RESTRICTED
WORLD TRADE WT/BOP/S/5
18September 1997
ORGANIZATION(97-3731)
Committee onBalance-of-Payments Restrictions
1997 CONSULTATIONS WITH THE SLOVAK REPUBLIC
Background Paper bytheSecretariat
1. Thispaper hasbeenprepared inaccordance withparagraph 12oftheUnderstanding onthe
Balance-of-Payments Provisions oftheGeneral Agreement onTariffs andTrade 1994.
I. PREVIOUS CONSULTATIONS WITH THE SLOVAK REPUBLIC
2. On3March 1994, Slovakia introduced, forbalance-of-payments purposes, animport surcharge
of10percentapplicable toabroad range ofconsumer goods.1Consultations under Article XIIwere
heldinJuly1994, June1995 andJune1996.2Thesurcharge waslowered from 10to7.5percent
witheffect from 1July1996 andeliminated on1January 1997.3
II. TRADE AND EXCHANGE SYSTEM
3. Slovakia 'strade policies were comprehensively reviewed under theTrade Policy Review
Mechanism inDecember 1995.4Keyfeatures oftheSlovak republic 'strade regime include afully
bound tariff, aCustoms Union withtheCzech Republic inforce since January 1993 andaEurope
Agreement withtheEuropean Union inplace since February 1995. Notsurprisingly, exports toand
imports frompreferential partners account for80and70percent,respectively, ofSlovakia 'sexternal
trade.
4. Since theendoftheUruguay Round, theSlovak Republic has,interalia,drafted traderemedy
legislation; theanti-dumping lawwasapproved byParliament inFebruary 1997. InSeptember 1995,
import duties (19percentmfn) onsmall carswere removed temporarily andreimposed on
1January 1997. From 1July1997, certain export promotion measures wereintroduced tohelpsmall
andmedium-sized companies inparticular, andtheForeign Trade Promotion Fund wasestablished.
TheLawofForeign Economic Relations isunder revision.
5. On1May1997, theSlovak Republic introduced animport deposit scheme, asix-month non
interest-bearing deposit equivalent to20percentoftheinvoiced price oftheimported product.5
1GATT, L/7428, 22March 1994.
2WT/BOP/R/15, 7July1996.
3WT/BOP/N/15, 24January 1997.
4World Trade Organization, Trade Policy Review: Slovak Republic, 1996. (seealsoWT/BOP/W/12).
5WT/BOP/N/21; Corr.1 andCorr.2.WT/BOP/S/5
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Subsequently, Slovakia replaced thedeposit scheme byanimport surcharge on21July1997. The
surcharge, setat7percent,applies tothevastmajority ofproducts, excluding somebasicrawmaterials,
inputs andagricultural items.6
Exchange regulations
6. TheSlovak crown ispegged toabasket oftwocurrencies, thedollar andthemark which make
up40and60percentofthebasket respectively. Inthecourse of1996, theNational Bank ofSlovakia
progressively widened thefluctuation bandaround theparity from1.5percentto7percent,inorder
todiscourage speculative capital inflows. TheNational Bank intends tomaintain thepresent exchange
rateregime.
7. On1December 1996, capital account transactions werefurther liberalized, authorizing outward
direct investment andacquisition ofrealestate byresidents inOECD Member states; financial credits
from Slovak residents toOECD residents withmaturities offiveormore years; credits received by
Slovak residents fromabroad withmaturities ofthreeormore years; international credits withrespect
toOECD members, provided thatthecreditor isathirdparty between customer andsupplier.
III. MACROECONOMIC DEVELOPMENTS
8. TheSlovak Republic 'sprogress intransition toamarket economy hasresulted instrong growth
anddeclining inflation inrecent years. However, thecurrent account weakened considerably in1996,
asloose monetary policies andarelaxation ofthefiscal stance boosted aggregate demand. Supply
constraints emerged, notleastasaresult ofonlygradual progress withenterprise restructuring.
