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Slovak Republic Country Brief 2003
Overview
The Slovak Republic is an upper middle income country with a Gross National Income (GNI) per capita of US $ 3,950. The country is located in the heart of Central Europe and is bordered by Austria , the Czech Republic, Hungary, Poland and Ukraine. The country's economic structure is similar to that of a developed market economy with agriculture accounting for some 4 percent of GDP, industry for 32 percent and services for 64 percent.
The Slovak Republic has achieved both political and economic stability since its independence following the breakup of Czechoslovakia. Its economic transformation over the past five years has positioned it well for European Union accession. The Treaty of Accession to the European Union (EU) was signed on April 16, 2003 as a result of the successful efforts by two successive governments to transform the economy and lay the groundwork for a prosperous state. The country is now poised to close the gap in per-capita income levels with the rest of Europe.
The Slovak Republic is one of the fastest growing economies in the region, with GDP growth of 4.4 percent in 2002, despite the slowdown in the EU – the country’s main market. Nonetheless, unemployment -- at 18 percent (or 14 percent as reported by the National Labor Office) -- remains high, even by regional standards, although unemployment levels have started to recede in line with improved performance in the real sector, as well as administrative measures taken by the Government. In addition, there are sharp regional differences in unemployment, with the eastern region having a much higher incidence of poverty, as economic activity is heavily concentrated in the western part, particularly around the capital, Bratislava.
Events since independence
The Slovak Republic achieved independence in 1993, following the breakup of Czechoslovakia. After an initial decline in output in 1993, as a consequence of post-independence external shocks, the country’s economic performance improved in the mid-1990s, and built on the structural transformation and economic liberalization that took place in Czechoslovakia during 1989-92.
However, in the absence of structural reforms, growth became increasingly unsustainable. Poor governance in the public and private sectors led to rising levels of inefficient investments, and macroeconomic balances worsened after 1996. The tight monetary policy to offset the loose fiscal stance resulted in high interest rates that caused debt servicing problems for the enterprise sector, and a deterioration in the loan portfolios of banks. At the same time, speculative attacks on the exchange rate in the wake of the Russia crisis in 1998, as well as political uncertainties, caused a sizable loss of reserves. However, the Government moved quickly to take strong and convincing stabilization measures.
Recent economic performance
In 2002, real GDP grew by a remarkable 4.4 percent. Core inflation reached a historical minimum (2 percent) while the inflation rate remains moderate despite price adjustments in utilities. Fiscal and external balances remain high but both are starting to improve as a result of better export performance, as well as the fiscal moderation package implemented this year.
Large capital inflows contributed to a significant appreciation of the national currency -- the Koruna. Much of the Slovakia’s monetary policy efforts have been geared to prevent sharp fluctuations in the exchange rate while restraining upward pressures on the Koruna. The Government has started to resolutely tackle the high fiscal deficits.
There has been good progress on the structural front in recent years. The main banks and utilities have been restructured and privatized, fiscal transparency and control have improved and quasi-fiscal activities have been curtailed, while the legislative framework has been strengthened. Despite these advances, however, important challenges remain in corporate restructuring, labor markets, and the further strengthening of banking supervision. Major reforms are also being introduced in the area of health sector modernization, and are under preparation in the education sector.
In addition, more remains to be done in implementing a multi-pillar pension system, as well as strengthening the state administration and the legal and judicial system. Based on the Government Manifesto approved in December 2002, there is a strong commitment on the Government’s side to ensure sustainable implementation of the economic and social agenda.
Focus of World Bank Assistance
The Slovak Republic joined the World Bank in 1993 by joint succession with the Czech Republic from the former Czechoslovakia. World Bank lending to Slovakia in the immediate aftermath of independence served mainly to support economic recovery. After a period of low - level engagement from 1994-1998, Bank assistance picked up in late 1998, with an active program of technical and financial assistance. The overarching objective of the World Bank's Country Assistance Strategy is to put Slovakia on a path of sustained growth that will promote convergence with its West European neighbors and improve living conditions, particularly among the most vulnerable groups of the population. The strategy focuses on three broad areas which are in line with priorities stated in the new Government Manifesto.
- Completing the transformation reforms
- Strengthening governance and building institutions, especially to promote convergence with the acquis communautaire of the European Union
- Improving social security, enhancing human development, and meeting environmental standards
Slovakia’s GDP per capita is well below the graduation threshold at which discussions to initiate formal graduation from the World Bank would normally commence. World Bank assistance to Slovakia, including the composition of lending and advisory services, has been demand-driven and is based on the Bank’s framework for support to EU Accession candidate countries.
Impact on the Ground
Banking sector successfully restructured. Slovakia's financial sector has been successfully restructured to bring it in line with EU requirements, with World Bank support through a EUR 200 million, Enterprise and Financial Sector Adjustment Loan (EFSAL). Restructuring has taken place through re-capitalization and privatization of formerly state-owned banks, and an overhaul of the legal framework for banking, insurance and the securities market .
 Social protection system being improved. The Government is establishing a modern, cost-effective and efficient social protection system with World Bank assistance through a EUR 26.2 million loan under the Social Benefits Administration Reform Project. It is designing and implementing multi-pillar pension reforms; improving collection and administration of social contributions; and strengthening the institutional capacity of the Ministry of Labor, Social Affairs and Family, as well asof the Social Insurance Agency and the National Labor Office. The project will have a direct impact on 2.1 million employees and nearly 500,000 unemployed persons.
