneofthelowest intransition economies. Fiscal consolidation continued, leading toasurplus
inthegeneral government accounts of0.6percentofGDP. Ontheother hand, theauthorities allowed
alooser monetary stance thanin1994; rapid expansion ofcredits toenterprises together withthenon-
sterilized external surplus caused broad money togrow byover20percent.
Themain development sofarin1996 isanunexpectedly large andrapid turnaround inthe
external current account. Inthefirstquarter of1996, thecurrent account registered adeficit ofabout
US$430 million orover8percentofGDPonanannual basis(compared tosurpluses ofUS$175 million
inthefirstquarter of1995andUS$650 million forall1995) reflecting mainly continued highimport
growth while exports stagnated. Infact,thedeterioration ofthecurrent account isdueinparttoone-off
factors--imports ofmilitary equipment, astock adjustment aftertheelimination ofcustoms duties on
small carsinlate1995, theeffects onthefuelimport billoftheparticularly longwinter, anextraordinary
stoppage ofamajor petrochemical company --fortechnical control purposes, andtheabolition ofthe
payments agreement withtheCzech Republic. Butother factors, suchastheweakening offoreign
demand andexport prices andcapacity constraints insome exporting sectors, arebehind thecontinued
deceleration ofexport growth; andthepersistently highgrowth ofimports appears tobelinked to
thebuoyancy ofdomestic demand andtheexpansionary monetary policy.WT/BOP/R/15
Page7
Thedevelopments inthecurrent account ofthebalance ofpayments andotherindicators suggest
thattheeconomy isgrowing atthesame highpaceasin1995, andthatgrowth isledmainly byprivate
consumption andinvestment. Confirming thestrength ofdomestic demand, retail salesandindustrial
production grew byabout 9percentinrealterms through thefirstquarter of1996.
Preliminary dataforthefirstfourmonths of1996point tocontinued fiscal tightness. Money
andcredit toenterprises, ontheother hand, continue toexpand atveryhighrates(23and17percent
respectively inthe12-months toend-May 1996). Thestable exchange rate,which hasenabled demand
tospilloverintotheexternal accounts, together withexcess capacity inthenon-tradeables sector, may
explain whyinflation hascontinued todecline, reaching 6percentinApril 1996, inspiteofthelooser
monetary stance.
Afirstwave ofstructural reform, including price andfinancial liberalization, andamass
privatization programme tookplacebefore independence. TheSlovak Republic hasgradually continued
withthisprocess, albeit atanuneven pace. Privatization andprivate sector development haveledto
over60percentofGDP being produced intheprivate sector in1995, compared toonlyonethird
in1992. Enterprise restructuring hasenabled Slovak industry tocompete inforeign markets andto
increase itsexports totheEuropean Union. Butdifficult reforms which arestillpending, including
restructuring ofthebanking andenergy sectors andfurther privatization, arecrucial tosustain the
progress thathasbeenachieved.
Theexchange andtrade system
Thepayment agreement withtheCzech Republic, thatwasineffect fromFebruary 1993, was
abolished onSeptember 30,1995 justprior toaccepting theobligations ofArticle VIII, Sections 2,3
and4under theFund'sArticles ofAgreement.
Slovakia hasasubstantially liberalized trade system. Itmaintains anAssociation Agreement
withtheEU,freetrade agreements withVisegrad andEFTA countries, andafewcustom union with
Czech Republic. Import andexport licenses arerequired foronlyafewitems, andtheaverage import
tariff isrelatively low(6percentonanunweighted basis). Moreover, theSlovak authorities are
gradually removing many oftheremaining trade restrictions. Forexample, inlate1995, thecustoms
dutyonimports ofsmall cars(under 1,500 cc)wasremoved.
However, Slovakia continues tomaintain a10percentimport surcharge onconsumer goods,
which wasimposed inMarch 1994 todealwithatemporary deterioration oftheexternal accounts.
Theauthorities havedelayed theelimination ofthesurcharge, which wasoriginally intended totake
place byend-1994, mainly because ofbalance ofpayments concerns. In1995, theyconsidered phasing
outthesurcharge inviewoftheirstrong balance ofpayments position, butdecided tokeepitinplace
because oftheuncertain effects ofthechanges intheclearing system withtheCzech Republic.
Initsconsultations withSlovakia, theFundhasurged theauthorities tophase outthesurcharge.
Moreover, theFund continues tomaintain thatfinancial policies, rather thantheimport surcharge,
arethemostappropriate tooltorespond tobalance ofpayments imbalances. Ifaccompanied bythe
introduction oflessdistortionary taxes, phasing outofthesurcharge isunlikely tocreate major problems
inthebudget, given Slovakia 'sstrong fiscal position. TheFund urges theauthorities tobegin reducing
thesurcharge onaclearandspecific timetable withaviewtoeliminating italtogether promptly, and
totighten financial policies inparallel, toavoid adverse effects onthebalance ofpayments.WT/BOP/R/15
Page8
Toconclude, theSlovak authorities havemade important progress inthetransition toamarket
economy. Tighter financial policies andfurther structural adjustment areneeded toconsolidate these
achievements, andtoensure amore robust external position. TheFund regrets theSlovak authorities '
decision nottophase outtheimport surcharge in1995 when thesituation wasespecially propitious.
Iturges theauthorities toreconsider theirdecision bybeginning tophase outthesurcharge immediately
withaviewtoitsprompt elimination.