Proposal for a Council Decision repealing Decision 94/939/EC providing further macro-financial assistance for the Slovak Republic
Date: 1996-01-23
Institutions: European Commission
Subjects: Community loan, International Monetary Fund, Slovakia, balance of payments, financial aid

COMMISSION OF THE EUROPEAN  COMMUNITIES 

Brussels,  23.01.1996 
COM(96) 9  final 

96/0018 (CNS) 

Proposal  for  a 

COUNCIL  DECISION 

repealing Decision 94/939/EC 

providing further macro-financial  assistance 

for the Slovak Republic 

(presented  by the Commission) 

EXPLANATORY  MEMORANDUM 

1.  In  June  1994,  the  Slovak  government  requested  macro-financial  assistance  from  the 
EU  and  other  members  of  the  Group  of  Twenty-Four  in  the  amount  of  US$  300 
million.  This  assistance  was  to  complement  the resources that  the  IMF  and  the World 
Bank  were  to  provide  to  the  Slovak  Republic  in  support  of  a  stabilization  and 
structural reform programme for the second half of  1994 and  1995.  In response  to this 
request,  the  EU  Council  approved  on  22  December  1994,  by  Decision  94/939/EC,  a 
loan facility to the Slovak Republic of up to ECU  130 million. 

I.  With a view to implementing this Decision,  the Commission  services held in May  1995 
discussions in Bratislava with the Slovak  authorities  on the economic  policy  conditions 
insufficient 
to  be  attached  to  the  loan  facility.  During  the  discussions,  however, 
progress  was  made  by  the  Slovak  authorities  with  respect  to  several  of  the  policy 
measures considered  by the Commission to be essential,  including in particular the early 
phasing out of the  10% import surcharge introduced in March  1994. 

3.  The  resumption  of  the  discussions  on  the  implementation  of  this  assistance  was 
complicated by the decision taken by the Slovak government in June  1995 to cancel the 
shares-for-vouchers  privatization  scheme,  which  was  also  considered  by  the 
Commission  to be an important  step in the transition  of the  Slovak  Republic  towards a 
fully-fledged  market  economy.  Instead  of  shares  in  state  enterprises,  the  3.5  million 
citizens that bought vouchers in  1995 will be given  5-year interest bearing bonds issued 
by the National  Property Fund. The privatization process has been further weakened by 
the  Government's  decision  (incorporated  into  legislation  passed  in  July  1995)  to 
maintain  controlling  stakes  in  a  significant  number  of  "important"  and  "strategic" 
enterprises. 

The  new  bonds-for-voucher  scheme  not  only  has  implied  a  new  delay  in  the 
privatization  process  but  risks  having  negative  fiscal  implications  and  could  undermine 
foreign  investor  confidence  in  the  government's  commitment  to  the  reform  process. 
Partly  reflecting  the  slow  formulation  and  instability  of  privatisation  and  other 
structural  policies,  the  World  Bank  interrupted  between  April  and  October  1995 
discussions  on  any  new  operation  with  the  Slovak  Republic  (including  on  a  Enterprise 
and  Financial  Sector  Adjustment  Loan).  Also,  IMF  concern  about  the  repercussions 
(including  its  fiscal  effects)  of  the  shift  in  privatization  policy  has  been  one  of  the 
factors  preventing  the completion  of the mid-term  review  of the stand-by  programme. 

4.  Meanwhile, 

the  Slovak  Republic's  macroeconomic  situation  has  experienced  an 
impressive  turnaround.  Following  four  consecutive  years  of  recession,  real  GDP  grew 
by  4.8%  in  1994  and  by  6.1%  (year-on-year)  in  the  first  half  of  1995.  Inflation  has 
fallen  from  25%  at  end-1993  to  7.9%  in  October  1995.  The  deficit  of  the  general 
government  has  declined  from  7.6%  of  GDP  in  1993  to  only  1.4%  of  GDP  in  1994, 
and  showed  a small  surplus  in (he first  half of  1995. 

Most  importantly,  the  balance  of  payments  has  strengthened  considerably.  The  current 
account  swung  from  a  deficit  of  5.4%  of  GDP  in  1993  to  a  surplus  of  almost  6%  of 

I 

GDP in  1994, and  is estimated  to have deteriorated  but to have remained  in surplus in 
1995. Official  foreign  exchange  reserves,  for  their  part,  have risen  from  only US$  0.5 
bn at end-1993 to US$ 2.9 bn (or 3.2 months of imports) at end-September  1995, well 
above  the  target  for  end-1995  contained  in  the  government's  initial  programme  for 
1994-95.  The  Slovak  Republic's  access  to  the  international  capital  markets  has  been 
reinforced  by  the  upgrading  of  its  ratings,  including  the  assignment  by  a  leading 
international  rating  agency  of  an  investment  grade  mark  in  May  1995.  The  National 
Bank of the  Slovak  Republic has successfully  placed two issues of international  bonds 
of about US$ 250 mio each in September  1993 and July  1994, respectively,  and,  at the 
end  of  1994, the  Slovak Republic  received  its first syndicated  bank  loan  commitment 
since independence. 

