Economic Briefs

Finance Minister presents fiscal policy to EC
Slovakia's year- on-year March inflation at 16.6%
Debt refinancing to be replaced by FDI in 2004
Foreign financial institutions suggest tax reform

Finance Minister presents fiscal policy to EC

The main goal in preparing the 2001 state budget is to maintain the public finance deficit at the same level as 1999, said Finance Minister Brigita Schmögnerová on April 12 in talks with a European Commission (EC) delegation. According to Schmögnerová, maintaining an even fiscal deficit has become difficult because of the growing expenditures in finance reforms as well as shortfalls in budgetary revenues resulting in tax cuts.
Peter Švec, Finance Ministry spokesperson said that the head of the EC delegation, Alexandre Cas-Cranje, stressed a need for changes in the budget, necessitated by changes in the structure of expenditures, as well as a need to maintain the results achieved so far. Schmognerová agreed that privatisation revenues should not be used to settle current expenditures of the government.
Švec said the EC delegation positively evaluated the progress of implementing a project in the state treasury, which was partly financed through the European Union's aid agency PHARE. EC representatives indicated that this program was one of the most significant projects in Central Europe, co-financed by the European Union (EU). The EC proposed monitoring the project by high-ranking experts from one of the EU finance ministries. Schmögnerová welcomed the proposal and said that the Slovak side had had contact with experts from Ireland, Portugal who had also experienced the same finance project.

Slovakia's year- on-year March inflation at 16.6%

The monthly inflation rate in Slovakia measured by the consumer price index was 0.4% in March 2000 compared to 3.3% in February. Year-on-year inflation in March was 16.6%, up from 16.4% the preceding month. The growth was driven by price hikes in housing, water, electricity, gas and other fuels by 48% y/y, the Slovak Statistics Bureau reported on April 11.
The average inflation rate for the first three months of 2000 was 15.5%.
The Statistics Bureau predicted that the year-on-year inflation would be at 16.1% at the end of the first half of 2000 while the average inflation rate would be 15.9%. The Slovak Cabinet based the state budget at the average inflation rate of 10 percent. The National Bank of Slovakia (NBS) forecasted the year-on-year inflation at 10.4% at the end of the year and the average inflation rate at 14.1%.
The central bank started monitoring core inflation at the beginning of the year. In March it was 7%. The NBS estimated the core inflation to be between 4.5% - 5.8% for 2000. Core inflation determines the rate of consumer price growth without including the influence of regulated prices, changes in indirect taxes and subsidies. Compared with net inflation it also takes into consideration food prices.

Debt refinancing to be replaced by FDI in 2004

Slovakia's total foreign debt is predicted to deepen in the next few years reaching $13 billion in 2004, when debt growth is expected to stop. Refinancing debt should be replaced by financing the debt through foreign direct investments (FDI), National Bank of Slovakia (NBS) vice governor Elena Kohútiková told the Trend conference "Financial Management" April 11. In late 1999, Slovakia's gross foreign debt was $10.5 billion.
"If the deficit of the current account of the balance of payments is covered by 50% by FDI, danger is low," said Kohútiková. "But if it is funded by FDI at a mere 12%, as is the case today in Slovakia, danger to the economy is high and the economy will be transformed exclusively through debt."
She pointed out that the volume of FDI in 1999 made up only 62% of the level in 1998.
In Slovak crowns, exports grew 11.3% last year while imports grew 1.6%. If expressed in US dollars, exports dipped 5% and imports 13.5%. Kohútiková expected black figures in both currencies this year, pinpointing the change in the structure of foreign trade.
As positive proof, Kohútiková pointed to the stabilisation of interest rates and an expected lowering of the interest yield curve, which was first reflected in lower yields from government securities. She also praised the fact that the government succeeded in borrowing long-term sources.
According to Kohútiková, the NBS expected GDP to grow in 2001 and investment rate to reach 30% of GDP. She also predicted that inflation would remain a one-digit figure. Public administration reform, as well as business sector restructuring and bank privatisation, would contribute to a reduction of budget expenditures.

Foreign financial institutions suggest tax reform

According to a report prepared by the Consulting Service for Foreign Investments of the International Finance Corporation and the World Bank, the tax burden on companies operating in Slovakia remains high even though corporate income tax was lowered from 40% to 29%. The report was delivered to the Slovak government after a mission from these organisations examined the legal and regulatory environment for foreign investors in Slovakia over the past year. The Slovak government has not commented on the report.
According to the document, the tax burden was not just a result of high tax rates but also in the way the tax base and other conditions were calculated. Various amendments to the tax code introduced since 1993 have caused the whole tax system in Slovakia to be complicated and awkward.
To make the Slovak business environment more attractive for foreign investors, the mission proposed a radical reform of the tax code to be implemented in two stages. The first stage, to be competed at the end of 2001, should eliminate distortions such as the recognition of a tax expenditure only after it is paid. This should enable the dissolution of a tax loss during the appropriate period.
The mission proposed to reduce the corporate income tax rate to 15-20 percent. As far as personal income tax was concerned, the mission suggested leaving the rates higher, with a maximum rate at 30 percent, and reducing the number of tax brackets to three. The mission suggested eliminating the vague character of the tax on the transfer of real estate, which depended on the volume of the transferred property, and instead set a single rate of 4 percent.

Compiled by Daniel J. Stoll
from SITA

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