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Cabinet backs away from big energy hikes

At the last minute, the Slovak cabinet decided to soften a package of economic restrictions and price hikes designed to heal the country's fiscal and current account deficits. Analysts said that cabinet would regret its loss of heart, as the gentler package would simply prolong the time needed for economic recovery.
The cabinet of Premier Mikuláš Dzurinda on December 16 voted down a 84-100% increase in electricity prices that had been proposed by Economy Minister Ľudovít Černák. "The government agreed that energy and water prices will go up as of January 1," said Ivan Mikloš, Deputy Premier for Economy. Mikloš said that the average increase in monthly costs for households would not exceed 110-130 Sk ($3-3.50).

At the last minute, the Slovak cabinet decided to soften a package of economic restrictions and price hikes designed to heal the country's fiscal and current account deficits. Analysts said that cabinet would regret its loss of heart, as the gentler package would simply prolong the time needed for economic recovery.

The cabinet of Premier Mikuláš Dzurinda on December 16 voted down a 84-100% increase in electricity prices that had been proposed by Economy Minister Ľudovít Černák. "The government agreed that energy and water prices will go up as of January 1," said Ivan Mikloš, Deputy Premier for Economy. Mikloš said that the average increase in monthly costs for households would not exceed 110-130 Sk ($3-3.50).

Analysts confessed to disappointment with the new package. "It's a very slow start given the current [economic] situation," said Martin Barto, an analyst with the Dutch investment bank ING Barings. "The cabinet should have gone much further with the restrictions, because as time passes, there will be less and less political will to do anything."

Slovenské Elektrárne (SE), the country's monopoly energy provider, also said that the cabinet's abandonment of the 100% energy hike had been too soft on people, and explained that it might have a negative effect on SE's operations.

"This increase certainly won't cover our expenses for energy production," said Ján Dohňanský, director of the Energy Supervision Office at SE. Dohňanský explained that the SE had proposed to the Finance Ministry that prices be hiked by 84-100% for households and 34% for the corporate sector. "We also agreed that tariffs for the economically weakest groups would not change at all," he added.

"SE managers are obviously trying to make money for their company, but the government has to be considerate of the citizens," Barto said, adding that tougher hikes would have boosted the cabinet's credibility abroad. "The measures agreed to so far are not as positive as foreign observers had expected," Barto said.

In a November 23 report by the International Monetary Fund (IMF), assessing the fund's November visit to Slovakia, the IMF advised that the cabinet apply deep cuts in state administration, slash wages and reduce family allowances, which, the IMF said, were "not given [to people on the basis of need] and are too generous."

Further price-hikes in 2Q99

The energy price hikes were part of an overall economic package that includes increases in the prices of gas, heating, housing and transport fares. "These prices will be modified within the first half of the year 1999," Mikloš said.

However, the determination of the cabinet to plunge ahead with radical reform has been slowed by its concern for the social impact of the increases.

Mikloš said that concrete figures on all price hikes would have to be negotiated at a tripartite meeting with the Trade Unions Confederation (KOZ) and the Council of Economic and Social Agreement (RHSD). Discussions would take place, he said, prior to a December 23 cabinet session where the package should finally be approved.

The KOZ trade union, for its part, has criticised the cabinet package for not having a precise time schedule or an analysis of the effects it will have both on the economy and on the population. Although the union said it considered the measures necessary, it demanded prior consultation with the cabinet's economic braintrust.

Mikloš also announced that the cabinet is preparing compensation measures for the increases, such as a revision to the law on income tax that would increase the nontaxable base for low-income groups.

"These soft measures will help the cabinet maintain social peace, but at what cost?" asked Barto, adding that the measures will soon have to be stiffened. "Then the government will have to apply another package, but conditions will be much more difficult," he said.

The cabinet also abandoned plans to introduce an import surcharge on December 11. The surcharge had been considered as a tool to correct the country's current account balance, which will be over 10% of GDP for the third year in a row.

What remains of the tattered economic package, in addition to the softened increases, are steps to increase budget revenues and squeeze budget expenditures. The cabinet intends to amend several tax laws, including setting a ceiling on non-taxable company expenses.

The government will also start legal proceedings against those Slovak corporations involved in tunnelling.

According to Mikloš, cabinet plans through its package to lower the state budget deficit to 12-15 billion Sk ($333-417 million), which would be approximately 2% of the 1999 GDP. The cabinet's goal is also to reduce the current account deficit to 5% of GDP in 1999.

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