Consequently, import demand andthedomestic absorption ofexportables increased. Declining
competitiveness andunfavourable terms oftradeputfurther pressure ontheSlovak Republic 'sexternal
position.
(1) Output andPrices
9. Outputgrowthedgedupslightlyto6.9percent,despiteaslowdowninthemanufacturingsector,
where growth decreased from almost 10percentin1995 to2.5percentin1996. Onthedemand
side,bothdomestic investment andconsumption increased significantly in1995and1996, prompting
signs ofoverheating. Investment growth followed tosome extent fromemerging supply constraints.
Incontrast, consumption wasstimulated bystrong increases inrealwages andatemporary reduction
inimport duties onsmall passenger cars(Chart 2).
10. Inflation hasbeendeclining steadily since 1993; Slovakia 'sinflation rateisoneofthelowest
amongst transition economies. Theincrease inconsumer prices fellbelow double digits in1995 and
eventually tobelow 6percentin1996(Chart 3).Areduction intheVAT rateonanumber ofproducts
andservices, andthetemporary reduction inimport duties noted above supported thistrend in1996.
Thedownward trend inconsumer prices isgenerally parallelled byadecline inproducer prices despite
wage increases andbuoyant demand which stimulated strong priceincreases intheconstruction sector.
Thefixedexchange rateregime alsocontributed tocontaining inflationary pressures. However, strong
wage growth inexcess ofinflation andproductivity gains produced anappreciation oftherealeffective
exchange rateonaunitlabour costs basis byover13percentin1995 and1996 (Chart 2).
6WT/BOP/N/28, 30July1997.WT/BOP/S/5
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(2) External Sector Developments
11. Thecurrent account position weakened dramatically in1996. After asurplus ofalmost 5per
centin1994 and2.2percentin1995, thecurrent account deteriorated by13percentofGDP toa
deficit ofabout 11percentofGDP (Chart 4).Adeficit ofthismagnitude wasalsorecorded inearly
1997. Strong demand forimported consumer andinvestment goods andthedomestic absorption of
exportables resulted inasizeable increase inthetrade deficit (Table 1).Thesignificant surplus of
theservices balance in1995 declined aswellandturned intoasmall deficit in1996 andearly 1997.
12. Thecapital account surplus increased slightly in1996, ascompared to1995. Adecline inforeign
direct investment andsome short-term capital outflows weremore thancompensated forbyanincrease
inlending abroad. However, theincrease inthecurrent account deficit byfaroutweighed thegrowth
inthecapital account surplus. Theoverall balance, therefore, changed fromasizable surplus in1995
toasmall deficit in1996. Thelatter wasfinanced largely through asubstantial increase inshort-term
liabilities ofthebanking sector. Reserves declined from 4.3months ofimports attheendof1995
to3.4months attheendof1996 (Chart 5).Awidening oftheSlovak koruna 'sexchange rateband
to5percentinJuly1996 andto7percentinJanuary 1997 intandem withrelatively tightcontrols
onthefinancial sector, however, helped toreduce pressure ontheexchange rateandreserves inthe
Slovak Republic. Thelarge current account deficit prevailed intothefirsthalfof1997, andfurther
reservelosseswererecorded,especiallyintheaftermathoftheflotationoftheCzechcurrency,Slovakia's
principal trading partner, inMay1997. Atthetime,theturmoil ontheCzech exchange market triggered
aspeculative attack ontheSlovak koruna, withthecurrency subsequently stabilized, butinterest rates
remain quite high.
13. Foreign debtincreased from31percentofGDPin1994to41percentin1996, duetoreserve
accumulation in1995 andthefinancing ofthecurrent account deficit in1996. Theunderlying trend
fordebtservice costs isupwards, although abunching ofrepayments caused atemporary peakat
14percentofexport earnings in1995.
