Macro-economy 1999

The macro-economic situation in 1999 benefited from a tremendous change in government policy that focused on reining in the fiscal and current account balance deficits, restructuring state companies, liberalizing regulated prices, and making preparations for the privatisation of state banks, the telecom monopoly and other formerly 'off limits' state firms. Two austerity packages were passed to meet these aims, but the belt tightening caused unemployment to rise to 17.73% by November and GDP growth for the first three quarters of 1999 to slow to 1.8%.

The macro-economic situation in 1999 benefited from a tremendous change in government policy that focused on reining in the fiscal and current account balance deficits, restructuring state companies, liberalizing regulated prices, and making preparations for the privatisation of state banks, the telecom monopoly and other formerly 'off limits' state firms. Two austerity packages were passed to meet these aims, but the belt tightening caused unemployment to rise to 17.73% by November and GDP growth for the first three quarters of 1999 to slow to 1.8%.

The government also sought to make financial transactions and privatisation deals more transparent than ever before, as the result of which two cabinet ministers and the top management of the National Property Fund (FNM) lost their jobs.

The Slovak cabinet finally approved a draft proposal to heal the nation's macro-economic imbalance on January 7. Analysts were quick to criticise this first 'austerity package' for being short on specifics, saying that the government didn't grasp the enormity of the problems they were facing. The package included 75 measures designed to restore fiscal discipline, reduce budgetary expenditures and increase revenues. The other main target of the package was corporate, bank and economic restructuring, including price hikes in transportation, gas for households and electricity for corporations that took effect April 1.

After months of deliberation in which the wide coalition cabinet hesitated on how far to push economic restrictions, an impending currency crisis and a negative balance of payments forced the government on May 31 to announce a second austerity package. Faced with low revenues for the state budget, the revival programme raised the value added tax (VAT) from 6% to 10% as of July 1, imposed a 7% import surcharge which took effect June 1, and deregulated prices which raised household electricity prices by 35%, natural gas by 50% and housing rents by 70%.

Just before the announcement of the second austerity package, the government declared on May 19 that troubled state banks were to be sold off. By raising the banks' basic capital with foreign investor participation and transferring bad loans to the state-owned Konsolidačná Banka, the government hoped to complete privatisation of the four banks, starting with Investičná a Rozvojová Banka (IRB), followed by Slovenská Sporiteľňa (SLSP), Všeobecná Úverová Banka (VÚB) and Banka Slovakia by the end of 2000. Financing for the entire process was to be secured by a World Bank adjustment loan of up to $400 million. The final blueprint to revive the state's troubled banks was put into effect during the second week of December.

To pave the road to privatisation, the Law on Strategic Companies was amended on September 16 allowing the sale of controlling stakes in state monopolies like Slovak Telecom, energy company Slovenské Elektrárne, insurer Slovenské Poisťovňa and banks like Slovenská Sporiteľňa.

The impact of the austerity packages slowed GDP growth from 2.9% in the second quarter of 1999 to 0.6% in the third quarter. Total real GDP growth in 1999 was expected to be about 2.5%, slightly under the government GDP target of 3.0% growth for 1999.

Unemployment settled to about 17.7% at the end of November after peaking above 19% in August. Since last year, unemployment has risen almost four percentage points. The state budget for 1999 promised to keep unemployment below 15%.

Transparency International Slovakia (TIS), the Slovak daughter of a German non-profit corruption watchdog, was asked to oversee the sale of a stake in the telecom giant Slovenské Telekomunikácie and energy utility Slovenské Elektrárne.

A new Law On Corporate Tax was passed on November 24, cutting the corporate tax rate to 29% from 40%. The decrease is expected to reduce budget revenues in 2000 by about 600 million crowns ($14.3 million). Parliament also approved the establishment of an optional separate income tax for small and medium-sized businessmen.

Bowing to public pressure, two ministers of the Dzurinda government resigned after a series of economic scandals that had sullied their reputations. The first to go was Telecom Minister Gabriel Palacka, who resigned in August 1999 after several botched tenders. He was followed by Economy Minister Ľudovít Černák in mid-October, who was forced out after being accused of shady dealings with the state-owned gas storage company Nafta Gbely, Slovak Telecom and Slovenské Elektrárne. Soon after his resignation, the president of the National Property Fund Ľudovít Kaník and his vice-president Ladislav Sklenár were recalled in a secret ballot by parliament for acting improperlyin the disposition of Nafta Gbely.

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