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SLSP funds diverted from bond payout

Minister for Labour, Family and Social Affairs Peter Magvaši praised an April 11 cabinet decision to allot privatisation proceeds from the sale of a state bank to two struggling state companies. The FNM state privatisation agency immediately declared that the move put plans for repaying FNM bonds under threat.
Having originally said that money from the 18 billion crown sale of Slovenská sporiteľňa bank in December 2000 would be used to finance state debt, specifically the 26.3 billion crowns needed to repay FNM bonds issued in 1996, the government reallocated 2.1 billion crowns from the sale to social insurance company Sociálna poisťovná (SP) and rail firm ŽSR.
SP will receive 1.5 billion crowns in the next few weeks, while ŽSR will receive the remaining money. The rail company will use the funds to pay overdue social insurance premiums to SP.

Minister for Labour, Family and Social Affairs Peter Magvaši praised an April 11 cabinet decision to allot privatisation proceeds from the sale of a state bank to two struggling state companies. The FNM state privatisation agency immediately declared that the move put plans for repaying FNM bonds under threat.

Having originally said that money from the 18 billion crown sale of Slovenská sporiteľňa bank in December 2000 would be used to finance state debt, specifically the 26.3 billion crowns needed to repay FNM bonds issued in 1996, the government reallocated 2.1 billion crowns from the sale to social insurance company Sociálna poisťovná (SP) and rail firm ŽSR.

SP will receive 1.5 billion crowns in the next few weeks, while ŽSR will receive the remaining money. The rail company will use the funds to pay overdue social insurance premiums to SP.

Hailing the move as one which would "bring more balance to the solvency of Sociálna poisťovná", Magvaši insisted that the FNM had enough money to pay the bonds.

Having begun redeeming bonds April 18, the FNM had planned to use 4.18 billion crowns from SLSP sale funds to redeem state papers that matured at the start of this year. It had also counted on a further 4.24 billion from the same source for other debts. However, after the decision to move some proceeds to the firms, fund spokesperson Tatjana Lesajová said that there was now "real concern over the distribution of funds from privatisation [for the FNM's use]".

The FNM currently has 6 billion crowns for bond repayments, and plans to raise further funds from the sale of shares in its portfolio, in companies such as VÚB, Slovakia's second largest bank, crude oil refinery Slovnaft, and steelmaker VSŽ.

Just how the shortfall will be made up is unclear. Deputy Prime Minister for Economy Ivan Mikloš said "the redemption of the bonds can now go ahead, it's just that the volume of funds available to the FNM to do so has been reduced".

Political motivations?

The decision drew dismay from economists, who said pandering to voters had taken precedence over economic planning.

"This is a political affair. The government has to pay pensions [from SP's budget], and it's a purely political decision to use privatisation proceeds in this way. Economically it's not a good step," said Pavol Ondriska, analyst at Slávia Capital brokers in Bratislava.

Debt at SP, which is responsible for paying out pensions and other welfare benefits, has risen to almost five billion crowns, and the government has made it clear that it wants to bring the company closer to solvency.

A first quarter report by the firm released April 10 had warned that if it did not receive an injection of funds it could have problems making pension payments, which were increased by 10% last year.

However, analysts believe that the decision to use the privatisation funds, and not a more stable source of revenue, to plug the fiscal gap at the insurance firm, is a poor solution to a longer-term problem.

"This is definitely the wrong move economically, one which has come about because of the lack of reform [of the state welfare system]. Maybe there was no way out for the government, and it had to do this because it didn't want to stop paying pensions just one and a half years before a general election. But using one-off revenues for what is a constant pure expenditure budget item is not wise," said Ján Tóth, chief economist at ING Bank.

"The whole pension system creates a constant deficit, and will continue to do so," said Tóth.

However, other government economic officials denied there had been any political motivation behind the move.

"The money had already been approved to go to these institutions in the 2000 budget. It should have gone to them in November this year, but all the government has done is to bring this forward," said Vladimír Tvaroška, advisor to Deputy Prime Minister Mikloš.

Conceding that any decision to put money into the firms might be seen by some observers as economically unwise, he said: "We have made it quite clear that the state will not be putting any more money from privatisation into these firms."

Reform needed

Many domestic economists, as well as multilateral lending institutions such as the International Monetary Fund (IMF) and the World Bank (WB), have been critical of the slow pace of reform of the state welfare system.

Although the government has committed itself to seeing the reform through, along with other crucial overhauls of the health care sector and public administration, it has been criticised for not pushing hard enough to make sure they are carried out, or at least begun, before the next elections in September 2002.

"By using the revenues from the Slovenská sporiteľňa privatisation in this way, it lessens the pressure on the government to get pension reform going now," said Tóth.

But despite the criticism of the latest move, Tvaroška insisted that the government had already agreed to limit the use of monies from privatisation solely to "financing government debt and reform of the pension system".

The Slovak pension system is, under government plans, to be transformed from its current "pay-as-you-go" payment system (pensions funded from continuous compulsory contributions) to a "three-pillar" system, which would include voluntary contributions to personal pension funds.

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