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Cabinet to squeeze current account deficit

Ivan Mikloš, Deputy Premier for Economy, said on November 26 he had devised a plan to stabilise the Slovak economy that includes a sizeable reduction of the current account deficit.
This objectives would be achieved, Mikloš said, by limiting budget expenditures and lowering domestic demand, bringing about an "inevitable" reduction in the current account deficit to between 4 and 5% of GDP in 1999.
But Martin Barto, an analyst with ING Barings bank, said correcting the current account deficit was a long-term project. "For this, we need an increase in exports," he said, "and a stable and persistent increase in exports will only happen when corporations begin to restructure, which in turn requires a functioning bankruptcy process."

Ivan Mikloš, Deputy Premier for Economy, said on November 26 he had devised a plan to stabilise the Slovak economy that includes a sizeable reduction of the current account deficit.

This objectives would be achieved, Mikloš said, by limiting budget expenditures and lowering domestic demand, bringing about an "inevitable" reduction in the current account deficit to between 4 and 5% of GDP in 1999.

But Martin Barto, an analyst with ING Barings bank, said correcting the current account deficit was a long-term project. "For this, we need an increase in exports," he said, "and a stable and persistent increase in exports will only happen when corporations begin to restructure, which in turn requires a functioning bankruptcy process."

Slovakia's current account and fiscal deficits have long worried international financial circles. A mission of the International Monetary Fund, which arrived in Bratislava on November 11, warned Premier Mikuláš Dzurinda specifically of the need to cut spending and bring the current account deficit down to around 5% of GDP from its current 11%.

Revised figures for 1997 show the current account deficit at 67.752 billion Sk ($1.9 billion), or 10.4% of GDP. The latest estimates for 1998 indicate that the trade balance deficit will hit 65 to 70 billion Sk again this year, according to Pavol Kárász, a senior economic analyst with the Slovak Academy of Sciences (SAV).

Barto, for his part, said that his office was forecasting about a 75 billion Sk trade deficit for 1998, equal to 10.4% of GDP. "This kind of deficit is not sustainable in the long term," he said.

Barto explained that the tools available to Mikloš in his efforts were principally those that restricted the amount of spending money in public circulation, such as reducing government investments and liberalising some prices. "I think a lot of people are living beyond their means, or at least beyond the value they add to the economy," he said.

"There will also be some pressure applied on corporates and institutions not to hike slaries too much, but its a slow process," Barto continued. "Somehow we have to end up with soft budgetary restraints - corporates which are already bankrupt or not producing anything have to be closed and have to stop paying their workers."

Mikloš said that although he did not support administrative interventions into the economy, he did not exclude such measures as a supplement to the overall economic package.

Slovakia phased out one such 'intervention', an import surcharge, on October 1, but Finance Minister Brigita Schmögnerová has since raised the possibility of re-imposing the surcharge.

"Such a measure would solve nothing," said Barto. "It would help cure the symptoms, but would not attack the cause of the problem."

But the cabinet may have little choice in the matter. The distrust of international financial institutions for emerging markets has made re-financing the current account deficit on foreign markets very expensive, while the government's attempts to reign in fiscal spending are being hampered by the need to refinance the current account deficit from domestic sources.

Fixing the current account deficit will prove politically as well as economically expensive. According to estimates of the National Bank of Slovakia (NBS), a drop in the current account deficit to 6% of GDP and a simultaneous reduction of the fiscal deficit to 2% of GDP would slow economic growth to 3%. "If the pace of reduction of both deficits was slower, economic growth would be at 4%, but would include a high risk of currency depreciation or a significant increase in interest rates, perhaps to 40 to 50%," said Miklos.

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