(3) Savings andInvestment
14. Since thesavings andinvestment balance isthemirror image ofthecurrent account balance,
changes insavings andinvestment provide animportant cluetounderstanding thechanges inthebalance
ofpayments. Although thenumbers havetobeinterpreted withcaution, gross investment appears
tohaveincreased considerably inrecent years toapproximately 37percentofGDP(Chart 6).Savings,
however, declined in1996toabout 26percentofGDPasconsumption increased strongly. Although
bothsavings andinvestment arestillatrelatively highlevels, thegrowing gapbetween thetworeflects
thestrong increase inaggregate demand.
(4) Explanatory Factors
15. Anumber offactors havecontributed tothestrong increase inaggregate demand andthe
deterioration oftheexternal position intheSlovak Republic:
- Economic overheating, afterstrong increases indomestic demand, became apparent
during thecourse of1996. Asmentioned, thisstimulated import growth andthe
domestic absorption ofexportables. Domestic monetary policies, inparticular, were
expansionary in1995andinthefirsthalfof1996. Consequently, broad money growth
exceeded 20percentin1995. Monetary tightening intheformofhigher interest rates
andtighter restrictions onbanks 'foreign currency exposure since July1996 caused
thisratetodecline to16percentbytheendof1996-theslowest rateofgrowth sinceWT/BOP/S/5
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1993. Expansionary fiscal policies provided anadditional impetus todomestic demand.
After abalanced budget in1995, thefiscal position recorded adeficit of1.3percent
in1996 andthe1997budget hasplanned forageneral government deficit of3.5per
centofGDP.(Table 2).
- High wage increases coupled withafixed exchange regime havestimulated demand
andreduced competitiveness (Chart 3).Moreover, realwage growth hasraised unit
labour costs, thereby weakening theexport sector.
- Weak terms oftrade undermined theexternal position in1996. Prices forsome of
themajor exports, e.g.,steelandwood pulp, declined whereas prices forimportables
suchasgasandoilincreased.
- Supply constraints became apparent in1996. Growth wasexport-driven untilabout
themiddle of1995asunused capacities allowed strong growth ofsupply. Since then,
capacity constraints haveemerged, andhighinvestments arenecessary tosustain high
growth. However, certain credit market distortions, incomplete enterprise restructuring
andproblems incorporate governance could encourage overly riskyandlessproductive
investments.
IV. TRADE DEVELOPMENTS
16. TheSlovak Republic isaverytrade-oriented economy, andtradehascontinued togrow rapidly
inrecent years. Exports andimports eachamount toabout 50percentofGDP. However, trade has
notdeveloped inabalanced manner. After arapid expansion ofexports in1993-95, growth ofexports,
invalue terms, slowed toonly2.6percentin1996 (Table 1).Import growth, ontheother hand,
reached 24.3percentin1996. Asignificant partofthedeficit maybelinked tothesurge ofimports
ofcarsandthecontinuing boom ininvestment.
17. Thecommodity composition oftradehasbeenrelatively stable inrecent years. Ontheexport
side,machinery andtransportation equipment account forabout 20percentoftrade(Table 3).Other
intermediate andfinished manufactured products represent overhalfoftheexport value. Food, raw
materials andfuels, andchemicals account fortheremainder ofexports. Ontheimport side, raw
materials andfuelsaremuch more important andrepresent about onequarter oftrade. Thisisasimilar
share asforintermediate andfinished manufacturing products. In1996, machinery andtransport
equipment imports wereboosted tooveronethirdofthetotalimport value bystrong investment growth
andthetemporary tariff reduction onsmall passenger cars.
18. Thegeographical composition oftrade ischanging slowly towards agrowing share oftrade
withWestern industrialized countries. Ontheexport side,theshare oftheE.U.hasgrown fromabout
30percentin1993 to40percentin1996 (Chart 7).Germany absorbed halfoftheexports tothe
E.U. Theexport share oftheCzech Republic declined from42to32percentoverthesame period.
