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Cabinet outlines tough restrictions

An economic package presented to cabinet on December 2 proposes to increase prices for energy, heating, housing and transportation. Although the measures will prove deeply unpopular with Slovak citizens, state officials and independent analysts agree that they are inevitable given the parlous state of the economy.
"The current difficult economic situation cannot be resolved without a set of regulations geared towards macro-economic stabilization... that are unpopular from the political point of view," said Ivan Mikloš, vice-premier for economy, at a November 30 meeting of the Slovak Economic Forum, a Bratislava-based association of economists.


Preparing to do battle. Premier Mikuláš Dzurinda and vice premier for economy Ivan Mikloš discuss economic plans.
TASR

An economic package presented to cabinet on December 2 proposes to increase prices for energy, heating, housing and transportation. Although the measures will prove deeply unpopular with Slovak citizens, state officials and independent analysts agree that they are inevitable given the parlous state of the economy.

"The current difficult economic situation cannot be resolved without a set of regulations geared towards macro-economic stabilization... that are unpopular from the political point of view," said Ivan Mikloš, vice-premier for economy, at a November 30 meeting of the Slovak Economic Forum, a Bratislava-based association of economists.

Martin Barto, an analyst with the Dutch investment bank ING Barings, agreed that given the state of the economy, the government had no alternative but to launch immediate radical reforms. "Whatever they do," he said, "they should do it as soon as possible and they should go as far as the coalition agreement allows."

Besides the above-mentioned price hikes, the proposed package includes cuts to state expenditures and investments, improved tax collection and adjustments to tax brackets, wage regulation and an import surcharge.

Mikloš said that the earliest date the package could be approved by cabinet was December 16.

Specific measures

The principal goals of the economic package are to lower both the fiscal deficit and the current account deficit (see article, this page) as well as to attract foreign direct investment and improve the competetive ability of Slovak exporters.

The 1999 fiscal deficit, according to Mikloš, would be cut to under 50% of the 1998 deficit, which is estimated at 19.2 billion Sk ($548 million), or 5.5% of GDP. Other specific targets include lowering the current account deficit to 5% of GDP in 1999. At the same time, inflation is to be kept under 10% while GDP growth will slow from 6 to 3% per annum.

At a November 30 press conference, Finance Minister Brigita Schmögnerová said that the cabinet of former Premier Vladimír Mečiar had brought Slovakia to the brink of economic disaster, and that the new cabinet had had little alternative but to plunge in with radical reform.

"If the economic tendencies established by the former government had continued, it is clear that very serious and destructive economic deformations would have occured," Schmögnerová said, adding that the Slovak currency could have been hit with a 15-20% devaluation if her ministry had not taken action.

But Sergei Kozlík, a deputy for the opposition HZDS party and the former vice-premier for economy, said that the new cabinet was moving ahead too quickly with economic reform, and that some of its proposed measures would hurt rather than promote economic growth. "If [cabinet] had devoted more attention to concrete steps in economic policy instead of wasting energy on personnel changes, it would have made more progress in fulfilling its promises to citizens," Kozlík said.

Price-hikes

The first measures to come into effect as of January 1999 comprise partial deregulation of energy and heating prices. Housing, natural gas and transportation tariff increases should follow.

"The former government carried out its social policy at the cost of [below market value] energy prices, and such a situation is no longer bearable," said Economy Minister Ľudovít Černák. He predicted that energy prices would rise by 30% to 40% on average next year and would affect mainly households, adding approximately 200 Sk ($5.80) to the current average monthly bill.

Černák stressed that while in western countries tariffs for large consumers were commonly lower than those for smaller users, such as households and small business, the Mečiar government had kept household prices as low as possible and covered the losses from the payments of major consumers.

Due to this policy, he said, Slovenské Elektrárne, the country's monopoly electricity provider, faced a loss of 2 to 2.5 billion Sk by the end of the year. "[In Slovakia] households pay the lowest prices while big businesses pay the highest. We have to transform the [system of] tariffs into one similar to that used in the European Union," Černák said.

Barto explained that it was impossible to predict how high deregulated prices would eventually climb, because Slovakia's energy and transportation sectors were mostly in the hands of monopolies, which could not be relied on to set prices purely in accordance with market forces.

"If you have a monopoly supplier you have to watch all components of the price structure," he said, adding that monopolies might factor unjustified expenditures into the prices they charged consumers.

Soft landing

Conscious of the political and social consequences of the measures, the government has promised to cushion their effect on the poor. "We will adopt some compensations such as an amended income tax law, which would reduce the tax burden on the two lowest tax brackets," Schmögnerová said.

Peter Magvaši, Labour and Social Affairs Minister, said that people would have to learn to make do with less. "We have to achieve significant cutbacks in [public] consumption," he said, adding that the state could not afford to be generous at the moment.

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