The painful economic reforms launched by the government in 1999 brought a huge reward to Slovakia - an invitation to begin talks on entry to the European Union (EU). But as the champagne bubbles and euphoria dissipate, the Dzurinda government is now faced with the daunting task of meeting the detailed requirements for entry into the EU and the Organisation for Economic Cooperation and Development (OECD).
One of the most fundamental conditions for membership in the OECD and EU is that the government maintain its current pace of economic reform. To prove its resolve, the cabinet set itself some tough goals in the state budget for 2000, which was passed by parliament on December 16. These optimistic figures, including 2.5% GDP growth, unemployment between 16-17%, inflation of 10% and a budget deficit of 18 billion Slovak crowns ($439 million, or about 2% of GDP) are the most important indicators of the country's will to transform into an open market economy.
To accomplish this feat, the government has continued a series of price increases that began with two economic 'austerity' packages last year. As of January 1, the first of a new round of price hikes took effect, increasing housing and energy rates. Further measures that should be approved by the government this month will boost the prices of gas, travel, electricity and water (see box, Page 7). These should take effect in February.
The purpose of the increases is to bring prices, particularly for energy, closer to market level and to facilitate freer competition. However, the process is deeply unpopular with the public, which has already weathered two such 'packages' from the cabinet in 1999 (see The Last Word, Page 4). But the government and analysts alike believe that the importance of the signal sent to international organisations outweighs domestic concerns, which may be mollified when the economy improves.
"Had the Slovak government not approved these price hikes it would have negatively influenced the trust the country gained abroad last year," said Ján Tóth, a senior analyst with the Dutch investment bank ING Barings. According to Tóth, the current price deregulation measures were embedded in the second austerity package approved at the end of May last year.
"If the cabinet hadn't following the set schedule, which was agreed on with organisations like the International Monetary Fund (IMF), it would have caused problems, mainly in the area of loans which Slovakia is likely to get from international institutions, and which are so important for the restructuring of the banking sector this year," Tóth said.
Free to a point
According to Martin Barto, the head of strategy at the state-owned SLSP bank, 'austerity' measures led to liberalisation of the market and the creation of strong competition. In the long run, he said, deregulation caused prices to fall, but in the short term it opened the door to price-gouging. "There is no reason to avoid these measures, although many things remain to be done," said Barto. "The most important will definitely be the establishment of a regulatory body."
Barto explained that in a system of fixed prices, monopoly producers like the SE energy utility and the SPP gas utility were unable to cheat consumers because of the ceiling imposed on the prices they charged. As prices were increased and then liberalised, however, much room existed for monopolies to gouge the public - hence the need for a watchdog which would monitor the difference between producer costs and consumer prices.
"There will have to be a lot of measures passed dealing with price regulations and controls, which will check whether the expenditures of producers are real," said Barto.
He was supported by Finance Ministry spokesperson Peter Švec, who said that the creation of a regulatory body was on the agenda for the first half of this year.
Švec also explained that another reason to liberalise prices had come from creditors who had lent money to electricity or energy producers like the Gabčíkovo dam, and had demanded price increases in order to secure repayment of their loans. "These price hikes help producers improve their cash flow too," he said.
Not all are cheering the government's plans, however. The KOZ Trade Union Confederation has calculated that the 2000 price hikes will add 1,118 Slovak crowns per month to the expenses of every family. This, the KOZ said, would bring many Slovak families to their knees.
But government officials maintain that the increase in prices will be bearable for the majority of Slovak citizens. "The government put 6,000 to 8,000 Slovak crowns annually back in each family's pockets when it lowered income taxes at the end of the last year," said Katarína Mathernová, an advisor to the Deputy Prime Minister for Economy Ivan Mikloš. "This measure helps mostly those in the lower tax brackets, where the tax decrease is most visible."
Although the government has not calculated how much the price hikes will cost an average family, Mathernová predicted that it would certainly be lower than the savings the average family would enjoy on income taxes this year.
However, according to Ivan Chodák, an analyst with CA IB Securities, the income tax cut would not produce many real gains since real wages and the quality of government services were also in decline. "If tax cuts had coincided with a reform of the services which the government offers for taxes, like social benefits, health care and so on, it would be fine," he said. "But it's not so. The common person now pays lower income tax, but his real income is still going down."
Real industrial wages fell almost 2% in 1999, and look set to take a beating this year as well. Although Deputy PM Mikloš has said that the price deregulation measures being introduced in the first quarter of 2000 should represent the last wave of massive price hikes, analysts said that the trend would continue.
"These measures only partly cover the fiscal deficit, and I think that some time in June the Finance Ministry will come to the conclusion that its calculations somehow don't add up, and that the first half figures are not hitting the targets," Chodák said, adding that he expected the Ministry to propose further measures on the revenue side of the budget to make up the difference.
Price hikes planned in the year 2000
- for business purposes +5%
Gas - for people +30%
- for business purposes +11%
Railway travel fare +30%
Bus travel fare +20%
Post services +10%
Telecommunication services +5%
10. Jan 2000 at 0:00 | Peter Barecz