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RESTRICTED
WORLD TRADE
WT/BOP/R/52
9 October 2000
ORGANIZATION
(00-4131)
Committee on Balance-of-Payments Restrictions
REPORT ON THE CONSULTATIONS WITH THE SLOVAK REPUBLIC
1.
The Committee met on 18 September 2000 to hold consultations with the Slovak Republic.
The Consultations were held under the Chairmanship of Mr. Milán Hovorka (Czech Republic) in
accordance with the Committee's terms of reference, pursuant to Article XII:4(b) and the
Understanding on the Balance-of-Payments Provisions of the GATT 1994. The International
Monetary Fund was invited to participate in accordance with Article XV:2 of GATT 1994.
2.
The Committee had before it the following document:1
WT/BOP/N/52
Notification from the Slovak Republic
A.
OPENING STATEMENT BY THE REPRESENTATIVE OF THE SLOVAK REPUBLIC
3.
The opening statement is attached as Annex 1.
B.
STATEMENT BY THE REPRESENTATIVE OF THE INTERNATIONAL MONETARY FUND
4.
The statement by the representative of the International Monetary Fund is attached as
Annex 2.
C.
CONCLUSIONS OF THE COMMITTEE
5.
The Committee welcomed the significant improvement in the external situation and
encouraged the continuation of the stabilization program. Members congratulated the Slovak Republic
on adhering to its phase out schedule and the elimination of its surcharge by the end of the year. The
Committee agreed that the Slovak Republic was in full conformity with its obligations under
Article XII of GATT 1994.
1
It had been agreed in May that the consultations would be held without producing the normal set of
documentation, but the Committee would rely on a background paper by the IMF, as well as the Fund statement.
(WT/BOP/R/49).
WT/BOP/R/52
Page 2
ANNEX I
Opening statement by the representative of the Slovak Republic
1.
First of all, on behalf of the delegation of the Slovak Republic, I would like to express our
appreciation for the pragmatic approach adopted by the Members of the Committee on Balance-ofPayments Restrictions with regard to the annual BOP consultations with the Slovak Republic, as
foreseen in Article XII:4(b) of GATT 1994.
2.
I would also like to thank the International Monetary Fund for preparation of very
comprehensive material on the recent economic development in the Slovak Republic.
3.
In accordance with the last decision of the BOP Committee, held on 5 May 2000, concerning
the notification of the Slovak Republic (WT/BOP/N/49), allow me to address the substance of today's
annual consultations. In this respect, I would like to draw your attention to the economic development
since the last consultations held with the Slovak Republic in the Committee on Balance-of-Payments
Restrictions in September 1999.
4.
It has been already presented in our previous documents and statements, that the Government
of the Slovak Republic introduced an import surcharge as a tool which is an integral part of the
May 1999 package (“Strategy for Accelerating Reforms – Program of Recovery”) to overturn
negative development and macroeconomic imbalance as well as to stabilize the economy and to
restart structural reforms. The package of measures introduced by the Slovak Government contained
measures with influence on various sectors of the Slovak economy. These measures has been aimed
on reduction of the deficit of general government, improvement of the structure of the Slovak
industry, promotion of inflow of the FDIs as well as on recovery of the banking sector. The primary
main focus of these measures has been to eliminate the balance-of-payments difficulties and to
improve the international reserves of National Bank of Slovakia.
5.
I would like to underline that the Government of Slovak Republic, while pursuing reform
strategy has devoted its efforts to stabilization of the overall Slovak economy during the period 19992000 and to creation of favorable conditions for the future sustainable growth in period of years 20012004.
6.
The recent economic performance has been also characterized by fiscal tightening in the
framework of the mentioned May 1999 package. The prudent fiscal policy has been pursued in order
to achieve consolidation of the deficit of general government mainly through the reduction of
expenditures on administration and social assistance programs and mobilization of revenues. To this
category belongs for example adjustment of excise and indirect taxes such as the property tax on
vehicles, the road tax and administration fees; further deregulation of administered prices in area of
electricity, natural gas, bus and railway charges, drinking water and post services. In addition, lower
level of the VAT rate has been increased from 6% to 10%.
7.
