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PREDICTIONS FOR 2007 PESSIMISTIC

Business environment worsening

THE BUSINESS Alliance of Slovakia (PAS) has said that since the Fico government took power last year, doing business in the Slovak Republic has been becoming more and more difficult.

THE BUSINESS Alliance of Slovakia (PAS) has said that since the Fico government took power last year, doing business in the Slovak Republic has been becoming more and more difficult.

The PAS has been compiling regular business environment index reports for Slovakia since 2001. In the third quarter of 2006, when the new cabinet took power, the index fell for the first time ever and continued a downward trend in the fourth quarter.

According to the PAS, Slovakia's business environment is not mature enough to be able to afford to backslide.

"Studies done by the World Bank and the World Economic Forum show that there are 35 other countries in which it's easier to do business than in Slovakia," said PAS director Martin Krekáč.

Krekáč called on the government to improve the business environment by removing barriers to doing business.

The Economy Ministry claims it is aware of the problems that businesses face, and promises to cut red tape.

"In terms of improving the business environment, last year the Slovak cabinet approved a draft concept for establishing a network of unified contact points in Slovakia", Andrej Šulka, the Economy Ministry's spokesman told The Slovak Spectator.

"These unified contact points will be hubs where administrative and management procedures for various business activities will be concentrated, along with consultation and information services."

However, it is not red tape that has left entrepreneurs frustrated, but rather the changes to the tax code and other legislation that has been introduced by the Fico government.

"Slovak businessmen said their biggest disappointment was the changes to the tax system," said PAS director Robert Kičina, referring to a reduction last year of VAT on drugs from 19 to 10 percent, and a slight increase in taxes for people who earn over about Sk50,000 a month.

Even though these changes were not as substantial as the social-democrat Smer party had promised before the June 2006 elections, Slovak businessmen still reacted to them very sensitively, said Kičina.

According to Ján Marušinec, an economic analyst with the MESA 10 economic think-tank, the government is only paying lip-service to the business community.

"The improvement of the business environment is not a priority for the new government," he said. "The way that they evade topics that the business community considers to be crucial proves this. The business community's drop in trust also reflected their assessment of the new government's moves in the business sector."

Marušinec continued, "The government still devotes only a minimal amount of attention to reducing business tax burdens, especially payroll taxes, and these are still significant barriers blocking the development of businesses in Slovakia."

A PAS survey of 10,000 business managers worldwide ranked the Slovak tax system as the ninth most competitive in the world after the tax reforms carried out by the previous Dzurinda government.

New legislation this year, including a proposed revision of the Labour Code, is expected to result in further deterioration of the business environment. According to Krekáč, in its current form, the proposed amendme nt would return Slovak labour legislation to the early 1990s, and would be significantly inferior to the landmark 2003 amendment to the Code that brought unemployment down to historic lows of under 10 percent late last year.

"These are not paths that Slovakia should go down. These are paths that have been criticized by the European Commission, which has warned that this kind of thinking has to be changed if the European Union is to move forward," said Krekáč.

Marušinec agreed: "The proposed changes to the Labour code will damage the flexibility of the labour market and will threaten further employment growth," he said. "They will have an impact above all on small and medium sized companies, which have significant influence on the employment level."

Chronic problems in the Slovak business environment remain the enforceability of the law, high payroll taxes, an ineffective social system, widespread corruption, complicated bureaucracy, and the lack of educational reform.

The Economy Ministry plans to quantify the administrative burden of doing business in Slovakia by the end of 2008, and to reduce that burden by 25 percent by the end of 2012.

Meanwhile, Jana Murínová, spokeswoman for the Slovak Investment and Trade Development Agency (SARIO), told The Slovak Spectator that it was too soon to judge whether the worsening business environment was having an impact on potential investors.

"The development mentioned by the PAS has not been reflected in an exodus from Slovakia yet," she said. "We will not be able to assess it until the end of this year."

According to SARIO, established investors, especially in western Slovakia, are increasingly complaining about the lack of qualified workers, especially in electrical engineering and other technical sectors.

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