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Import surcharge narrows trade gap

Slovakia's partial recovery from its 1996 trade balance shortfall of 70.26 billion Sk ($2 billion, or 12.1 percent of GDP) has never set more than one hand clapping - that of the Ministry of Economy (MH). And now that the results for January 1998 have been digested by analysts, critics are even more inclined to boo the MH than to praise it.
The problem is that the MH and its detractors can't agree on whether the foreign trade cup is half full or half empty. Although in 1997 the trade balance deficit was cut to 49.5 billion Sk ($1.41 billion, or 7.7 percent of GDP), January 1998 figures show exports down 14.3 percent compared to January 1997, fuelling claims that the trade balance was improved artificially through the reintroduction of a 7 percent surcharge on July 21, 1997. Analysts said that the duty, in choking off imports, had also left exporters gasping for air.

Slovakia's partial recovery from its 1996 trade balance shortfall of 70.26 billion Sk ($2 billion, or 12.1 percent of GDP) has never set more than one hand clapping - that of the Ministry of Economy (MH). And now that the results for January 1998 have been digested by analysts, critics are even more inclined to boo the MH than to praise it.

The problem is that the MH and its detractors can't agree on whether the foreign trade cup is half full or half empty. Although in 1997 the trade balance deficit was cut to 49.5 billion Sk ($1.41 billion, or 7.7 percent of GDP), January 1998 figures show exports down 14.3 percent compared to January 1997, fuelling claims that the trade balance was improved artificially through the reintroduction of a 7 percent surcharge on July 21, 1997. Analysts said that the duty, in choking off imports, had also left exporters gasping for air.

The MH maintains that it has pro-export policies in place, and that it is doing everything possible to foster small and medium businesses in building an increasingly diversified export sector. Numerous 1998 trade missions to western European countries and active participation in international trade organizations, MH officials say, will lay the foundations for a trade balance recovery over the next few years.

The trade balance issue divides economists, making cautious optimists of some and hearty pessimists of others. Juraj Renčko, an economic strategy adviser for United Consultants, said that the January figures need not mean the sky was falling. "Slovakia's economy is small enough for its monthly results to be affected by even one-time business transactions," he said. "The [January] developments seem to be in line with last year, and we expect the 1998 trade balance to be even a little bit better than last year's."

But Martin Barto, an analyst with ING Barings, said that "the new figures are not very good, especially because of the decline in exports," and added that January's results were more than a freak occurence. "We saw this trend back in December," he said.

Small sacrifices, big goals

Anna Joštiaková, Director of the MH's Trade Policy Section, said she was not worried by the latest figures. Exports increased by 9.2 percent in 1997, she said, and the ministry was expecting "10 to 12 percent growth in 1998." Any periodic falls in an otherwise upward trend, such as January's atypical results, represented small sacrifices that the Ministry had to accept in the ongoing fight to reconcile "[domestic] industrial politics...with direct foreign investment income."

One of the most pressing difficulties in 1998, Joštiaková explained, had been Slovakia's devastating current account deficit. "The import surcharge was not implemented to create obstacles for imports, but...to increase our [hard] currency reserves," she said. "In practical terms, the measure has impact on almost 75 percent of both imports and exports, but over the period 1997-1998 it will positively affect the current account balance."

Renčko agreed that the surcharge had been a necessity. "When you have a current account imbalance of around 11 percent of GDP, you have to act," he said, "even if it means taking radical action like administrative measures."

Killing the patient

But Renčko stressed that if applied for too long, these measures can kill rather than cure the patient. "Each of these measures distorts the market and is not sustainable in the long run," he said. The real solution to the trade deficit was to increase exports, "but that will only happen if the export sector is widened, and if problems are solved with financial flows and in the microeconomic sphere."

Joštiaková agreed that smaller exporters would play a vital role in the return to a healthy trade balance. "I don't think it would be good to have 20 large exporters, and then if one loses its export position, it greatly influences the trade balance," she said. "Our intention is to create a network of exporters that includes small and medium enterprises."

Will it work?

Joštiaková cited two organizations, created in 1997, as pivotal to the diversification of the export sector. The Fund for the Development of Foreign Trade (FPZO), she said, required exporters to donate 0.1 percent of the value of their exports to its coffers, to which the government added "an equivalent sum". The FPZO budget, 590 million Sk ($16.86 million) in 1997 and a forecast 790 million ($22.57 million) in 1998, was to be distributed among business applicants to fund marketing studies, training courses and "anything connected with trade," Joštiaková said.

The other 1997 fillip to exporters was Exim Bank, an institution designed to finance mid- and long-term export and import loans. "It was meant to insure the export risks [stemming] from commercial and political problems in foreign countries," Joštiaková said.

But not everyone has been impressed with the work of these two institutions. Peter Staněk, State Secretary of the Finance Ministry, complained to The Slovak Spectator last October that "there has been a lot of talk about cooperation with Exim Bank, but it has only been talk. Nobody has the political will to do anything about it."

And at a March 19 press conference, FPZO Chairman Slavomír Hatina revealed that only 38.8 percent of the 1997 FPZO budget had actually been spent on business support projects "because of applicants' delays in filing documentation."

Renčko agreed that "until now, [Exim Bank and FPZO] have not had any significant impact, and very serious questions should be asked of the government as to why these bodies were established at all."

Explaining January's figures

So what is behind January's sickly results? Barto blamed decreases in the prices of key Slovak exports like pulp and paper, oil and machinery products, and said increasing competition from eastern European and Asian producers was squeezing Slovakia's share of foreign markets.

Renčko drew a similar picture. "Our main problem is that our exports are dependent on a narrow core of industries, and are oriented towards competetive foreign markets with low dynamics," he said. "We have to struggle just to maintain our position, [let alone] greatly increase our exports."

In accordance with the World Trade Organization (WTO) demands, the import surcharge is to be abolished on October 1, 1998. But analysts said they were not worried that imports would soar when the duty is phased out.

"The reduction of the surcharge will not cause a dramatic change in imports, because these are influenced more by the relative difficulties that companies experience in getting loans," Barto said. Renčko agreed, adding "I don't expect to see the 1996 situation again, because the economy, expectations and the environment have all changed."

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