The strengthening of the balance of payments has allowed the authorities to remove as 
of  1  October  1995  (that  is,  three  months  before  the  date  foreseen  in  the  IMF 
programme)  all  remaining  restrictions  on  the  convertibility  of  the  Slovak  crown  for 
current account purposes. The Slovak Republic has thus achieved Article VIII status at 
the IMF. 

In view of the improvement  in the country's external  position,  the  Slovak  government 
announced in April  1995 that it would  not draw on the remaining tranches of the IMF 
stand-by credit. 

5.  In the circumstances, the Commission is proposing the cancellation  of the  Community 

balance of payments loan facility for the Slovak Republic. 

In accordance with the provisions of the Guarantee Fund mechanism, the adoption of a 
decision cancelling macro-financial  assistance of up to ECU  130 million for the Slovak 
Republic would  imply a definitive  reduction by ECU  18 million of the payments to be 
made in  1996 to the Guarantee Fund for  new operations of loans and loan  guarantees 
to third countries. 

Proposal for a 

COUNCIL DECISION 

repealing Decision 94/939/EC of 22 December 1994  • 

providing further macro-financial  assistance 

for the Slovak Republic 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  establishing  the  European  Community,  and  in  particular 
Article 235 thereof, 

Having  regard  to  the  proposal  of  the  Commission2  submitted  after  consulting  the 
Monetary Committee, 

Having regard to the opinion of the European Parliament3, 

Whereas,  by  Decision  94/939/EC,  the  Council  approved  further  macro-financial 
assistance for  the  Slovak  Republic of up to ECU  130 million in the form  of a medium-
term loan facility; 

Whereas  however  the  Commission  and  the  Slovak  authorities  have  not  made  sufficient 
progress in agreeing  on the economic policy conditions to be attached  to this facility,  in 
particular  on  an  early  removal  of  the  10%  surcharge  on  imports  of  consumer  goods 
introduced by the Slovak Republic in March 1994; 

Whereas furthermore  the Slovak government  decided in June  1995 to  cancel the shares-
for-vouchers  mass  privatization  scheme,  and  whereas  this  and  other  decisions  of  the 
government  have resulted  in a slow formulation  and implementation  of privatization and 
other key structural reform policies; 

Whereas  the  mid-term  review  of the  economic  programme  agreed  between  the  Slovak 
government  and  the  IMF  and  supported  by  a  "stand-by  arrangement"  has  not  been 
completed,  and whereas discussions between the Slovak  authorities and the World Bank 
on an "Enterprise and Financial Sector Adjustment  Loan" have been discontinued; 

Whereas the balance  of payments situation  and foreign  exchange reserve position  of the 
Slovak  Republic  have  strengthened  substantially  and  whereas  the  Slovak  Republic's 
access to the international  private capital markets has considerably improved; 

OJN°L366,  31.12.94, p. 10. 

if 

Whereas  the  strengthening  of  the  country's  external  financial  position  has  allowed  the 
Slovak Republic to  stop  making  purchases under  the  "stand-by  arrangement"  approved 
by the IMF on 22 July 1994; 

Whereas,  in  these  circumstances,  there  is  no  ground  for  the  implementation  of 
Community  macro-financial  assistance  for  the  Slovak  Republic  and  whereas  this 
assistance should therefore be discontinued; 

Whereas  the  Treaty  does  not  provide,  for  the  adoption  of this Decision,  powers  other 
than those of Article 235, 

HAS DECIDED AS FOLLOWS : 

Sole article 

Decision 94/939/EC is hereby repealed. 

Done at 

, 

For the Council 

The President 

5 

1.  Budget line concerned 

FINANCIAL RECORD 

Article (BO-2122), reflecting  the budget  guarantee for  the Community loan  facility 
to the Slovak Republic, is to be repealed through amending and/or a supplementary 
budget. 

2.  References (legal base) 

Article 235 of the Treaty 

3.  Classification of the Expenditure 

Obligatory 

4.  Description and Justification for the action 

a)  Description of the action 

Repeal of the budget  entry  reflecting  the commitment  of the budget  guarantee 
associated  with  the  Community  medium-term  facility  to  the  Slovak  Republic 
made available by Council Decision 94/939/EC  and aimed  at  strengthening  the 
balance of payments and foreign exchange reserve position of the country. 

b)  Justification for the action 

Given  the  lack  of  agreement  between  the  Commission  and  the  Slovak 
authorities on the economic policy conditions to be attached  to  the loan  and in 
view  of  the  improvement  in  the  country's  balance  of  payments  and  reserve 
position, the loan facility is to be cancelled. 

5.  Nature of the expenditure and method of calculation 

a)  Nature of the expenditure 

Guarantee for the Community loan to the Slovak Republic. 

b) Method of calculation 

Given  that  the  amount  and  timing  of  any  call  on  this  budget  line  cannot  be 
calculated  in  advance  and  because  it  was  expected  that  this  budget  guarantee 
would  not be called,  a token  entry had been used.  This token  entry is now to  be 
repealed. 

6.  Effect  of the action on intervention credits 

The potential risks borne by the Budget are reduced accordingly. 

£ 

ISSN 0254-1475 

COM(96) 9 final 

DOCUMENTS 

EN 

11 

Catalogue number  : CB-CO-96-013-EN-C 

ISBN 92-77-99569-6 

Office for Official Publications of the European Cammunities 

L-2985 Luxembourg 

>