RESTRICTED
WORLD TRADE WT/BOP/R/40
10February 1998
ORGANIZATION(98-0475)
Committee onBalance-of-Payments Restrictions
REPORT ONTHE CONSULTATIONS WITH THE SLOVAK REPUBLIC
1. TheCommittee onBalance-of-Payments Restrictions consulted withtheSlovak Republic on
9October and17December 1997. Theconsultations were heldunder theChairmanship of
Mr.Peter R.Jenkins (United Kingdom) inaccordance withtheterms ofreference ofArticle XII:4(a)
oftheGATT 1994andtheUnderstanding ontheBalance-of-Payments Provisions oftheGATT 1994.
TheInternational Monetary Fund wasinvited toparticipate intheconsultations inaccordance with
Article XV:2 ofGATT 1994.
2. TheCommittee hadbefore itthefollowing documents:
WT/BOP/S/5 Background Paper prepared bytheSecretariat
WT/BOP/G/5 Basic Document supplied bytheSlovak Republic
WT/BOP/N/21 andCorrs. 1and2 Notification from theSlovak Republic
WT/BOP/N/28 Notification from theSlovak Republic
IMF Slovak Republic, Recent Economic Developments, 3March 1997.
Opening Statement bytheRepresentative oftheSlovak Republic
3. Theopening statements areattached asAnnexes IandII.
Statement bytheRepresentative oftheInternational Monetary Fund
4. Thestatements areattached asAnnexes IIIandIV.
Discussion intheCommittee
(i) Balance ofpayments position andprospects; alternative measures torestore equilibrium
5. Members recognized thattheSlovak Republic faced aserious balance-of-payments problem,
inthatacurrent account deficit approaching 10percentofGDP wasunsustainable andreserves were
atalowlevel. However, members noted thatappropriate macroeconomic policies andinparticular,
fiscal tightening, asrecommended bytheIMF, were desirable andwould bring about lasting relief.
Inthiscontext, members alsourged anacceleration ofreform inthebanking andcommercial sectors
Following thesuspension, inDecember, members welcomed theparliamentary approval ofthe
1998 Budget, which raised taxesaimed atlowering thefiscal deficit, andthenewbankruptcy lawwhich
would allow forneeded restructuring.WT/BOP/R/40
Page2
(ii) System, method andeffects ofrestriction
6. TheCommittee welcomed theprompt notification oftheimport surcharge andthefactthat
itwasprice-based, generally applied andatimetableforphase outhadbeenprovided. Itwaspointed
outthatthesurcharge, which hadreplaced theimport deposit scheme, applied tomore products than
thelatter restriction had,thusincreasing protection. Some members questioned whether thelevelof
thesurcharge wasproportional totheproblem. Some members suggested thatthemeasure wasnot
appropriate toaddress thebalance-of-payments problem, others thatthemeasure wasinconformity
withArticle XII. Members suggested thatthephase outschedule beaccelerated withsome calling
foranelimination ofthesurcharge bytheendoftheyear.
Replies bytheSlovak Republic
7. Therepresentative acknowledged thattheimport surcharge wasnotasubstitute for
macroeconomic policies butwasrather ashort-term corrective measure untilreform policies could
havetheirstabilizing effect. Withrespect totherateofthesurcharge, theauthorities haddetermined
thatahigher levelwould affect competitiveness andignite inflationary tendencies, andheadded there
waslessselectivity initsapplication thanhadbeenthecaseunder theimport deposit scheme.
8. InDecember, therepresentative presented arevised phase outschedule which would accelerate
thereduction ofthesurcharge andeliminate itby1October 1998.
Conclusions
9. TheCommitteerecognizedthattheSlovakRepublicwasfacingbalance-of-paymentsdifficulties,
withalowlevelofreserves, asnoted bytheIMF. TheCommittee welcomed theprompt notification
oftheimport surcharge andtheaccompanying schedule foritsphase out.Members alsowelcomed
thatthemeasure wasprice-based andgenerally applied.
10. Some Members questioned whether themeasure wasanappropriate response tothe
balance-of-payments problem confronting theSlovak Republic; theysuggested thatstructural reform
andmacroeconomic adjustment weremorelikely tobring lasting relief. Theycalled forfiscal tightening
andanacceleration ofthephase outplan.
