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World Bank loan leaves reform questions

As the state was given the final seal of approval on a 200 million euro loan from the World Bank August 7, the institution's central European head, Roger Grawe, called recent Slovak economic changes "some of the strongest reforms in the region". Grawe added the extension of the loan would bring more much-needed investment to the country.
The EFSAL (Enterprise and Financial Sector Assistance Loan) credit, which had first been discussed two years ago, is seen as one of the key agreements between Slovakia and the World Bank. The government says it is a way of ensuring important economic reforms are kept on track.
Coupled with an IMF mission report released only a week earlier that gave a similar appraisal, the loan agreement has given the government's reforms the backing to date of two of the most important financial institutions in the world.

As the state was given the final seal of approval on a 200 million euro loan from the World Bank August 7, the institution's central European head, Roger Grawe, called recent Slovak economic changes "some of the strongest reforms in the region". Grawe added the extension of the loan would bring more much-needed investment to the country.

The EFSAL (Enterprise and Financial Sector Assistance Loan) credit, which had first been discussed two years ago, is seen as one of the key agreements between Slovakia and the World Bank. The government says it is a way of ensuring important economic reforms are kept on track.

Coupled with an IMF mission report released only a week earlier that gave a similar appraisal, the loan agreement has given the government's reforms the backing to date of two of the most important financial institutions in the world.

Key Slovak reforms include a series of austerity measures aimed at bringing macroeconomic balance, last year's launch of banking sector privatisation, and an amendment to the Commercial Code and Bankruptcy Law. The measures have been praised by the IMF and World Bank, as well as by the EU, which Slovakia hopes to join in 2004.

But while the government has been keen to point out its success in securing the EFSAL loan, and to secure recognition of its hard work in following an unpopular reform programme, some analysts questioned the Dzurinda coalition's ability to build on what they said were impressive reforms so far.

With 13 months until the next elections, the future of the ruling coalition looks unclear after a formal recommendation by the leadership of the Hungarian Coalition Party (SMK) August 10 that members approve its pull-out of the government. In the atmosphere of political instability, analysts said that despite what has been achieved since the last elections in 1998, key financial reforms such as that of the pension system seem doomed to fall short of implementation.

"I would not question the IMF's view that there has been tremendous change, but that is not to say that all of the reforms have been carried out optimally," said Ján Toth, chief economist at ING Bank.

"Reform is likely to slow down as we come into the year before elections, public administration reform is more or less failing, and there has been a lack of pension reform. In terms of implementing reforms in the period coming up to the election, the Slovak political reality is such that all reforms which are not forced through by external pressures, such as EFSAL or the European Union, won't be implemented," he added.

Government confidence

The key to the EFSAL loan, the government and analysts agree, is not the sum of money involved, but the conditions it places and the reforms it implies. To be delivered in three different tranches of 60 million euros, then 70 and 70 million, with a 14 year repayment period, the loan has been conditioned on a number of reforms being carried out.

Many of these have already been implemented, such as privatising the banking sector and amending the Bankruptcy Law, while others are expected to be approved in parliament in the next few months, such as amending the Bank Act, Commercial Code and the Securities Act.

All of the reforms will help strengthen the economic and business climate in the country, says the government. Banking sector supervision will be made more effective, while some firms are expected to be able to obtain money more easily as a result of the Commercial Code amendment, and the sale of state banks. Changes to the Bankruptcy Law should see less companies crashing and more receiving better loans from finance houses.

But the loan conditions also require the acceptance of an IMF Staff-Monitoring Programme, which will oversee the implementation of further reforms, such as that of the pension system (which the IMF has reminded Slovakia is one of a number of crucial structural reforms which must be launched) and the maintenance of macroeconomic stability.

Before the signing of the EFSAL deal, Grawe played down any possible threats to Slovak reforms from political instability and said that "the majority of the most painful reforms have already been realised".

However, a figure close to the government team which worked on securing the loan was reluctant to give assurances that politics would not hamper further steps to implement structural economic change.

"Of course political situations or tensions will be a problem, certainly for [reforms related to the] Staff Monitoring Programme. The reforms covered under that programme are politically much more sensitive than those under EFSAL," said Vladimír Tvaroška, advisor to Deputy Prime Minister for the Economy Ivan Mikloš.

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