Concerted efforts todiversify export markets away from theCzech Republic andthe5percent
revaluation oftheSlovak versus theCzech currency, following thedismantling oftheclearing account
arrangement inSeptember 1995, supported thistrend. Other countries, including developing countries,
account fortheremaining quarter ofexports. Ontheimports side,theshare oftheE.U. increased
from 28percentin1993 to36percentin1996, whilst imports from theCzech Republic declined
from36to25percent. The40percentimport share ofother countries islargely duetoenergy and
rawmaterial imports from Russia.WT/BOP/S/5
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Table 1
Slovak Republic -Balance ofPayments, 1993-1996
(US$ million)
1993 1994 1995 1996Jan-March
1997
Trade balance -932 59 -228 -2,293 -477
Exports 5447 6,691 8,579 8,831 2,138
Imports 6379 6,633 8,807 11,124 2,615
Services balance 231 538 527 -8 -41
Receipts ... 2,412 2,625 2,290 487
Payments ... 1,874 2,099 2,299 530
Ofwhich: Interest ... 236 243 238 56
Current transfer 100 69 92 203 33
Current account -601 665 391 -2,098 -485
Foreign investment, net ... 250 380 225 -5
Other medium andlong-term capital, net 562 659 595 1,109 106
Short-term capital, net 73 -198 74 184 -70
Othersa... -261 129 30 0
Capital account 980 450 1,177 1,547 31
Errors andomissions -23 309 108 225 0
OVERALL BALANCE 356 1,424 1,677 -326 -222
Financing -356 -1,424 -1,677 326 222
Gross official reserves (-=increase) -521 -1,492 -1,684 -814 -538
Other financing (including IMFcredit) 165 68 7 1,140b7,616b
Memorandum Items:
Export value
(in%change overprevious year)-16.4 23.8 28.2 2.6 3.8c
Import value
(in%change overprevious year)-11.3 3.8 32.8 28.3 4.9c
Current account balance
(in%ofGDP)-5.4 4.8 2.2 -11.1 -10.6
Official reserves
(inmonths ofimports, endofperiod)1.2 3.1 4.3 3.4 ...
External public debt
(in%ofGDP, endofperiod)30.3 30.9 33.4 41 ...
Debt service (in%ofexports ofgoods and
services)... 8.8 14.0 10.1 ...
aIncludes capital transfers andclearing account balance andsettlement.
bIncludes anincrease inshort-term bank liabilities byUS$1,256 million in1996 andbyus$781million inthefirstquarter of
1997.
cJanuary-June 1997
Source: International Monetary Fund staffestimates andSlovak authorities.WT/BOP/S/5
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Table 2
Slovak Republic -Fiscal Developments, 1993-1996
(PercentofGDP)
1993 1994 1995 1996 1997 budget
Total Revenue 44.2 46.4 47.1 46.9 43.5
Total Expenditure 51.2 47.7 47.0 48.3 47.0
Current expenditure 45.5 43.2 42.2 41.8 40.2
Capital expenditure
(excluding netlending)5.7 4.5 4.8 6.5 6.8
Fiscal Balance -7.0 -1.3 0.1 -1.3 -3.5
Source: International Monetary Fund andSlovak Ministry ofFinance.
Table 3
Slovak Republic -Commodity composition oftrade
Memorandum item (Percent oftotal merchandise exports andimports)
1993 1994 1995 1996
Exports, f.o.b.
Food andrelated products 6.5 5.5 6.0 4.6
Rawmaterials andfuel 9.8 9.7 9.3 9.1
Chemicals 12.0 12.9 13.2 12.5
Machinery andtransport equipment 19.4 19.0 18.8 22.2
Other manufactured intermediate andfinished
productsa52.3 52.9 52.6 51.8
Total 100 100 100 100
Imports, c.i.f.
Food andrelated products 9.0 8.5 8.2 7.4
Rawmaterials andfuel 26.1 24.6 23.5 22.3
Chemicals 11.4 13.2 13.6 12.1
Machinery andtransport equipment 29.3 27.7 28.9 34.3
Other manufactured intermediate andfinished
productsa24.3 26.1 25.9 24.0
Total 100 100 100 100
a Includes small amounts under SITC 9(0-0.2% oftrade).
Source: International Monetary Fund andSlovak authorities.WT/BOP/S/5
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