11. After ashort suspension oftheconsultation, theSlovak delegation reported thattheSlovak
parliament hadadopted abudget for1998 which provided forareduction inthefiscal deficit; the
bankruptcy lawhadbeenamended; andamodification tothephase outplanwhich would result in
theelimination ofthemeasure by1October 1998 would benotified formally.
12. Onthatbasis, theCommittee agreed torecommend that,pursuant toparagraph 13ofthe
Understanding, theSlovak Republic should bedeemed incompliance withitsobligations under GATT
1994, provided itadhered toitsmodified time-schedule. Itwasunderstood thatanydeparture from
thetime-schedule would benotified promptly sothattheCommittee could meet.WT/BOP/R/40
Page3
ANNEX I
Statement bytheRepresentative oftheSlovak Republic
attheBOPMeeting of9October 1997
Itisaprivilege formetohaveanopportunity toparticipate onbehalf oftheSlovak Republic
onconsultations intheWTO Committee onBalance-of-Payments Restrictions.
Before myintervention explaining thereasons forapplication ofrestrictive import measure,
pursuant torespective provisions ofArticle XIIoftheGATT 1994, Iwould liketoexpress my
appreciation totheWTO Secretariat andIMFforpresenting ofrespective documents andconstructive
cooperation inpreparatory process.
Allow menowtoturntothesubstance ofourconsultations. Since thedetailed information
onmacroeconomic development, current account, foreign exchange reserves andother indicators, is
available intherespective documents, Iwould likebriefly toinform about thelatest figures and
developments inthese aggregates.
Aftersatisfactorydevelopmentsinpreviousthreeyears,again,positiveresultsarebeingregistered
inGDP,where 6percentgrowth inconstant prices inthefirsthalfofthisyearhasbeenrecorded.
Inflation ratereached 6.1percentandhasbeenkeptrelatively lowduring thethirdconsecutive year.
Stability ofthecurrency hasbeenmaintained inthesame period duetoanti-inflationary policy and
measures undertaken byNational Bank ofSlovakia which areindetail contained inBasic Document.
However, intensified pressures onexchange rateofSlovak crown haveappeared during several last
months caused bybothinternal andexternal factors.
After relatively favourable results inforeign trade achieved intheyears1994and1995reflected
inbalance oftrade andservices, negative developments in1996 havebeenrecorded. Asaresult of
theaccelerated growth inimports (28.5 percentincrease onyear-on-year basis) andtheconsiderably
reduced growth inexports (increase 6.1percentonly), hugetrade deficit amounting US$2.3 billion
hasbeenregistered. Thisstrongly negative development continued inthefirsthalfofthisyearand
trade balance deficit amounted US$986 million, which ishigher figure incomparison withthesame
period ofthelastyear. Unofficial figures forAugust show thatdeficit reached amount US$1.1 billion
Additionally, rather unfavourable development wasrecorded intheservices balance which hasbeen
akeyfactor inthegeneration ofcurrent account surpluses intheprevious years.
Interritorial structure ofSlovakia ´sforeign trade, there areseveral weak points negatively
influencingitsdevelopment,namelyinadequatelydiversifiedexportsanddependenceuponrawmaterial,
semi-finished products andenergy imports .High share ofCzech Republic andGermany inexports
ofSlovakia isansensitive element inexport performance andanynegative development isreacting
accordingly. Alsocommodity structure ofSlovak exports dominated bysemi-finished products isnot
favourable andthussensitive torealandpossible swings.
Trade balance deficit in1996,consequently influenced theSlovak Republic ´scurrent account
deficit amounting US$2 billion andthisunfavourable trend hasbeencontinuing during thisyear.
Inabsolute terms deficit ofcurrent account totalled US$1 billion.in June1997. According toavailable
datashare onGDP increased from 8.6percentuptoalmost 11percentofGDP inrelative terms.
