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Thorny way to prosperity

OVER the past several years Slovakia has undergone various strategic reforms in its economic and political life.
Even though the reforms have had a harsh impact on some aspects of people's lives in the form of price hikes and new expenses, their macroeconomic healing effects have begun to take hold.

OVER the past several years Slovakia has undergone various strategic reforms in its economic and political life.

Even though the reforms have had a harsh impact on some aspects of people's lives in the form of price hikes and new expenses, their macroeconomic healing effects have begun to take hold.

Slovakia is experiencing decent economic growth compared to other European Union countries, as well as a decreasing public finance deficit.

In a 2003 edition of Forbes magazine, founder and billionaire media magnate Steve Forbes called Slovakia a paradise for investors.

Thanks to an improving business environment, Slovakia has succeeded in attracting large companies such as PSA Citroen Peugeot and Hyundai/Kia. 2004 was a record year in the volume of foreign direct investment influx.

Whether the reforms were prepared well and realistically will be borne out in forthcoming years when they are no longer concepts but part of everyday life.

However, there are still some areas in dire need of change. Slovakia needs stronger anti-corruption measures and the Education Ministry is lagging behind in university and school reform, for example.


Tax reform


In 2003 the Slovak parliament adopted several tax laws with the aim of creating a transparent and simple tax system attractive to foreign investors and businesses in Slovakia.

At the centre of the tax reform was the implementation of a flat-rate income tax and the principle of the equal taxation of all incomes of individuals and corporations. Since January 2004 all individuals and corporations in Slovakia pay 19-percent income tax.

The new legislation eliminated the 21 different types of taxation of direct income, including five different personal income tax rates (10, 20, 28, 35 and 38 percent).

Effective January 1, 2004, corporate tax was reduced to 19 percent from the previous rate of 25 percent. At the same time, the new tax system follows the principle of taxing the investment and capital gains income only once as it is transferred from the corporate to the personal level. Thus, dividend taxation has been cancelled and investment income will be taxed only once, at the level of corporate profits.

The Income Tax Act also radically simplified the taxation of both individual and corporate income. The new tax law eliminated virtually all exceptions, exemptions and special regimes.

Prior to the reform, Slovakia had a standard value added tax (VAT) rate of 20 percent and a reduced rate of 14 percent. As part of the reform, the reduced VAT is being cancelled entirely and a unified 19-percent rate was introduced for all goods and services as of January 1, 2004. The tax reform also included increased excise duties on mineral oils, tobacco and tobacco products, and beer.

Real estate transfer tax, donation tax and inheritance tax were cancelled as a part of the tax reform.


Pension reform


The goal of the pension reform was to ensure the long-term sustainability of public finances, which is threatened by demographic developments (an ageing population).

To achieve this, a three-pillar pension system was introduced. The first pillar is the old, but reformed, pay-as-you-go system, the second (new) pillar is based on the principle of savings through newly established pension fund management companies. The third pillar consists of various forms of voluntary pension and life insurance schemes.

The second pillar came into force in January 2005. All citizens of a productive age will have to decide within one-and-a-half years (January 2005 to June 2006) whether to begin savings in their own pension accounts or to stay in the reformed pay-as-you-go pillar. Saving in the second pillar will be compulsory for newcomers on the labour market.

An important part of the reform was a rise in the statutory retirement age from 60 years for men and 53 to 57 for women (depending on the number of children), to 62 for both genders.


Social and labour market reform


Reform of the social system and labour market in Slovakia was introduced with the aim of cutting the overall tax and contribution burden on the labour force, supporting the economic and social activity of inhabitants and cutting down abuses of the social system.

The key changes within the Labour Code, which contributed to the creation of a more flexible labour market, were specifically in the number of working hours (an increase to 48 per week including overtime), in part time and fixed-term contracts and overtime. The reform also tried to make the system of benefits and contributions more transparent.


Healthcare reform


Approved in autumn 2004, a package of six health laws are expected to improve the quality and effectiveness of medical care in the country and eliminate corruption in the health sector.

The result of the healthcare reform should mean both hospitals and healthcare insurance firms operate on the principle of competitiveness to bring benefits to patients and insured clients.

The healthcare reform laws include two types of insurance - public, which is obligatory, and voluntary. The latter covers services that go beyond the scope of general insurance.

Transforming hospitals into joint stock companies, redefining ambulance services and introducing sanctions for the failure to deliver emergency assistance to patients are also part of the package of the reforming laws.


Banking


Banking reform was one of the first to be worked out. The history goes back to the late 1990s and very early 2000s.

Under the government of former Prime Minister Vladimír Mečiar from 1994 to 1998, some state banks provided loans to companies on the basis of what many industry insiders and independent analysts dubbed political motivation and/or personal friendships, rather than company viability.

Banks ended up with huge classified and non-performing loans.

From 1999 to 2000 the transformation process started. The broad restructuring basically pertained to three major Slovak banks: Slovenská sporiteľňa, Všeobecná úverová banka, and Investičná a rozvojová banka (today's OTP Bank).

The government's plan to clean up the banks culminated in transferring the bad credit to special financial bailout 'hospitals' Slovenská konsolidačná and Konsolidačná banka in 2000. Classified loans reached a value of more than Sk100 billion (€2.41 billion).

Between 1999 and 2003, almost all Slovak banks were privatized or sold to important European banking players.


Source: The Slovak Spectator, Foreign Affairs Ministry

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