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Budget 2000 debate monitored by banks

Finance Minister Brigita Schmögnerová vowed last week that the state budget for the year 2000 would be approved by the government by the beginning of November. Economic professionals say she has a tough job on her hands, caught between international pressure to cut the fiscal deficit and demands from her cabinet colleagues to increase spending on cash-strapped ministries.
According to the budget draft presented to the cabinet by Schmögnerová on October 13, next year's budget deficit should be 18 billion Slovak crowns ($450 million), less than 2% of forecast GDP. The deficit in public finances, meanwhile, should come in at 3.7% of GDP. The Finance Ministry also expects inflation to be reined in to 10%, while unemployment is set between 16 and 17%.

Finance Minister Brigita Schmögnerová vowed last week that the state budget for the year 2000 would be approved by the government by the beginning of November. Economic professionals say she has a tough job on her hands, caught between international pressure to cut the fiscal deficit and demands from her cabinet colleagues to increase spending on cash-strapped ministries.

According to the budget draft presented to the cabinet by Schmögnerová on October 13, next year's budget deficit should be 18 billion Slovak crowns ($450 million), less than 2% of forecast GDP. The deficit in public finances, meanwhile, should come in at 3.7% of GDP. The Finance Ministry also expects inflation to be reined in to 10%, while unemployment is set between 16 and 17%.

Early signs have already appeared that these targets, particularly the budget deficit, may be hard to meet. Defence Minister Pavol Kanis stormed out of the October 13 cabinet sitting, arguing that projected cuts to his department "mean the virtual destruction of the army." Kanis, who is trying to ready the Slovak army for NATO entry, said that the government plans to spend only 1.37% of GDP on the military next year, far below the 2% that NATO demands.

Other ministers, particularly Health Minister Tibot Šagát and Education Minister Milan Ftačník, have presented similar demands that their planned budgets be increased to allow for a much-needed overhaul of the Slovak health and educational systems.

How firmly the Finance Ministry puts down these cabinet rebels is of no small importance to Slovakia's reputation on world financial markets. The budget dispute is being closely watched by the World Bank and the IMF, both of which have already sent missions to Slovakia.

The IMF is focused on the government's fiscal policy for next year, and has already stressed in a report issued in July the importance of cutting government spending and easing the tax burden relative to GDP.

Currently on a two-week mission to Slovakia, the IMF has also encouraged the government to tighten its control over the state funds which lie beyond the sphere of the state budget, such as the Road Fund, the Labour Office and the FNM privatisation agency.

Much depends on whether the IMF likes what it sees in the 2000 state budget. Domestic and foreign economists warn that if the IMF report on the Slovak budget, expected next month, is negative, it could result in higher interest rates on future government debt.

With the government expecting a World Bank loan to cover a significant part of the 90 billion crown ($2.25 billion) cost of bank restructuring in Slovakia, small differences in perception of Slovakia's fiscal policy can translate into costly increases in loan financing costs.

Roger Grawe, the World Bank's Director for Central Europe, confirmed that the bank relied on IMF advice in making decisions on loans. "If we decide to provide the Slovak government with a loan to restructure banks that are scheduled to be privatised, we will definitely consider the IMF final report as the basis for our decision," Grawe said in an interview with The Slovak Spectator on October 20.

According to Grawe, the World Bank is mainly involved in the financial, enterprise and social benefits sectors, where it advises the government on various reforms. "If our co-operation with the government ends successfully, the [bank restructuring] loan will be the first loan that the World Bank has extended to Slovakia," Grawe said.

Matthew Vogel, a senior economist with investment bank Merrill Lynch, said he expected the IMF's final report to be positive, although he said the IMF would be critical of the government's inability to reign in its fiscal deficit in 1999.

The government forecast a full-year budget deficit of 15 billion crowns in 1999, but Deputy Finance Minister Viliam Vaškovič said on October 20 that the budget deficit had already exceeded this figure. He described the situation as "dramatic."

Vogel said he expected the government would be more aggressive in meeting its fiscal targets for 2000. "I expect a fairly tight budget on the state budget side," he said, adding that he was concerned by political pressure to increase expenditures through some of the country's extra budgetary funds.

Ján Tóth, a senior analyst with ING Barings in Bratislava, said that the real fiscal deficit for next year would be far higher than the 18 billion crowns forecast, but added that the Finance Ministry was planning to avail itself of some 10 billion crowns of extra-budgetary income from the privatisation of state-owned companies in order to artificially lower the deficit. "If that money wasn't there, the budget deficit wouldn't be 18 but 28 billion crowns," Tóth said.

Schmognerova has said that the money will be divided among government ministries, but Tóth argued that the 10 billion was one-time income that should be used to pay off some of the state's debts. "Once you give this money to the ministries, it's gone," Tóth said.

For Vogel, however, it was not surprising that the government was seeking all means possible to satisfy IMF demands for fiscal austerity, as well as cabinet demands for sufficient funding. "With unemployment rising and the country going through an austerity programme, and just about to go through what we feel will be a painful process of industrial restructuring, it's quite understandable that they [ministers] are asking for more money," Vogel said.

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