Capital account initsstructure isnotdeveloping positively either. AsourBasic Document
indicates, there isverylowlevel offoreign direct investment amounting US$181 million in1996,
while short-term capital dramatically increased toroughly 70percentofoverall capital inflow. ThisWT/BOP/R/40
Page4
speculative capital sharply increased infirstfourmonths ofthisyear,buttothebroader extent outflowed
inMay, which consequently ledtoreduction offoreign exchange reserves totheamount lower than
three months coverage ofimports ofgoods andservices. Other types ofcapital inflow havebeen
negatively influencing external indebtedness ofSlovakia, where foreign debtinfouryears more than
doubled fromlessthanUS$3 billion. in1993 uptoUS$9 billion registered inJune 1997. Themost
rapidincrease inforeign debthasbeenregistered during firsthalfofthisyear,where overall debtgrowth
accelerated andexpanded byUS$1.2 billion, inthisperiod. While foreign debtinabsolute terms
would notseem tobealarming, percapita debtmaybecurrently amatter ofconcern. Percapita debt
increased formUS$562 inthebeginning of1993 uptoUS$1,705 inJune1997. Taking intoaccount
current development inborrowing activities oftheGovernment, enterprises andcommercial banks,
itishighprobability thatgross indebtedness willexceed amount ofUS$10 billion intheendofthis
year, which willincrease percapita debtuptoUS$1,950 ingiven period. Inthiscontext, debtservice
willbegrowing, asaconsequence toabove mentioned development, what willmean anadditional
burden andthuspressure tobalance-of-payments.
While inprevious years overall balance-of payments hasrecorded modest surpluses ,this
trend hasbeenreversed inrecent period. Balance-of payments figures available inJune1997 show
deficit amounting US$253 million forthefirsttimeofexistence ofSlovakia.
Official foreign exchange reserves ofNational Bank ofSlovakia afterrelative stability intwo
previous years, where thelevelhasbeensufficient tocover imports ofgoods andservices upto4months
in1995 and3.4months in1996, declined inApril andfurther inMay1997 below US$3 billion in
absolute figures andbelow 3months ofimports coverage. Thissituation prevailed inconsecutive three
months andJuly1997dataconfirmed thisunfavourable development, where foreign exchange reserves
reachedthelevelcovering2.8monthsofimportsonly.Highshareofshort-termcapitalontotalliabilities
ofcapital andfinancial account mayfurther endanger levelofforeign exchange reserves.
State Budget in1996 hasdeteriorated anddeficit amounting SKK25.6billion representing
1.3percentofGDP inrelative terms, wasrecorded. Situation inthefirsthalfofthisyearhasnot
improved. Current figures available forJune1997areindicating deficit ofSKK13.2billion andfiscal
deficit amounted SKK 5.5billion Ingiven period ,overall realrevenues reached 45.9percentand
expenditures44.1percentofannualbudgetplan.Reasonsforlowerlevelofrevenueshavebeendetected
mainly inlower taxcollection fromlegalentities andonexpenditure sidebyextensive growth ofcapital
expenditures which haveexceeded thetimeframework ofbudget expenditure planinthefirsthalfof
thisyear.Themainstrategy oftheSlovak authorities forthisyearistokeepfiscal deficit ontheprojected
levelorlower. External andinternal imbalances ledSlovak Government toadopt several measures
necessary forcorrection ofthisdevelopment.
Now, letmebriefly mention thesetofmeasures adopted recently withtheaimtoresponse
toabove-mentioned developments andimbalances intheareaof:
A. Budgetary, fiscal andtaxpolicy:
(i) Tightened regulation ofbudgetary expenditures inthesecond halfoftheyearwith
expected selective whole-year limitation ofbudgetary expenditures minimum volume
ofSKK5billion.
(ii) Taxadministration andcollection through stricter control andpenalization ofviolation
ofregulation withtheaimtoachieve better fiscal discipline inbeing introduced.WT/BOP/R/40
Page5
(iii) Inorder tostrengthen taxincomes andtoinfluence consumption submit adraftofthe
Actamendment ofexcise duty onhydrocarbon fuels andlubricants hasbeen
effected.Excise taxhasbeenincreased by5percentinaverage, product coverage has
been expanded. Additional increase ofrevenues from thismeasure amounting to
SKK500million isexpected.
(iv) Prices ofenergy forlarge-scale consumption inaverage by10percenthavebeen
raised.
(v) Thewater ratebySKK1andsewage ratebySKK1forhouseholds havebeenraised.
(vi) Theconcession charges forTVandradio broadcasting havebeenraised bymaximum
50percent.
(vii) Public investment projects hasbeenreduced bySKK 5billion.
