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Slovakia: Dismal Economic Prospects Compound Political Failures

By Michael Wyzan

Prague, 4 November 1997 (RFE/RL) -- According to the Western view, Slovakia's economy is a solid performer and only political factors have kept the country out of European institutions and NATO. The European Commission said as much when it justified its decision in mid-July not to recommend Slovakia among the five post-communist countries to be invited to accession negotiations.

But this year, there have been indications of looming economic problems, especially growing foreign sector imbalances. Until now, however, fiscal--and especially monetary--policy has been run competently, resulting in low inflation and rapid economic growth.

Some indicators suggest 1997 is shaping up to be another satisfactory year for the Slovak economy. Consumer prices rose by about six percent in the year ending in July, a much better result than in neighboring countries. Gross domestic product (GDP) grew by more than six percent in the first half of the current year, while industrial output was also up. Among transition economies, only Estonia and Poland are growing more rapidly.

On a less positive note, the unemployment rate remained high at 12.8 percent in July, almost the same as a year earlier. Slovakia also has a large and growing budget deficit, predicted to reach about five percent of GDP this year. That figure is much higher than in Poland or the Czech Republic and is similar to Hungary's.

But the main cause for concern is the foreign sector. The first seven months of the year revealed a current account imbalance (more than $1 billion) and considerable trade deficit ($986 million). And the current account is likely to decline further this year. There is also little prospect for foreign investment.

To reduce the budget deficit, Bratislava has raised value-added tax, slapped a seven percent surcharge on most imports, and is discussing levying a tax on portfolio investment. But the leadership remains opposed to devaluing the crown, which is defended with high interest rates and tight money.

Pulling in the opposite direction from the fiscal standpoint, recent "economic revitalization" measures allow firms in high-unemployment areas to apply for debt forgiveness from the state and to defer tax, excise duty, and social security payments. Another source of budget revenue loss are the tax holidays for foreign investors who meet certain conditions.