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GOVERNMENT MOVES TO MEET CONCERNS IN IMF REPORT ON ECONOMY

Crisis? What crisis?

AN INTERNATIONAL Monetary Fund (IMF) mission has warned the government to cut planned spending this year to prevent a dangerously high fiscal deficit.
The IMF said on March 13 that "Slovakia is facing a challenging situation". Weak demand on its export markets combined with strong domestic demand created an "unsustainable" current account deficit of over 9 per cent of GDP in 2001, while "the 2002 fiscal deficit is projected to exceed significantly the target agreed".

AN INTERNATIONAL Monetary Fund (IMF) mission has warned the government to cut planned spending this year to prevent a dangerously high fiscal deficit.

The IMF said on March 13 that "Slovakia is facing a challenging situation". Weak demand on its export markets combined with strong domestic demand created an "unsustainable" current account deficit of over 9 per cent of GDP in 2001, while "the 2002 fiscal deficit is projected to exceed significantly the target agreed".

The Fund, which said the fiscal deficit could reach 5 per cent of GDP this year instead of the government's 3.5 per cent target, recommended that the cabinet revise a planned 15 per cent rise in civil service wages down to 9 per cent, and slash Sk2 billion from spending on highway construction, which the government had increased by 40 per cent over 2001.

Overall, the IMF suggested the government had to cut spending by about Sk15 billion to reach its deficit goal.

"Slovak representatives agree that the situation is such as we have described. We're just reminding them of the promises which they committed to," said IMF mission leader Juan Jose Fernandez-Ansola.

Acknowledging that in an election year the Slovak government faced unusual pressures to spend, Fernandez-Ansola said the IMF was not proposing politically unacceptable budget cuts. "The steps we have suggested are realistic and represent more limits on growth in spending than actual cuts."

The IMF warnings came against a background of generally good economic news for Slovakia last week. Preliminary data from the Statistical Office showed 3.3 per cent growth in GDP last year against market expectations of 3.1 per cent, and real wages rising by 0.8 per cent after falling for two years in a row. The office predicted 3.9 per cent GDP growth for the first half of 2002.

Inflation, which was projected at 6.7 per cent in the state budget, is now forecast at between 4 and 4.5 per cent for 2002 by the National Bank of Slovakia (NBS), which should underpin strong growth in real wages.

Deputy Prime Minister for Economy Ivan Mikloš explained that last year's trade deficit had been influenced by 'one-off' factors such as redemption of privatisation bonds, production slowdowns at major exporters such as VW Bratislava and US Steel Košice, and major technology imports by new investors.

But he said he had already asked cabinet ministers to examine income and expenditure figures and suggest ways to eliminate risks their targets would not be met. Mikloš said he and Finance Minister František Hajnovič would "very likely" suggest cutting the 15 per cent state sector wage rise to 12-13 per cent, reducing state investments and going back to quarterly spending caps.

Mikloš also attacked what he called "either deliberately misleading or incompetent" warnings from domestic economic analysts of an impending currency crisis in Slovakia. The analysts, from the Mesa 10 think tank that Mikloš himself founded, had based their claims on a European Commission report they said criticised Slovakia's record trade deficit and unemployment rate in 2001.

The EU executive Commission's report, released on March 12 ahead of the bloc's economic summit in Barcelona, actually said there were no major threats to the financial stability of EU entry candidates, 10 of which hope to join the Union in 2004. But the EC said their current account deficits should be kept under strict control, especially in countries where the privatisation of state assets was expected to dry up as the source of financing the shortfall.

Peter Ševčovic, head of the NBS monetary division, said Slovakia was not in danger: "Symptoms of a currency crisis would only appear if the inflow of direct foreign investments declined, which we don't expect to happen, or if we had a long-term bad situation with foreign trade, which we also don't forecast."

"With the SPP deal signed on March 18, external vulnerability has decreased significantly," agreed Ján Tóth, chief economist at ING bank in Bratislava. "The proceeds increase reserves by 60 per cent, and will pay down some domestic and foreign debt. It means a vast improvement in macro-economic indicators.

"Even though it's a one-off deal, it buys us some time. The probability of a currency crisis is very low, although should the country not join the EU or Nato, meaning we wouldn't see an expected investment inflow, it is conceivable Slovakia would have a problem in the medium term."

Mikloš ascribed the currency crisis reports among other things to a general mood of pessimism gripping the country despite relatively healthy economic figures.

Respondents in a recent survey by the Ineko economic think tank estimated, on average, that inflation in Slovakia last year had been 17.6 per cent when it was actually 6.4 per cent. They also guessed that real wages had fallen 8.4 per cent even though they in fact rose.

"I don't want to hide the problems Slovakia has and will have, but reality is simply far better than citizens believe," Mikloš said.

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