B. Wages
There isadistortion between growth oflabour productivity andrealwages growth with
difference of1.8percentinthefirsthalfoftheyear.Therefore, Government hasadopted amendment
oftheLawonWages where adjustment ofrealwages inbusiness entities should beincompliance with
thelabour productivity. Themaingoalofthismeasure istoslowdown domestic demand andreverse
further deepening ofcurrent account deficit.
Except ofabove mentioned package, there arefurther intentions oftheSlovak Government
toadopt measures infiscal areawiththeaimtoreach more balanced macroeconomic situation and
toreverse unfavourable developments ,forexample:
(a) toinclude thefurther taxation ofpersonal consumption ofthebusiness sphere intothe
proposal ofincome tax.
(b) toprepare aproposal oftheActforimplementation ofexcise duties onsome goods
andservices.
(c) toreassess:
- applying ofheating subsidies inrespect tothehouseholds incomes
- measures forelimination oflosses caused bytransport ofheating.
(d) toprepare theproposal fordifferent tariffs forover-consumption ofenergy, gasand
transport byhouseholds since thebeginning of1998.
(e) toconsolidate maximum prices ofheating andwater heating.
(f) toincrease prices forrailways forpersonal transport.
(g) toamend LawonVAT where some items willmove tothehigher rate(from 6to
23percent).
Asfarasprojection offiscal budget for1998isconcerned, itisanexpectation, thatitsdeficit
willbereduced toSKK5billion.WT/BOP/R/40
Page6
Import surcharge creates anintegral partofbroadly adopted package aimed atstabilization
ofthecurrent situation andshould beseenascorrective measure oftemporary nature anddoesnot
substitute ordeviate from openandliberal trade policy ofSlovakia. Itischaracterized bylowfully
bound tariffs, verylownumber ofnon-tariff measures, aswellasactive participation insectoral
initiatives, forexample ITA,andactive approach inservices sector withvaluable contribution inbasic
telecom andfinancial services where additionally further liberalization steps arebeing currently
undertaken onnational level. Therefore, import surcharge hasbeen introduced alternatively as
transparent price-based measure having lessdisruptive effect ontrade. Itisapplied onanon-
discriminatory basis, almost across theboard withsome exceptions stipulated innegative list,covering
more than75percentoftotalimports.
TheSlovak authorities areaware ofthefact,thatinevitable condition forsound growth is
transformation initscomplexity, restructuring ofeconomy through effecting ofsystemic andrational
measures supporting sectors withhigher value added, which would leadtoimprovement ofexternal
position andreversing ofcurrent imbalances. Changes inGDPgeneration willrequire certain period,
during which stable macroeconomic environment isnecessary. Thisis,however, asweareaware,
endangered byexistence offoreign trade imbalance registered through deficit oftrade balance and
recorded from thesecond halfofthe1995.
TheSlovak Government reiterated inprevious occasions thatitfeelsfullytobebound byits
international commitments foractive andeffective cooperation withallWTO Members. Reversed
developments insome keyelements ofthebalance-of-payments andoftradebalance inparticular, lead
toconsideration ofreversing thissituation. TheSlovak Government isconvinced thatinvocation of
Article XIIofGATT 1994, inorder tosafeguard itsexternal position andbalance-of-payments situation,
toforestall theimminent threat ofserious decline initsmonetary reserves, isalegitimate step.The
Slovak Government made itsutmost effort toobserve respective provisions oftheArticle XIIofthe
GATT 1994 from thecriteria aswellassubstance aspects andwishes toassure WTO partners that
transparent timetable ofphasing outcontained inourBasic document willberespected.
Weareprepared toconsult withWTO Members ingoodfaithandrespond toquestions which
nodoubt willberaised.WT/BOP/R/40
Page7
ANNEX II
Statement bytheRepresentative oftheSlovak Republic
attheBOPMeeting of17December 1997
Mr.Chairman,
ItisanhonourformetoparticipateonbehalfoftheSlovakGovernmentinresumedconsultations
inthisCommittee. Inthecontext ofprevious consultations Iwishtorecall thatdetailed information
ongeneral macroeconomic developments, including developments ontrade balance, current account
ofbalance ofpayments, foreign exchange reserves andother relevant aggregates, being important for
assessment forjustification ofinvocation ofArticle XIIoftheGATT 1994, isavailable indocument
WTO/BOP/G/5. Intoday´sintervention Iwould liketoconcentrate ontheupdating offigures and
facts, which areimportant forfurther assessment ofapplication oftheimport surcharge. Thelatest
development intheperiod frommid-year uptotheendofSeptember andtrade balance uptotheend
ofthisOctober willbepresented briefly.
