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Cabinet moots new import surcharge

Stung into action by the nation's plunging currency and macroeconomic imbalances, the Slovak government announced it was discussing a new package of economic measures on May 20 that, it claimed, would rein in both Slovakia's current account balance deficit and runaway public sector deficit.
The government is considering, among other things, reimposing an import surcharge that would stem the tide of imports into Slovakia as well as bolster the income side of the state budget. While state officials concede that the surcharge distorts trade and only postpones solution of the country's underlying industrial problems, they insist that the gravity of Slovakia's overall economic situation warrants such drastic steps.

Stung into action by the nation's plunging currency and macroeconomic imbalances, the Slovak government announced it was discussing a new package of economic measures on May 20 that, it claimed, would rein in both Slovakia's current account balance deficit and runaway public sector deficit.

The government is considering, among other things, reimposing an import surcharge that would stem the tide of imports into Slovakia as well as bolster the income side of the state budget. While state officials concede that the surcharge distorts trade and only postpones solution of the country's underlying industrial problems, they insist that the gravity of Slovakia's overall economic situation warrants such drastic steps.

"Every economist knows that imposing an import surcharge is not a very good step," said Vladimír Zlacký, an advisor to Deputy Prime Minister for Economy Ivan Mikloš. According to Zlacký, import surcharges are "not a good long-term solution," since they neither improve the competitiveness of Slovak exporters nor rein in domestic demand.

However, he said, a temporary import surcharge regime may stabilise the country's economy. Slovakia's current account balance deficit in 1998 came to over 11% of GDP, and although the government has set itself the goal of cutting the deficit to under 6% of GDP this year, international lending institutions and ratings agencies have recently questioned this target.

"This time, the import surcharge forms part of a comprehensive package of measures, so it is not a sin to use it," said Zlacký, adding that he saw the surcharge regime lasting from 12 to 18 months, depending on the results of consultations with international bodies like the World Trade Organisation (WTO).

Other measures to improve the income side of the budget proposed by the government on May 20 included raising the lower bracket of the Value Added Tax (VAT) and raising taxes on fuel, tobacco and motor vehicles. On the expenditure side of the state budget, the cabinet plans to slash welfare payments by 5-6 billion Slovak crowns in 1999 as well as to trim public payrolls. The government also said it planned to deregulate the prices of electricity, housing, travel and water.

The only fly in the ointment, of course, is when these measures will be applied. Prime Minister Mikuláš Dzurinda said at a press conference on May 24 that the government was united on the need for reforms, and that "whatever we are going to do, we would like to do it from June 1, and the remainder from July 1."

However, the very next day, Dzurinda's assurances were cast into doubt by Agriculture Minister Pavol Koncoš, who said that he for one did not support a VAT increase.

Pavol Hamžík, Deputy Prime Minister for European Integration, said on May 24 that the government hoped to achieve consensus on the measures by the following Monday. "There is political agreement that all measures will be discussed at the same time. The measures will be finalised on Monday [May 31]," he said.

With all the uncertainty surrounding the new economic package, few state officials were willing to hazard a guess as to when an income surcharge might take effect, what rate it might be set at or what products it would cover.

Anna Joštiaková, general director of the Economy Ministry's Trade Policy Section, told The Slovak Spectator simply that "the government will discuss the application of an import surcharge," and said the recent fall in the Slovak central bank's foreign exchange reserves to below the required minimum level (the amount of reserves needed to cover three months of imports) had made an import surcharge imperative.

Joštiaková also pointed to the high deficit in Slovakia's balance of payments as justifying administrative action to curb imports, adding that "I expect that the validity period of the import surcharge will be at most two years."

Juraj Renčko, a forecaster with the Slovak Academy of Sciences (SAV), said that the rate of the surcharge and the date of its application would depend on the level to which the government raised the VAT rate. A higher VAT rate, he said, would depress demand for imports and lessen the needs for the budgetary income generated by the surcharge.

The government's Hamžík said on May 24 that the VAT rate would be hiked from 6% to 12%.

"It's necessary to find a percentual balance between these two [VAT rate and import surcharge] quantities," Renčko said. "The VAT changes the financial flows in an economy, and these flows fall into the same category as the income surcharge."

Renčko also explained that according to WTO rules, the surcharge could not be applied on a product-by-product basis, but had to cover at least 80% of imports.

Analysts revolt

Despite the government's insistence that a surcharge is necessary, many analysts are against the measure on principle.

"In foreign trade, there is no place for restrictive steps like import surcharges," said Ján Tóth, a senior analyst with investment bank ING Barings. According to Tóth, such moves are 'non-standard' and carry more economic and social disadvantages than advantages.

"The import surcharge slows down economic development, deforms the domestic market and lowers domestic competition. It also promotes corruption in the state sector."

Tóth explained that administrative measures such as import surcharges allowed state officials to decide which foreign goods should be subject to restrictions, and thus made bureaucrats more susceptible to lobbying from domestic producers of the same goods.

While agreeing that an import surcharge might cure Slovakia's twin deficits, Tóth warned that the WTO, which protects the business interests of its member countries, was not likely to allow Slovakia to use the surcharge for a long time - maybe only 12 months. "If we establish the import surcharge, we restrict other countries, and they can do the same thing in turn to us. In that case there would be no winner, and as prices climbed higher, the consumer would be the loser."

But Renčko opined that the WTO would take note of the fact that "the level of imbalance in the Slovak economy is quite high, and that recovery will not be a quick process." The WTO, he said, would likely give Slovakia some rope, perhaps even until the year 2002, "depending on the progress of reforms."

Slovakia last used an import surcharge under the government of former Prime Minister Vladimír Mečiar. The tax was set at 7% in January 1997, but after consultations in the fall with the WTO, was lowered to 5% in October 1997, 3% in January 1998 and phased out completely in October 1998.

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