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Macro figures belie economic criticisms

Figures released last week confirming a continuing improvement of the country's macroeconomic situation stood in stark contrast to the recent barrage of criticism directed at cabinet for its laggardly performance on sector reforms, and led government officials to flourish the data as reassurance that their economic policy is still on track.
The Slovak central bank announced on May 19 that foreign debt had dropped per capita to $1,900 and in total to $10 billion - an annual fall of 1% and an about-face from previous years where it had risen by as much as 30%. April also saw Slovakia's first positive trade balance for four and half years, the bank said. But despite the good news, the Organisation for Economic Co-operation and Development (OECD), the International Monetary Fund (IMF) and top-ranking US officials warned that sector privatisation is stalling dangerously.

Figures released last week confirming a continuing improvement of the country's macroeconomic situation stood in stark contrast to the recent barrage of criticism directed at cabinet for its laggardly performance on sector reforms, and led government officials to flourish the data as reassurance that their economic policy is still on track.

The Slovak central bank announced on May 19 that foreign debt had dropped per capita to $1,900 and in total to $10 billion - an annual fall of 1% and an about-face from previous years where it had risen by as much as 30%. April also saw Slovakia's first positive trade balance for four and half years, the bank said. But despite the good news, the Organisation for Economic Co-operation and Development (OECD), the International Monetary Fund (IMF) and top-ranking US officials warned that sector privatisation is stalling dangerously.

At stake is the country's economic image, which to a great extent will determine the speed at which Slovakia enters western structures. Differing international views on the depth and the effectiveness of the government's reforms have recently caused a rift between European countries, which favour early integration, and the United States, which is apparently pursuing a more cautious approach.

One hand clapping?

At a press conference May 19, Prime Minister Mikuláš Dzurinda chose to celebrate the macroeconomic figures released by the central bank rather than take issue with the OECD's criticisms. "There are signs that Slovakia has moved in the right direction," he said. "These signs include mainly the foreign trade balance, but also developments in the unemployment rate and some other indicators." The unemployment rate for April showed a slight dip to below 20%.

Vladimír Tvaroška, advisor to Deputy Prime Minister for the Economy Ivan Mikloš, pointed out that both export growth and an 8% growth in industrial production in each of the last two months were important indicators that the series of reforms introduced by the government over the last 18 months had begun to bear fruit.

But an OECD report, also released May 19, said that there was a need for extensive restructuring of large enterprises in the corporate sector, calling this the "Gordian knot" of the Slovak economy. The report said that unless this was dealt with there was a real danger that widespread financial fragility in both the enterprise and financial sectors could put pressure on the state budget.

And in what has become a bug-bear for many observers, the OECD pointed out that urgent work in the corporate sector was vital for the full benefit of banking sector reform to be felt.

"Problems in the banking sector are linked to those in the enterprise sector and the poor financial condition of many large Slovak enterprises. In the absence of enterprise reform, the benefits of bank restructuring will not fully materialise. Either banks will not lend to prevent a new accumulation of bad debts, thus reinforcing existing credit constraints, or, under pressure to resume the flow of lending to un-restructured enterprises, financial problems in the banking sector will re-emerge," the organisation said.

The OECD warnings topped off a turbulent two weeks for the government that saw first the IMF and then the US attack the government's performance on sector reform. An IMF mission to Slovakia only two weeks before had been fulsome in its praise of the government's performance in cutting a swathe through macroeconomic instability.

The fund said 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 the deep fall in the trade balance deficit. The mission also praised the 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, all this was tempered by progressively louder warnings on sector reform and was followed on the eve of the OECD report by media reports that the US was blocking Slovakia's OECD membership. US officials denied that there was any 'blocking' but confirmed that they had reservations over the timing of Slovakia's entry to the economic grouping, a move that chiefs at European investment groups and institutions have privately condemned as ridiculous.

Analysts have repeatedly voiced concern that banking sector reform must be carried through. However, many were surprised that the recent macroeconomic performance had not gone at least some way to counteract doubts over sector reforms.

"The US is possibly more sensitive to political information than some other countries [in the OECD] and doesn't follow macro development maybe quite as closely," said Miloš Božek of J & T Securities in Bratislava.

However, he added, the recent macro figures may weigh in Slovakia's favour in reversing the US stance. "The US may review economic developments, and with the hopefully successful acquisition of VSŽ [Vychodoslovenské železiarne steel producer] by US Steel, I believe that Slovakia can be accepted as an OECD member."

The importance of the government's macroeconomic success story was highlighted in a European Commission bi-annual report released one day after the OECD's assessment. The EC said that the macroeconomic reforms that had been carried out had "regained the interest of foreign investors in Slovakia."

The US back-track on its previous support for Slovakia's OECD bid prompted the formation of a special working team within the Foreign Ministry to co-ordinate diplomatic activities connected to admission. Both Prime Minister Dzurinda and Deputy PM Mikloš have said that the report and the US stance have not spelt an end to Slovak ambitions of joining the organisation this year.

The government had been hoping for an invitation to join the OECD to be extended in July, and despite the US disapproval, Tvaroška added that ministers were still "very hopeful" that Slovakia would be invited to join on schedule. "Everything is still open," he said.

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