1. Economic development ofSlovakia shows uptotheendofSeptember signsofstability incertain
areas. RealGDP growth forthisperiod reached 6percent, however, growth incomparison with
lastyearhasslowed down. Theinflation ratebased oncurrent prices reached 6.1percent, which
is0.2percenthigher thaninthesame period ofthelastyear. Currency stability hasbeenmaintained
bytheanti-inflation monetary policy andbythecorrective measures oftheNational Bank ofSlovakia.
However, pressures ontheexchange rateoftheSlovak currency, which havebeenrecorded inthe
lastmonths, willmostprobably continue, which isbeing caused bybothinternal andexternal factors.
Theaverage unemployment rateof13percenthasslightly increased incomparison withthesame
period oflastyear. There islong-term unemployment prevailing.
2. DevelopmentofthetradebalanceofSlovakiacontinuestobeunfavourable.Thenegativebalance
inthethirdquarter hasincreased byUS$185 million andattheendofSeptember reached inabsolute
terms US$1,171 billion, which ishowever, incomparison withthesame period oflastyear, lessby
US$199 million. Main factors contributing tothisrelative improvement canbeconsidered asfollows:
improved market situation intheEC,themost important trade partner ofSlovakia, stabilization of
prices forimported rawmaterials namely crude oilandnatural gas,andlastbutnotleastintroduction
oftheimport surcharge. Inabsolute terms, ahigher volume ofexports thanimports hasnotbeen
recorded, butinrelative terms export growth hasbeenmore dynamic thanimports. Theforeign trade
turnover ofSlovakia intheperiod from January uptoOctober 1997 increased incomparison with
thesame period oflastyearby8.4percent, where exports increased by10.4percentandimports
increased by6.8percent. Dynamics ofimports from thisMayhasslowed down andthistrend is
recorded alsoinexports inthelasttwomonths. While average trade balance deficit January-April
reached US$189 million andintheperiod May-July (import deposit scheme) amounted to
US$101 million, trade deficit during August andOctober (import surcharge) reached US$74 million.
Intheterritorial aswellascommodity structure therehavenotbeenrecorded anyfundamental changes.
3. Current account deficit intheyear1996amounted toUS$2.1 billion Thistrend hasremained
unchanged alsoduring thisyear. Intheperiod ofninemonths oftheyear1997, current account of
balance-of-payments deficit reached levelofUS$1.2 billion (infixed exchange rate30.65 SKK/US$).
Thelevelofthecurrent account deficit onGDP isstillhigh, approximately 8percent.
4. Thecoverage ofthisnegative balance ofthecurrent account isfollowed byinadequate structure
ofcapital andfinancial account ofbalance ofpayments. Above all,dataavailable show averylowWT/BOP/R/40
Page8
share offoreign direct investments. Intheyear1996 FDIreached almost US$200 million (lessthan
1.4percentofGDP). Intheyear1997 foreign direct investments arenegative. During theperiod
from January uptoSeptember 1997 FDIinflow amounted toUS$55.5 million (0.4percentofGDP
only), while FDIoutflow reached US$58.2 million. Negative development isclear alsointhearea
ofdisbursement ofcapital liabilities, where short-term capital share ishigher than50percent.Capital
andfinancial account structure hasdirect impact ontheincrease offoreign debt. Inabsolute terms
totalgross foreign debtofSlovakia reached US$9.4 billion (official datatotheendofAugust 1997).
Inthiscontext, debtservice willbegrowing withevident consequences.
5. Thebalance-of-payments position hasnotchanged from thelastconsultations. Tobemore
precise, overall balance ofpayments during three quarters of1997 hasrecorded adeficit amounting
toUS$183.7 million These figures areunderstandably amatter ofconcern.
