Despite the IMF's generally positive assessment, the fund warned that sector reforms, such as in banking, must be pushed forward.photo: Vladimír Hák
Government officials were last week patting themselves on the back after receiving their strongest praise yet from the International Monetary Fund (IMF) for their commitment to economic reforms and measures taken to stabilise the macroeconomic situation in the country.
Ministers were keen to stress the IMF's support for their economic management and the macroeconomic improvements that the IMF said were sure to boost investment levels.
However, the international organisation was quick to warn that the government must tighten the reins on public finances, push forward with banking sector reform, address the state welfare system to close down a burgeoning grey economy and crack down on lax corporate tax discipline which the IMF believes is costing Slovakia dearly.
"The IMF gave us a positive assessment. They said we've done a good piece of work and the report is generally very positive, especially in the sense of recognising the work done on public sector reform," said Katarína Mathernová, economic advisor to Deputy Premier for the Economy Ivan Mikloš.
She added that while the IMF's assessment that "impressive gains have been made" with the economy had been tempered with an identification of areas where some work was needed, the organisation had given an endorsement of the government's own figures for the macroeconomy.
"The report confirmed the government's calculations," the advisor said.
Robert Feldman, head of the IMF mission to Slovakia, said that the organisation agreed with the government's predictions of 2.5% GDP growth in 2000 as realistic.
He added that recent statistical data had been 'encouraging', singling out in particular significant growth in exports and industrial production in the first quarter of 2000 and a deep fall in the trade balance deficit. The mission head said that while the deficit of the general government without proceeds from privatisation was marginally higher than planned at 3.6% of GDP in 1999, it had fallen from 5% in 1998 and together with a significant drop in unsustainably high investments, brought about a lowering of the deficit of the balance of payments of the current account to roughly 5.5% of GDP in 1999 from over 10% in the preceding three years.
However, the mission pointed out that the government's current fiscal policy had inherent risks, and warned that unless moves were taken to cut expenditures, pressure would be put on the state budget.
The government last year froze public sector wages in an attempt to keep a lid on expenditures - a move that was cited by analysts as a short-term solution to a long-term problem.
The report also pinpointed what it said were important government measures which directly led "to a rise of foreign exchange reserves of the central bank to a more than acceptable level."
Feldman added that the government "has built foundations for a realistic and long-term improvement of the economic situation in Slovakia."
Mind the gap
Despite the praise, the government has been urged not to rest on its laurels but to continue with sector reforms and properly channel money from privatisation.
"There is a general concern with the banking sector and having that move forward, and there is also specific concern with the financing of government development projects," said Ján Tóth of ING Barings, who met with the mission in Slovakia.
"The IMF wants to see privatisation funds used not for new expenditures, but in clearing old debt - most of which is in foreign money," he added.
Slovakia's gross foreign debt at the end of 1999 was $10.5 billion, 56.5% of GDP, a fall of 1% from the year before. The foreign debt grew 26% in 1998.
The IMF report also drew attention to the high level of state benefits in Slovakia. A growing grey economy has been fed, both analysts and the IMF have said, by welfare payments that encourage people to claim benefits illegally while continuing to work, lowering government tax revenues and putting pressure on the state deficit.
It also issued an ominous warning that more work needs to be done to get people back into employment.
"Without measures boosting motivation to employment and the creation of jobs, unemployment can become a permanent phenomenon for many," said the report.
Government officials have already admitted concern over budget revenues, and last week decided not to offer investment incentives in the form of tax breaks to domestic companies amid concerns over the amount of corporate income tax they would lose from such a move.
The IMF report underlined that "the deteriorating tax discipline of companies has evoked serious concern," and urged the government to overhaul its tax administration.
Loan fate still under wraps
Conspicuously absent from the discussion agenda during the IMF's meetings with the government was the thorny question of a $400 million World Bank loan for corporate and banking sector restructuring.
The government has repeatedly stepped back from committing to taking the credit line following differing demands from the IMF and the World Bank on conditions for the loan. The level of IMF involvement in the loan, which originally included monitoring of Slovakia's economy, has proved the sticking point for the government, and recent talks in Washington failed to reach any agreement despite the World Bank's offering alternative conditions for accepting the loan.
Mathernová, herself a former World Bank employee, said that despite the current impasse, the government was still committed to taking the loan.
"We're still negotiating on this. The IMF and World Bank are sending conflicting signals and we've asked the two organisations to get back to us," she said.
"The government does want the loan and we are appreciative of the help that both of them are giving us and we want that to continue. But it is just a case of how much the loan will be conditioned by assistance from the IMF.
"We can't move forward until the World Bank and the IMF tell us where they stand."
