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TIGHTER FISCAL CONTROL IS NEEDED TO TACKLE THE GROWING TRADE IMBALANCE, SAY FINANCIAL ADVISORS

IMF repeats deficit warnings

The International Monetary Fund (IMF) has issued a stern warning that the Slovak government needs to tighten its fiscal belt to avoid currency pressures and interest rate rises, as well as damage to its ambition to join the European Union.
The mission released preliminary findings on May 22 from its regular mission to Slovakia that predict growth in gross domestic product (GDP) of four per cent this year, up from 3.3 per cent in 2001, but also urge key fiscal reforms, without which the county's current account deficit could reach $2 billion, or nine per cent of GDP in 2002.
"There is a risk that the deficit will remain at an unsustainable level, or may even increase, because of excessive domestic demand pressures, which reflect too expansive a fiscal policy.


SLOVAKIA remains too hungry for imports, say IMF officials.
photo: TASR

The International Monetary Fund (IMF) has issued a stern warning that the Slovak government needs to tighten its fiscal belt to avoid currency pressures and interest rate rises, as well as damage to its ambition to join the European Union.

The mission released preliminary findings on May 22 from its regular mission to Slovakia that predict growth in gross domestic product (GDP) of four per cent this year, up from 3.3 per cent in 2001, but also urge key fiscal reforms, without which the county's current account deficit could reach $2 billion, or nine per cent of GDP in 2002.

"There is a risk that the deficit will remain at an unsustainable level, or may even increase, because of excessive domestic demand pressures, which reflect too expansive a fiscal policy.

"Were a strong program of adjustment not to be implemented, the economic costs would include a depreciated currency and higher inflation, higher interest rates, lower investor confidence, and a potential setback in Slovakia's ambitions for EU accession," reads the report.

Slovakia aims to join the European Union in 2004, but remains far from meeting an EU rule that member countries keep fiscal deficits within three per cent of GDP.

A key part of the IMF's findings is that in spite of reduced external demand for Slovak products, strong growth in fixed investment, restructuring in enterprises, rising wages and increased employment, together with an expansionary fiscal policy, have led to increased private consumption and improvement in the overall economy.

However, due to supply side weaknesses on the Slovak market, the fund sees most additional demand being covered by imports, widening further what was last year a record Sk103.2 billion trade deficit.

"The inflexibility of enterprises to respond to changing demand conditions may have contributed to the recurring external current account deficits. For instance, many large enterprises have difficulties finding reliable good quality domestic suppliers and need to rely primarily on imported intermediate goods," the report read.

While growing domestic demand is part of the economy's improvement, the fund argues that demand pressures must be contained to address the trade imbalance, and that tightened fiscal policy is the best way to maintain growth while avoiding harmful interest rate and currency pressures.

The report points to a Sk4 billion increase in social security payments and a Sk13 billion shortfall in budgetary revenues as contributing to a fiscal deficit which could reach Sk55.5 billion this year, 5.3 per cent of GDP, widely missing the 3.5 per cent of GDP target agreed for 2002 by the state and the IMF.

Deputy PM for the Economy Ivan Mikloš has explained that the increased deficit is due to a methodological error when the budget was compiled, and that the latest deficit target was 4.5 per cent of GDP.

"The public finances deficit should not overstep the ceiling of 4.5 percent of GDP. This is a level that would not endanger general economic stability and would not create pressure on interest rates or the Slovak crown exchange rate," said Mikloš.

However, the IMF report joins warnings this year by the EU, the Organisation for Economic Cooperation and Development, Nato and western diplomats that much remains to be done to clear the way for Slovakia's 2004 EU ambitions, and that the coming parliamentary elections will strongly influence how soon, or if, Slovakia gets in.

In its findings, the IMF warns: "The government and parliament that emerge from September's elections will need to move promptly and decisively to continue with the extensive reform agenda.

The authorities should recognize that delays, especially in those areas where there has been limited progress over the last few years, would be harmful for Slovakia's ambitions for early EU accession and adoption of the euro."

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