6. Official foreign exchange reserves modestly improved during thelasttwomonths. However,
coverage ofimports ofgoods andservices isstilloncritical level, notexceeding three months. This
unfavourable levelofforeign exchange reserves together withremarkable share ofshort-term capital,
maycause various problems including possible exchange rateattacks.
7. TheSlovak National Council approved on12December 1997 thestatebudget fortheyear
1998. General government deficit for1998 isprojected for3percentofGDP, incomparison with
1997 forwhich deficit hasbeenprojected for4.8percentofGDP. Fiscal budget deficit for1998has
beenapproved atthelevel0.7percentofGDPincomparison with1.8percentofGDPin1997. Slovak
authorities consider frommedium- andlong-term strategy tokeepfiscal balance. Based ontheabove-
mentioned data, atendency from expansionary fiscal policy towards arestrictive oneisevident.
However, realpossibilities andlimits intheeconomy havehadtobetaken intoaccount.
8. Inorder tosolve theproblem ofinternal imbalances, inaddition tothepackage indicated in
moredetailed fashion inthelaststatement, further measures havebeenadopted, namely: (i)amendment
oftheLawonVAT hasbeenadopted, where some items moved tohigher level, from 6percentup
to23percent; (ii)excise taxfortobacco andalcoholic beverages hasbeenincreased; and(iii)gradual
liberalization ofprices forheating, energy andgasareconsidered.
9. TheSlovak Government realises thatthefundamental precondition forfurther growth ofthe
economy isitsrestructuring, above allintheindustrial sectors. Withtheaimtoreach more effective
andtransparent aswellasaccelerated restructuring oftheeconomy, theamendment ofbankruptcy
lawhasbeenadopted bytheSlovak National Council.
10. Aliberal policy isafundamental element intheSlovak overall policy. AndIwould liketo
stress, thatSlovakia pursues thisopenandliberal policy. Lately, theSlovak Government joined ITA
andwillapply reduced tariff rateswitheffect from 1January 1998, ithasapproved Fourth Protocol
toGATSonbasictelecom,andactivelyparticipatedinnegotiationsonliberalizationoffinancialservices.
Bythisapproach Iwishtoindicate thattheimport surcharge currently applied isatemporary corrective
measure tooverall policy aimed atstabilization ofcurrent macroeconomic imbalances.
11. TheSlovak Government would liketoreiterate itsbinding toadopted international rulesand
commitments. Itis,however, convinced thatinthecontext ofitsmacroeconomic situation aninvocation
ofArticle XIIoftheGATT 1994, inorder tosafeguard itsexternal position, especially
balance-of-payments position, toforestall theimminent threat ofserious decline initsmonetary reserves,
isajustifiable step. Slovakia haspresented anexact timetable forphasing outoftheimport surcharge
pursuant totherespective paragraphs ofArticle XIIoftheGATT 1994. Taking intoaccount concerns
ofWTOMembersduringpreviousconsultationstothepresentedharmonogramandthoroughassessmentWT/BOP/R/40
Page9
ofthelatest macroeconomic developments afterintroduction oftheimport surcharge, theSlovak
Government considered allaspects offurther application ofthismeasure. Inaddition, based onmodestly
improved balance-of-payments situation aswellasforeign exchange reserves, despite stillbeing fragile
andvolatile, theSlovak Government would liketosubmit thefollowing amended timetable forthe
phasing-out oftheimport surcharge:
- Asfrom1January 1998theimport surcharge willbereduced to5percent.Decision
onthisreduction hasbeen already adopted byDecree No.339/1997 dated
13December 1997.
- Theimport surcharge willbefurther reduced asfollows: asfrom 1April 1998 -
3percent,asfrom1October 1998 theimport surcharge willbeabolished, provided
thebalance ofpayments aswellasforeign exchange reserves situation willbestabilized.
Thisproposal means accelerated phasing-out harmonogram andeffectively shortens
theoriginally submitted timetable.
Mr.Chairman,
Thisinitiative stepoftheSlovak Government willbehopefully taken positively asaconcrete
contribution toreach consensus andwould leadtoconclusive consultations.
Weareprepared consult withtheWTO Members ingoodfaithandresponse questions which
mayberaised.
