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Slovakia: Delayed Reforms A Setback For Economy

Prague, 26 February 1999 (RFE/RL) -- The Organization for Economic Cooperation and Development (OECD) says Slovakia's economy is becoming increasingly vulnerable to reform delays.

In a study released today, the Paris-based OECD says Slovakia is not on the verge of a crisis. But it says that the country's six percent GDP growth in recent years should not be confused as a sign of economic recovery.

The 145-page report says large budget and current account deficits make it impossible for Slovakia to sustain its previous growth rate without bank and enterprise restructuring. Better co-ordination between the monetary policies of the central bank and the fiscal policies of the government also are seen as a key to stability.

The director of the OECD's Slovak desk, Joaquim Oliveira Martins, told RFE/RL that years of delayed reforms have made the state sector a burden on the economy. Depreciation of the Slovak crown also could cause difficulties for banks, enterprises and the public sector because of their exposure to foreign currency debts. Martins says, "The government has to make progress in some areas of structural reforms --like bank and enterprise restructuring-- because if not enough progress is achieved in these areas, macroeconomic stability will never be sustainable."

Martins said reforms announced in December by Prime Minister Mikulas Dzurinda's government could allow a return to sustainable growth. Key aspects of that program are faster restructuring of state firms and banks, as well as a reduction of the budget deficit and an increase in regulated prices for commodities like energy.

Bringing prices for heat and electricity to international levels is seen as critical to a functional market economy. Institutions like the World Bank and the International Monetary Fund say public utilities can n-o-t be operated on the basis of social concerns in a market economy. They must either become profitable or eventually go bankrupt so that they don't burden the state budget. The World Bank says social programs are the proper realms for addressing social concerns like the inability of some residents to pay heating bills.

Martins said the apparent reform commitments of the new Slovak government, elected last September, have increased the confidence of potential foreign investors in the country despite the fallout to the investment climate from financial crises in Russia and Brazil. But he warns that an economic slowdown in the short term is an unavoidable and necessary adjustment.

"One must acknowledge that the new Slovak government has a very difficult task because there were delays and time lost in the previous years in terms of structural reforms, as well as this problem with sustainability through macroeconomic policies."

A large part of OECD report focuses on risks to Slovakia from problems within the banking sector. Martins says Slovaks merely have to look at the recent collapse of banks in Russia and Bulgaria to see the ramifications of delayed bank reforms. The OECD notes that Slovakia's two largest state-controlled banks, which hold about 40 percent of total banking assets, have lent substantial amounts of money that is unlikely to be repaid. These so-called "bad debts" accounted for 22 percent of total bank assets last September. After taking into account guarantees, loan collateral and reserves, the uncovered exposure of Slovak banks is about three percent of total assets. All of that exposure is concentrated in state-controlled banks.

Martins says the data suggest Slovakia has, to some extent, contained the problem of non-performing loans, mainly by committing profits to building up provisions and reserves, and through state support. But the OECD is questioning the quality of collateral listed by Slovak banks -- especially if those assets need to be liquidated quickly at a time when confidence and market demand may be weak.

A Slovak central bank audit of the Investment and Development Bank (IRB), which collapsed at the end of 1997, revealed a greater amount of bad loans than had been declared. That audit also raised doubts about the value of collateral on IRB's books.

The OECD report says the high level of government-guaranteed bank loans has simply transferred Slovakia's bad debt problem from ailing state banks to other parts of the public sector.

Meanwhile, the growing market share of privately owned banks is seen as a positive development. The report says the government should progressively remove "explicit and implicit" state support that tends to protect the position of state banks at the expense of private banks.

The OECD concludes, "speed is vital" in privatizing state banks because creating a reliable banking sector is "essential for the overall health of the economy." The organization says Slovaks will find it difficult to minimize financial sector problems as long as banks remain under state control. But transparent reforms, together with balanced fiscal and monetary policies, will help Slovakia successfully integrate with established market economies.

Martins says foreign investors, so far, are confident that Dzurinda's government will carry out its reform pledges:

"There is good talk of credibility given to the new Slovak government in terms of implementation [of its reform program]. For the moment we have to wait for the follow up to this [reform] program. But up to now there is no reason to doubt the political commitment of this government to implement the program in a very effective way."