The important step towards the structural reform, in particular of state-owned banks and
enterprises has been done through the privatization and by strengthening of legal framework. Three
largest banks (General Credit Bank, Investment and Development Bank and partially Slovak Savings
Bank) and Slovak Telecommunications has been included in the process of privatization. In the legal
framework the Banking Act has been amended in order to strengthen the supervisory position of the
NBS. Furthermore amendments of the bankruptcy law has been approved.
8.
In order to improve competitiveness and to stimulate expansion of exports income tax has
been lowered.
WT/BOP/R/52
Page 3
9.
The document prepared by the International Monetary Fund reflects impact of all measures
on real economic and social development. This document contains tables with economic and fiscal
indications as well as review of balance-of-payments development during the period of 1995-2000. In
this context and in order to economize our time I would not repeat the figures in my statement, that
you have in front of you prepared by the IMF. I will limit myself only to brief remarks on some
features of the current economic development.
10.
After previous large macroeconomic imbalances the current Slovak economy shows the
progress in stabilizing the economy and accelerating the structural reform. In 1999, the external
current account has been narrowed, the general government deficit has been reduced, the trade deficit
has been lowered mainly due to the export increase, reflecting some improvement in industry, namely
in the area of competitiveness and productivity. At the same time import volume also sharply declined
as a result of significant decline of the domestic demand. The external position of the Slovak economy
has been strengthened and international reserves of National Bank of Slovakia improved.
11.
However, despite of this significant progress, there is still certain vulnerability of the Slovak
economy which we should not overlook. Taking into account of the goal of the further sustainable
economic development we shall not underestimate the impact of slowdown in real GDP and weak
domestic demand on the social balance and on employment, taking into account the high level of
openness of the Slovak economy. Therefore medium term and long term period measures has been
adopted in order to ensure economic and social balance.
12.
The import surcharge has been an important part of the May 1999 package and has
complemented and supported implementation of economic and fiscal measures. In accordance with
economic improvement and with commitment presented at the BOP Committee, the Government of
the Slovak Republic have adhered to the proposed timetable for elimination of the import surcharge.
The first reduction of the rate of import surcharge was carried out as from 1 January 2000 from 7% to
5% and than from 1 July 2000 from 5% to 3%. These reductions have been notified to the WTO and
circulated in documents WT/BOP/N/BOP/47 and 52.
13.
In conclusion, in light of the above mentioned recent positive economic development and also
taking into account expected continuation of influence of package of economic and fiscal measures,
on process of economic stabilization of the Slovak economy, I am authorized to confirm that the
Government of the Slovak Republic in accordance with its commitments will eliminate the import
surcharge by 31 December 2000.
WT/BOP/R/52
Page 4
ANNEX 2
Statement by the representative from the International Monetary Fund
1.
After having experienced previously large macroeconomic imbalances and strains in the
banking and enterprise sectors, the Slovak Republic has made significant progress in stabilizing the
economy and accelerating structural reform. The external current account deficit was 10 per cent of
GDP or more in each of the three years to 1998, while, during that period, the fiscal deficit increased
to as much as 5½ per cent of GDP. Determined fiscal tightening in 1999—reflecting the
implementation of the May 1999 package—was a key component in reducing macroeconomic
imbalances. The non-government sector also contributed to a sharp decline in domestic demand,
which, along with strong export performance, resulted in a considerable easing of balance of
payments difficulties. The external current account deficit was halved in 1999 and has narrowed
further in 2000, while the National Bank of Slovakia’s (NBS) international reserve position has
strengthened. On the structural front, though yet to be completed, important steps have been taken
toward restructuring and privatizing state-owned banks and enterprises, and advancing legal reforms.
Economic developments in 1999 and 2000
2.
The May 1999 package led to a reduction in the deficit of the general government to 3.6 per
cent of GDP in 1999. Though somewhat above the authorities’ target of 3 per cent of GDP, this
represented a contraction of 1½ percentage points of GDP from the previous year. Key elements of
the package included an increase in the lower VAT rate from 6 per cent to 10 per cent, higher excises,
an import surcharge, measures to rationalize social assistance programs, and significant increases in
important administered prices.
3.