Thank youWT/BOP/R/40
Page10
ANNEX III
Statement bytheRepresentative oftheInternational Monetary Fund
attheBOPMeeting of9October 1997
1. TheSlovakRepublichasmadeimpressiveprogressinitseconomicmanagementandperformance
since itsindependence in1993. Growth resumed in1994 andaccelerated ineachofthefollowing
years, reaching almost 7percentin1996, while inflation fellsteadily from more than20percent
in1993 tolessthan6percentin1996. TheSlovak success withmacroeconomic stabilization was
supported byprudent fiscal policy andcontinuing enterprise restructuring. However, averylarge
external current account deficit emerged in1996which haspersisted sofarin1997. Monetary policy
hasbeen tightened inresponse, butitseffectiveness inslowing down domestic demand hasbeen
undermined byafiscal policy thathasturned more expansionary overthepasttwoyears.
Overview ofEconomic Developments
2. 1996wasthethirdyearofstrong growth andfalling inflation. However, thecurrent account
registered adeterioration of13percentage points ofGDP, torecord adeficit ofmore than11percent
ofGDP, asimports surged, fuelled byanincrease ofmore than20percentindomestic demand.
Rapid credit growth through mid-year (with credit toenterprises growing atmore than20percent),
afiscal deterioration of1½percentage points ofGDP andsizeable wage increases contributed tothe
rapid expansion ofdomestic demand. Thetemporary removal oftheimport dutyonsmall carswas
another factor behind thesharp increase inimports. Inreaction tothegrowing external deficit, the
National Bank ofSlovakia (NBS) began totighten monetary policy inmid-1996, pushing interbank
ratesupfrom 10percentto16percentbyDecember.
3. Preliminary datasuggest thatin1997theeconomy isgrowing atamore moderate paceofabout
5percent,asprivate investment hasslowed down inresponse tothetightmonetary policy. Inflation,
at6percent(year-on-year) inJuly,isexpected topickuptoabout 7percentbyyear-end, following
recent increases inindirect taxes. Export growth hasrebounded, expanding by13percentinSlovak
crown terms (year-on-year) during thefirsthalfof1997, compared withgrowth ofonly6percent
in1996; import growth moderated during thefirstsixmonths oftheyearto14percent(year-on-year),
down from 30percentduring 1996. Nevertheless, theexternal situation remains precarious ,as
thecurrent account deficit remains atabout 10percentofGDP.
4. InMay1997, theSlovak crown faced aspeculative attack ,precipitated inpartbycontagion
effects from theturmoil intheCzech exchange market, butalsoagainst thebackground ofthelarge
current account deficit. Thecrown briefly felltothelower bound ofitsfluctuation band,1butpressures
ontheexchange ratesubsided aftertheNBSchoked offliquidity onthemoney market, pushing short-
term interbank ratesabove 30percent.
5. These economic developments reflect theshortcomings oftheprevailing policy mix.Despite
theexternal imbalance, fiscal policy hasbecome more expansionary, withthegeneral government
deficit planned toincrease by2½percentage points ofGDPto3½percentin1997, astheGovernment
maintains itsfocus oninfrastructure development, andonpursuing anindustrial revitalization plan.
Projections based ondatathrough mid-1997 wereevenmore worrisome, pointing toadeficit ofover
1Theexchange rateispegged within aband toabasket comprising theU.S. dollar andtheGerman mark
withweights of0.4and0.6respectively. Todeter speculative capital inflows theNBS widened theband in
several steps during 1996 from ±1½ percentto±7percent.WT/BOP/R/40
Page11
7percentofGDPduetoasubstantial shortfall inrevenue collection andhigher-than-anticipated interest
payments.
6. Inresponse totheseprojections, theauthorities announced apackage ofmeasures inJuly1997
thatwould reduce thedeficit toabout 4½percentofGDP in1997. Thisfiscal deficit, together with
thecontinued tightreinonmonetary policy ,havekeptinterbank interest ratesabove 20percent.
Thecurrent policy mixcould crowd outprivate investment, slowdown economic restructuring, and
stillleave theeconomy vulnerable toexternal shocks. Toavoid these risks, theFund staffhasurged
further fiscal tightening aimed atachieving abalanced fiscal position inthesecond halfof1997, and
asmall surplus in1998. Inaddition, theFund Staffhascautioned theauthorities nottoinvolve the
stateineither therevitalization orthemanagement ofenterprises.
