RESTRICTEDWORLD TRADE
ORGANIZATIONWT/BOP/S/10
2 September 1999
(99-3635)
Committee on Balance-of-Payments Restrictions
1999 CONSULTATIONS WITH THE SLOVAK REPUBLIC
Background Paper by the Secretariat
1. This paper has been prepared in accordance with paragraph 12 of the Understanding on the
Balance-of-Payments Provisions of the GATT 1994.
I. PREVIOUS CONSULTATIONS WITH THE SLOVAK REPUBLIC
2. The Slovak Republic first introduced a 10% import surcharge for balance-of-payments
purposes on 3 March 1994.  The Committee consulted with the Slovak Republic in June 1994, 1995
and 1996.1  On 1 July 1996, the surcharge was lowered to 7.5% and eliminated on 1 January 1997.
Subsequently, the Slovak Republic took recourse again to Article XII introducing an import deposit
scheme on 1 May 1997 which on 21 July 1997 was replaced by a 7% import surcharge.  Consultationswere held in October and December 1997 and the surcharge was phased out by 1 October 1998.
2
II. BALANCE-OF-PAYMENTS POSITION AND PROSPECTS
3. Since 1994, with the exception of a few brief interludes, the Slovak Republic has maintained
restrictive measures on imports for balance-of-payments reasons.  Reserves have been fairly low
throughout the period and have shown little recovery, neither in terms of imports (2.3 months ofimports at end-1998) nor relative to short-term debt (49% of short-term debt); in addition, the current
account deficit, mainly financed by foreign borrowing,  has been more than 10% of GDP since 1996
(see Table I).  Nor are the macro-economic indicators propitious:  growth slowed (to 4.4%) in 1998
with declining domestic, and weak foreign, demand, inflation crept up slightly and the unemployment
rate, as a result of lay offs in the public construction sector,  has increased to 14%.
                                                     
1 BOP/R/218;  WT/BOP/R/14;  WT/BOP/R/15.
2 WT/BOP/R/40.WT/BOP/S/10
Page 2
Table 1
Selected Economic Indicators (1996-1998)
1996 1997 1998
Real GDP (percentage charge) 6.6 6.5 4.4
CPI (period average) 5.8 6.1 6.7
Unemployment rate 12.6 12.9 14.0Budget deficit (share of GDP) -1.3 -5.2 -6.0Gross national savings / share of GDP 29.7 28.1 29.3Gross national investment / share of GDP 39.4 38.7 39.4
(US$ billion)
Exports 8.8 9.6 10.7
Imports -11.1 -11.7 -13.0Trade balance -2.3 -2.1 -2.3Current account balance -2.1 -2.0 -2.1Official reserves 3.5 3.3 2.9External debt 6.7 7.8 9.9
of which short-term 3.0 3.5 4.0
(percentage GDP)
Current account balance -11.2 -10.1 -10.1External debt 35.5 40.2 48.5Debt service / exports of goods and non-
factor services14.7 12.5 13.2
Official reserves / months of import 3.2 2.9 2.3
Official reserves /short-term debt 86.8 60.1 48.9Real effective exchange rate (per cent
charge, period average)0.1 6.1 -1.4
Source:  IMF
4. Imports, driven by strong domestic demand, continue to exceed exports and in late 1998
surged, ahead of the devaluation and upon removal of the 3% surcharge.  In the last two years, exports
of intermediate goods (steel, base chemicals and petroleum products) fell as a consequence of
growing global overcapacity;  however, machinery and equipment, mainly automobiles, was a
buoyant sector (Table 2).  While the negative trade balance is the main component of the current
account deficit, both the services and income balance have deteriorated, the latter as a result of higherinterest payments due to larger amounts of external obligations.WT/BOP/S/10
Page 3
Table 2
Commodity Composition of Trade (1996-1998)
Description 1996 1997 1998
Exports, f.o.b. (US$ Million) 8,831 9,639 10,667
Food and live animals 3.8 3.4 3.2
Beverages and tobacco 0.7 0.7 0.5Crude Materials 4.5 4.2 3.6Fuels and related products 4.9 4.6 3.5Animal and vegetable oils and fats 0.1 0.2 0.2Chemicals and related products 12.4 10.8 8.9
Intermediate manufactured products 38.3 34.0 30.0
Machinery and transport equipment 23.2 28.4 37.3Miscellaneous manufactured articles 12.1 13.7 12.7Other 0.1 0.0 0.0
Imports, f.o.b. (US$ Million) 11,123 11,672 12,959Food and live animals 6.0 5.6 5.3
Beverages and tobacco 1.1 1.0 0.9
Crude materials 4.9 4.4 3.9Fuels and related products 16.7 15.7 10.9Animal and vegetable oils and fats 0.2 0.2 0.2Chemicals and related products 11.5 11.6 10.7Intermediate manufactured products 15.3 16.5 18.1
Machinery and transport equipment 35.2 35.9 40.0
Miscellaneous manufactured articles 9.0 9.0 10.0Other 0.1 0.0 0.0
5. Fierce competition from Russia and East Asian competitors in the intermediate goods sector