Public finance management being reformed. A World Bank loan of US$ 5 million is supporting the government’s Public Finance Reform Strategy. The project focuses on strengthening the institutional capacity for the budgetary and financial management of government operations; strengthening the macro-economic analysis and forecasting capacity of the Ministry; supporting the establishment of a professional debt management agency, completing the institutional set up of the new Treasury System; and supporting technical expertise to ensure effective coordination of the reform effort.
 Health sector being modernized. A Project Preparation Facility (PPF) in the amount of US$ 750,000 has been approved in order to help accelerate the modernization of the health sector . The PPF is to be followed by a loan of EUR 55 million which supports comprehensive health sector reforms that promote fiscal sustainability, while continuing to provide quality health care. An accompanying technical assistance loan of EUR 10.58 million will support capacity building in the health sector.
Civil society empowerment being promoted. Through the Small Grants Program, the Bank directly supports the activities of a number of civil society organizations in Slovakia, promoting the empowerment of marginalized and vulnerable groups. In FY 03, 16 projects received funding in the total amount of US$ 45,000. The Bank also includes NGOs in the policy making process through regular consultations, seminars, and round-table discussions.
 Issues facing the Roma being addressed. The Bank has been actively engaged with Roma issues in Slovakia over the past three years. The capacity of the Office of Plenipotentiary of the Slovak Government for Roma issues has been strengthened through an Institutional and Development Fund grant. In addition, a Policy and Human Resources Development (PHRD) grant has been approved for the preparation of a Social Development Fund to improve service delivery in poor areas, develop income generating activities for vulnerable groups, and increase their involvement in decision making processes. The analytical underpinnings are provided by a 2001 study on poverty and living conditions in Roma settlements.
Slovakia has also declared its commitment to participate in the Decade of Roma Inclusion and the Roma Education Fund. Moreover in Zehra, a village in Eastern Slovakia, funds have been provided by the Bank to ensure finalization of new social housing for the Roma. This would allow some 350 Roma to move from the slums to the newly built houses.
Slovakia’s EU accession being supported. As Slovakia approaches EU accession, an overview of the medium term public expenditure and policy issues, with its medium term fiscal implications, has been prepared jointly by the Bank and the Government. The constraints and potential of the agricultural sector, and its readiness for EU membership, have also been analyzed and the findings disseminated jointly with the Government. Legal and judicial systems and institutions have been assessed and their strengths and weaknesses identified in a study completed in 2003. The assessment is a complementary activity to the IDF grant, implemented by the Ministry of Justice. The grant aims at enhancing the quality of laws and improving access to legal services and justice, with a view to facilitating the country's EU accession.
Challenges Ahead
- Building public sector capacity and improving governance. Institutional capacity in the public sector is lacking, and governance issues need to be addressed.
- Completing reforms. Major reforms to ensure high growth and fiscal sustainability need to be completed.
- Further reducing unemployment. Unemployment remains high, even by regional standards, although levels have started to recede.
- Promoting social inclusion and reducing poverty among the vulnerable sections of society. The situation of the Roma, who by some estimates make up close to ten percent of the population, represents a core challenge to poverty reduction and social cohesion in Slovakia.
World Bank Partners
| SECTOR | LEAD NATIONAL AGENCY | PARTNERS |
| Financial Sector | Ministry of Finance /
National Bank of Slovakia
.. | IMF / EU |
| Health | Ministry of Health
.. |  |
| Agriculture | Ministry of Agriculture /
Research Institute of Agricultural and Food Economics
.. | EU |
| Environment | Ministry of Environment
.. | EU / UNDP |
| Energy | Ministry of Economy
.. | EU |
| Infrastructure | Ministry of Transport, Post and Telecommunication
.. | EU / EIB / EBRD |
| Legal | Ministry of Justice /
Supreme Court
.. | EU |
| Social | Ministry of Labor, Social Affairs and Family/ National Labor Office /
Social Insurance Agency
.. | EU / UNDP |
| Education | Ministry of Education
.. | EU |
| Roma issues | Office of Plenipotentiary of the Government for Roma minority /
Office of the Government
.. | UNDP / EU / OSF / Canadian Embassy |
| Economic Think-Tanks | MESA 10 /
Institute for Public Affairs (IVO) /
Center for Economic Development (CPHR) | |
The Bank’s support to the Slovak Republic complements the activities of the European Union, the European Investment Bank, and the European Bank for Reconstruction and Development, which have been the main source of official assistance to the Slovak Republic.
World Bank Lending to the Slovak Republic
Total IBRD/ IDA Commitments from FY91 to FY03 : US$ 341 million
(by fiscal year *,in nearest US$ millions)
| up to 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | Total |
| Commitments | 135 | - | - | - | - | - | 201 | 5 | 341 |
| Disbursements | 247 | 9 | 14 | 8 | 2 | - | 54 | - | 334 |
Total Commitments by Sector since 1991
(in nearest US$ millions)
*Fiscal year from July 1-June 30
For more information please contact:
Petra Vehovska : phone (Bratislava) + 421 - 2 - 59 337 317
E-mail: pvehovska@worldbank.org
September 2003
| About the Slovak Republic |
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