Fiscal tightening and a decline in non-government investment led to a sharp fall in domestic
demand in 1999, but the slowdown in real GDP growth to 1.9 per cent was limited by a significant
increase in exports. In real terms, exports were 7 per cent higher in 1999 than in 1998, reflecting
strong productivity growth in exporting industries and the competitiveness gains associated with the
depreciation of the koruna in the first half of the year. At the same time, import volume fell by 2½ per
cent in the face of the sharp decline in domestic demand.
4.
With data for the first half of 2000 also indicating continued weak domestic demand
(particularly for consumption) and strong export growth, Slovakia’s external position has
strengthened significantly. On the heels of a sharp decline in the external current account deficit
in 1999, this deficit declined to US$111 million in the first five months of 2000 compared with
US$704 million in the same period of last year. Moreover, the trade deficit has also narrowed: in the
first seven months of 2000, it was US$255 million compared with US$703 million in the same period
of 1999. Official international reserves at end-August 2000 reached US$4.4 billion (equivalent to 3.6
months of imports of goods and non-factor services), also boosted by borrowing abroad by both the
public enterprises and the government, and the privatization of a Czechoslovak bank (CSOB) and the
telecom company. The latest data show that gross external indebtedness declined to the equivalent of
54.6 per cent of GDP at end-May 2000 from 58 per cent of GDP at end-1998; short-term external debt
was 37 per cent of total external debt at end-1999.
5.
The authorities have been gearing monetary policy toward meeting their inflation target. In
October 1998, the NBS floated the koruna and shifted its monetary policy toward inflation targeting.
The target for core inflation is 4.7 to 5.8 per cent on a year-on-year basis for end-2000. With wage
costs and underlying inflation seemingly at bay, and heartened by reductions in the fiscal and external
current account deficits, the NBS has allowed domestic interest rates to decline, in circumstances of
WT/BOP/R/52
Page 5
upward pressure on the koruna. The NBS initially welcomed the strengthening of the currency when it
began in mid-1999, but, concerns about losing external competitiveness eventually led the NBS to
resist further appreciation, first by sterilized intervention in early 2000 and then by moving short-term
interest rates lower.
6.
While increases in indirect taxes and administered prices pushed the year-on-year headline
rate of inflation to 15.4 per cent in June 2000, inflation more recently declined to 9.2 per cent in July
(as some one-off factors faded). Moreover, with the unemployment rate at a very high level, wage
pressures have been in check. Core inflation (which excludes the impact of changes in administered
prices and indirect taxes) has recently been on a declining trend, falling to 5.3 per cent in July 2000.
7.
Vulnerability, on balance, has lessened in 1999 and in the first half of 2000, and market
confidence in government policies has improved. Although Slovak debt is still rated at below
investment grade, external borrowing costs have declined and the completion of banking sector
reforms and other structural measures would reduce risks further. In March 2000, the government
issued a ten-year eurobond at 217 basis points over comparable German bunds in March 2000, and it
now trades at a spread of 205 basis points. This compares with a 420 basis point spread when a fiveyear bond was issued in June 1999; that bond now trades at a 180-190 basis point spread. Balance of
payments prospects for 2000 as a whole are for an external current account deficit below 5 per cent of
GDP, and an increase in the international reserves of the NBS to the equivalent of some 4 months of
imports.
The Exchange and Trade System
8.
The Slovak Republic accepted the obligations of Article VIII, Sections 2, 3 and 4 on
1 October 1995 and maintains an exchange system that is free of restrictions on the making of
payments and transfers for current international transactions. Slovak trade policies are characterized
by the virtual absence of nontariff barriers, low to moderate most favored nation tariffs, liberal export
policies, and extensive participation in regional trading arrangements. Overall, the trade regime is
relatively liberal, being classified as “2” on the Fund’s 1 to 10 point scale of trade restrictiveness. In
fact, the Slovak regime was classified as “1” on the index prior to the adoption of the surcharge on
1 June 1999.
9.
The authorities have adhered to their proposed timetable for the elimination of the import
surcharge, reducing it from 7 per cent to 5 per cent in January 2000 and to 3 per cent in July 2000.
Their intention is to eliminate the surcharge by 1 January 2001. The Fund had indicated its regret over
the imposition of the import surcharge—having preferred additional fiscal expenditure cuts instead—
and strongly supports its removal.
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