has added to the difficulties for Slovakia's traditional exports.  Furthermore, in the transition to amarket-based economy, energy supplies, hailing mainly from Russia, are now imported at market
rather than artificially low prices;  Slovakia has a substantial trade deficit with Russia.  On the other
hand, Slovakia continues to benefit from its association agreement with the European Union, where it
sells an increasing share of its export goods.  In two years, as the chart clearly demonstrates Germany
has replaced the Czech Republic as Slovakia's major trading partner (Chart I).WT/BOP/S/10
Page 4
Chart I:  Origin and destination of merchandise trade, 1996, 1997 and 1998
1996Imports Exports
Germany
22Poland
5Hungary
5Russia
3Percentage shares
1997
1998EU15 
41Other 
EU15 19
Czech Republic
31Other
15 Other EU15
23
Russia
17United 
StatesEU15
37
Germany
14
Czech Republic
24Other
19
Other
15
EU15
47
Germany
24
Czech Republic
26Poland
5Russia 
3Other EU15
23
Hungary
4Other
19
EU15
44
Germany
20
Czech Republic
21Russia
13Other EU15
24
United States
3
EU15
56
Germany
29
Czech Republic
20Poland
5Other EU15
27
Hungary
4Russia  2Other
19
EU15
50
Germany
26
Czech Republic
18Russia
10Other EU15
24Other
13
United States 
3WT/BOP/S/10
Page 5
6. With respect to the capital account, inflows of foreign direct investment, concentrated in the
transport equipment sector, have been modest over the last few years, while external debt, of which
40% is short-term, has escalated considerably, rising from 35% to 49% of GDP between 1996 and
1998.  While Slovakia was able to borrow easily on international capital markets and did so, more
recently several international agencies have downgraded their credit ratings, from investment tospeculative grade.  Cumulative inflows of foreign direct investment of US$1.8 billion, since 1990,
compare unfavourably with several other transition economies:  equity investment by non-resident
investors has been limited because the previous go vernment's privatization policy, geared towards
promoting the development of a national entrepreneurial class, barred foreign investors until the post-
privatization phase and excluded "strategic" sectors such as gas, electricity and telecommunications.
In fact, privatization of state-owned enterprises has lacked transparency and been principally effected
through management buyouts and insider sales.  Nor has privatization been successful in generatingreceipts;  revenues amounted to 1.5% of GDP in 1995-1998 as a result of large discounts from book
value and long repayment periods.
7. The fiscal deficit increased from 1.3% to 6% of GDP in two years with increased public
spending on health and major public investment projects, e.g. highway construction, accompanied by
weak tax collection.  The weak fiscal position has led the central bank to maintain a tight monetarypolicy, which also reflects dissatisfaction with the pace of enterprise restructuring.  Monetary policy
has been the principal anchor of macroeconomic stab ilization, with the central bank following a strict
anti-inflationary programme, which has kept the consumer price index at a reasonable level.
Financing domestically has been expensive;  interbank lending rates were 24% in 1997 and 19% in
1998, yet debt has grown with relatively easy access to foreign borrowing.  Along with the strongcurrency, high real interest rates helped to at tract the capital inflows which financed the current
account deficit.
8. The real effective exchange rate appreciated by 23.5% in 1996 and 1997 reflecting nominal
wage growth and low productivity improvements.  Following the rouble crisis of August 1998, the
koruna came under pressure and, after exhausting US$1 billion of reserves to defend the currency, thepeg was abandoned in October.  Since the koruna wa s set free to float, the market exchange rate has
been trading at about 10% below the previous central parity.  While a floating rate is more likely to
allow for improvements in external competitiveness, the high import content of Slovakia's exports
prevent depreciation from exerting a strong impact on the trade balance and the currency's
depreciation has raised the costs of servicing the external debt.
9. Like other ex-centrally planned economies, Slovakia's industrial structure was geared towards
heavy capital-intensive industry and, absent market signals to reflect costs, production capacitysignificantly exceeded factor endowments;  as a result industry became heavily reliant on imports of
energy and raw materials.  Exports have been heavily concentrated in a narrow industrial base.