7. Asregards theexternal outlook ,under present trends, thecurrent account deficit in1997
could remain inexcess of9percentofGDP. Inthepast,thedeficit wasmostly financed bymedium-
andlong-term credits. There was,however, amarked increase inshort-term credits inthefirstquarter
ofthisyear(thelastquarter forwhich dataareavailable). Reserve cover hasfallen gradually toless
than 3½months ofimports ofgoods andnon-factor services from about 4½months in1995.
TheExchange andTrade System
8. TheSlovak Republic accepted theobligations ofArticle VIIIoftheIMF'sArticles ofAgreement
on1October1995.Itmaintainsasubstantiallyliberalizedtraderegime,withimportandexportlicences
required foronlyafewitems, andrelatively lowaverage import tariffs (8percentonanunweighted
basisin1996).SlovakiamaintainsacustomsunionwiththeCzechRepublicandAssociationAgreement
withtheEU,freetrade agreements withVisegrad andEFTA countries, anditanticipates becoming
amember oftheOECD before theendoftheyear. In1996, tocomply withOECD accession
requirements, theSlovak authorities further liberalized capital account transactions, including credits
from Slovak residents toOECD residents withmaturity offiveyears ormore; credits received by
Slovak residents fromabroad withamaturity ofthree years ormore; andtrade credits withrespect
toOECD members.
9. Inconsultation withtheWTO, on1January 1997, Slovakia completed thephased removal
oftheimport surcharge onconsumer goods thatithadimposed inMarch 1994todealwithatemporary
deterioration oftheexternal accounts. On1May1997, however, theauthorities introduced animport
deposit scheme, largely inreaction toasimilar scheme which theCzech Republic hadputinplace
butthatwasrevoked inlateAugust 1997. Theimport deposit scheme applied toconsumer goods
andfoostuffs andrequired asix-month non-interest-bearing deposit equal to20percentofimport value.
Effective 21July1997, theimport deposit scheme wasreplaced witha7percentimport surcharge
onabout 80percentofimports, thusincreasing thedegree ofprotection. Theauthorities announced
thatthesurcharge willbetemporary andthatitwillbecutto5percent atthebeginning of1998,
lowered to3percentinJuly1998, andphased outbyend-1998.
10. Initsconsultations withSlovakia, theFund hasurged theauthorities nottoimpose trade
restrictions andtorelyinstead onanappropriate mixofmacroeconomic policies todealwiththelarge
external imbalance. While recognizing thepressing needtodealwiththepersistently large current
account deficit, theFund regrets theimposition oftheimport surcharge whereas fiscal policy remains
expansionary.Thesurchargecannotbeasubstituteforappropriatefiscaltighteningtoreducetheexternal
deficit toasustainable level. Toconclude, theFund urges theauthorities toimmediately tighten fiscal
policy andtoinitiate thephased removal ofthesurcharge, preferably ahead oftheannounced schedule.WT/BOP/R/40
Page12
ANNEX IV
Statement bytheRepresentative oftheInternational Monetary Fund
attheBOPMeeting of17December 1997
1. TheFund'sassessment andrecommendations remain asinthestatement presented during the
October discussions (EBD/97/108; 9/24/97).
2. AnArticle IVconsultation mission visited theSlovak Republic during 30October to
12November 1997. Preliminary dataforthefirsthalfof1997 suggest thattheeconomy, although
moderating somewhat, hascontinued togrow atarateofclose to6percent. Private investment has
slowed inresponse tothetightmonetary policy stance thatremains inplace. Since July, there has
been amarked reduction inthemonthly trade deficit. Through October 1997, exports grew by
10percentinSlovak crown terms (year-on-year), while import growth continued todecelerate toless
than7percent(year-on-year), down from30percentduring 1996. Nevertheless, thecurrent account
deficit isprojected atbetween 8-9percentofGDP for1997. Official foreign reserves nowstand
attheirpre-May crisis level; thiscould deteriorate rapidly asthecurrent account deficit remains high
andturbulence ininternational capital markets haslimited theaccess toexternal borrowing.
3. Onthefiscal front, the1998budget iscurrently being discussed inParliament. Thegovernment
proposal implies ageneral government deficit of3percentofGDP for1998, compared withbudget
plans of3.5percentandaprojected outcome of4-5percentofGDP in1997.
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