Delays in undertaking structural reform have also  been instrumental in aggravating macroeconomic
imbalances and particularly the savings-investment imbalance.  Restructuring of the corporate and
banking sector has been slow with various laws and government policies hampering the advent of a
more competitive environment.  The share of non-performing loans held by the major and dominant
state-owned banks amounted to 37% of their portfolios;  loan-loss provisioning and capital adequacy
ratios need to be improved.  An overhaul of the Banking Act giving the central bank greater authority
in banking supervision as a part of a corrective action program based on explicit, quantifiable criteria,
would go some way to preventing the moral hazard in the banking sector.  Elsewhere, state enterprisesare heavily indebted and facing bankruptcy and need considerable restructuring before they can be
sold to private investors.  Although a bankruptcy law was introduced in 1997, procedures are costly
and prolonged;  in addition, the commitment to main taining existing employment levels in state and
privatized enterprises has necessarily affected financial performance.
10. In sum, the interaction of macroeconomic imbalances, the unsustainable current account
deficit, increasing external debt, and an unsound banking sector present clear risks.WT/BOP/S/10
Page 6
III. ALTERNATIVE MEASURES TO RESTORE EQUILIBRIUM
11. Since the last consultations in 1997, a new Government has been put in place which has
vowed to redress the fiscal imbalance that is at the heart of Slovakia's macroeconomic difficulties.
The fiscal deficit is targeted to be reduced to SK20 billion (compared to SK43 billion in 1998), 3% of
GDP, by the end of 1999.  At the beginning of this year, a package of fiscal measures was introduced,
a package which was strengthened in May.  Wages in the state administration have been frozen and
on the revenue side, administered prices are being liberalized.  Regulated prices for public services,
such as electricity, gas and transportation, have been increased, as have excise taxes on tobacco and
petroleum products; the lowest VAT rate of 6% has been raised to 10% and tax collection efforts have
been strengthened.  Revenues from indirect taxes ar e expected to yield SK8 billion this year and, with
higher prices for public services, government subsidies will be reduced from SK3.4 to SK1.6 billion.
12. With the monetary authorities no longer required to defend a currency peg, the central bank
will have a freer hand in managing domestic money supply, where growth has already been curtailed,
although there will be some inflationary pressure from the increase in indirect taxes legislated this
year.  Monetary policy will be relaxed in line with fiscal tightening and a shrinking of the current
account deficit.
13. The current Government's economic strategy aims to accelerate restructuring and improve the
transparency of public decisions, in particular, in the privatization process, where it intends to
introduce greater competition.  Weaknesses in the bankruptcy law and procedures are being addressed
by a recent amendment which makes it a criminal infraction for debtors not to submit a settlement
petition within 60 days of "indebtedness" (insolvency?) and simplifies and makes more effective
related procedures.  A programme for recapitalizing the three major state-owned banks is underway.Tax and duty exemptions have been introduced in order to attract foreign investment.  Rapid progress
in enterprise and bank restructuring would boost in vestor confidence and attract much-needed foreign
capital which in turn would ease the financing constraint on the current account deficit.  Continued
stabilization and structural reforms should allow the economy to return to a path of sustainable
growth.
IV. SYSTEM, METHOD AND EFFECT OF  THE RESTRICTION
14. On 1 June 1999, the Slovak Republic introduced a 7% import surcharge applied on an  mfn
basis to all imports with the exception of some agricultural items, basic raw materials and inputs.
3
Where inputs are exempt from the surcharge, user industries will benefit from increased effectiveprotection.  The surcharge, levied on the customs value of the goods, applies to about 80% of tariff
lines and is expected to generate about SK9.4 billion for the seven months of fiscal year 1999 (1½%
of GDP).  By comparison, revenue from the surcharg e provided SK7.5 billion in its five months plus
of operation 1997 and SK6.8 billion, when the phasing down was already in effect, in the first nine
months of 1998.  In the current situation, depressed demand combined with a de facto 10%
devaluation, the surcharge is likely to have a greater apparent effect on the curtailment of imports.
                                                     
3 WT/BOP/N/46, 17 June 1999.WT/BOP/S/10
Page 7
Balance-of-payments (US$ million) 1996-1998
1996 1997 1998
Trade balance -2.293 -2.084 -2.290
Exports 8.831 9.641 10.666
Imports -11.124 -11.725 -12.956
Services and income balance -8 -47 -137S e r v i c e s ,  n e t 3 67 31 7
Income balance -45 -120 -154
Current transfers 203 173 366Current account -2.098 -1.958 -2.061
Foreign investment, net 295 235 248
Direct 199 47 221
Portfolio 96 187 27
Medium and long-term credits 986 1.153 1.601Short-term capital 882 416 -67Capital account 2.192 1.804 1.782Overall balance 237 146 -550
__________