Books on Slovakia
% of GDP
Update No: 106 - (23/03/06)
Electoral season opens with the opposition in front
Slovakia, like the Czech Republic, is holding crucial parliamentary elections
this summer in June. The recent break-up of the ruling coalition and the dispute
over the proposed treaty with the Vatican on objections of conscience has had
little effect on voter support for the various political parties, a new poll
The poll, carried out by the MVK agency, confirmed the opposition Smer as
leading the field with 35 per cent voter support. Were the party to actually
receive this share of the vote, it would secure 59 mandates in the 150-seat
legislature. However, most political analysts believe Smer is unlikely to
receive such support in the June 17 election, and that the party is more likely
to score 10 percentage points less.
The main actors in the coalition conflict, the Christian Democratic Movement (KDH)
and PM Mikuláš Dzurinda's Slovak Democratic and Christian Union (SDKÚ), also
saw only slight changes in their voter support, the SME daily wrote. The KDH
left the coalition in February after the SDKÚ refused to approve the objections
of conscience treaty, which the Christian Democrats saw as a political priority.
Slovakia's political parties subsequently agreed to hold elections three months
earlier than scheduled, rather than try to patch together a caretaker
According to the MVK poll, the KDH would still beat the 5 per cent threshold
required for representation in parliament, with 7 per cent support, good for 12
seats. The SDKÚ would take 8.4 per cent, or 14 MP mandates. The opposition
Movement for a Democratic Slovakia was supported by 12.5 per cent of respondents
(21 seats), while the Hungarian Coalition Party remained stable at 9.9 per cent
The Slovak model
Slovakia changed course dramatically in 2003, with the result that it is now
being widely touted, notably by Bush, as a model of economic reform.
The main issue is that of taxation, central to all thinking about economics
since before Adam Smith.
The pre-reform tax bedlam
"Complex" does not begin to describe the shortcomings of Slovakia's
former tax code. It flouted every one of Smith's prescriptions for a successful
tax system, that it be fair and be seen to be fair, that it be simple and
non-arbitrary, that it be quite clear and that it be workable.
On the contrary it had five tax brackets ranging from 10 per cent to 38 per
cent; 90 different exemptions; 19 unique sources of tax-free income; 66 items
that were themselves tax- exempt; and an additional 27 items that carried their
own particular tax rates.
A split value added tax (VAT) taxed some items and services at 14 per cent,
others at 20 per cent, which made the code even more pretzel-like. Confusion
reigned because tax laws changed twice a year.
Not surprisingly, countless citizens avoided the tax system altogether.
Slovakia's shadow economy accounted for a high percentage of the country's
actual economic output. Slovaks had little incentive to create domestic capital
because of onerous tax rules. And foreign investment would not come rolling in
Flat tax introduced
Government leaders knew something had to be done to address this
growth-suppressing mess. In October 2003, parliament passed a flat tax reform
bill that was initially vetoed by the president, Rudolph Schuster.
Parliament overrode the veto in December. This reform bill unified and
simplified the Slovakian tax regime, creating one rate across the board. The
personal income tax, the corporate income tax and the VAT, were all set at 19
Personal income taxes dropped for almost all Slovaks. Those at the high-end of
the income scale have seen their highest tax rate fall from 35 per cent to 38
per cent down to 19 per cent. The flat tax avoided a tax increase on lower
income taxpayers by including a personal deduction of US$2,600; this exempted
half the average yearly wage in Slovakia. The previous personal exemption was
The new law reduced the perverse incentives that had driven so much of the
economy into the informal sector. As tax rates were slashed and simplified,
individuals and businesses began to emerge from the shadows. The government
projected that it would maintain its current level of revenues despite the cuts
in tax rates. It did even better: Tax collections soared by 36 per cent,
shrinking the budget deficit by 93 per cent in the first quarter of the new
The country was beginning to see a dramatic increase in foreign direct
investment. The New York Times, for instance, dubbed Slovakia the "Detroit
of Europe" because of contracts for new facilities for Hyundai-KIA and
Peugeot. These agreements brought billions of dollars of investment to Slovakia
for new manufacturing plants that employed thousands of Slovakians. By
attracting businesses with its very competitive tax system, Slovakia hopes to
become a beachhead for capitalism's spread across central and eastern Europe.
When international automakers signed billion-dollar agreements to relocate
manufacturing facilities to Slovakia, the nation proved it had embarked on the
same kind of journey that had transformed Ireland from an economic laggard into
the economic dynamo it is today.
In drastically lowering taxes, Slovakia and its fellow Baltic states will likely
follow in the footsteps of Ireland, which has become the economic model for many
central and eastern European counties. Decades ago, Ireland adopted an
aggressive corporate tax-reduction policy in order to attract investment and
serve as a platform for businesses targeting Continental Europe.
Many American companies saw this English-speaking island as an ideal jumping-off
point for their business invasion of the rest of Europe. Ireland cut business
taxes. In the 1980s, to counteract an economic slide, it cut taxes, especially
on personal income, even more. It worked. Ireland earned the nickname
"Celtic Tiger" as a result of its ability to attract foreign
investment and market itself as a location where corporations could thrive.
(Ireland's per capita income is now higher than that of Great Britain).
Czechs attract 17 times more FDI than Slovakia in 2005 due to pre-electoral
Nevertheless, the influx of foreign direct investment (FDI) to the Slovak
economy slowed dramatically in 2005. According to the Slovak central bank,
foreign companies invested Sk20 billion in the country last year, down 35 per
cent from 2004. In the neighbouring Czech Republic, on the other hand, FDI
doubled in 2005 to reach Sk346.5 billion, the Hospodárske noviny paper wrote.
According to analysts, the drop in FDI to Slovakia is mainly due to the fact
that less was privatised. "Virtually no state property was sold last
year," said Miroslav Šmál, an analyst with Poštová banka. "The
slowdown could also have been caused by the replacement of the economy
minister," he added.
Šmál also faulted the Slovak Agency for the Development of Investment and
Trade (SARIO) and the Economy Ministry for not cooperating well on attracting
investors to Slovakia. "SARIO fails primarily in its initial contacts with
investors," the analyst said.
Analysts estimate that FDI should reach Sk20 billion this year as well. Higher
investments are being held back by the fact that Slovakia will hold national
elections in June, and that the front-running leftist opposition parties have
said they will roll back some of the right-wing Dzurinda administration's
"Investors are waiting to see how the elections turn out, which is why they
are speculating a bit in deciding where to locate their operations," said
Štefan Lednár, the general secretary of the Slovak industrial union.
Slovakia to pay 10.6 billion crowns for Kia
The level of state support for the construction of a plant near Zilina for the
South Korean car-maker Hyundai Kia will be 3.2 billion Slovak crowns (86.5
million Euro) higher than originally planned, TASR News Agency reported.
Although the original contract from 2004 envisaged spending of 7.4 billion
crowns, the actual expenditure will amount to 10.6 billion crowns, reads an
economy ministry report about the use of state budget resources for the
construction of the Kia plant. "This amount represents the total sum of
initial amounts approved in March 2004 to support the investment, plus
additional expenses approved in October 2005 amounting to 3.076 billion crowns
and a further 139 million crowns required for purchasing land from the Slovak
Land Fund (SPF)," the report states. The ministry claims that the increased
expenses are due to delays in the process of buying land, an underestimation of
the resources needed for the preparatory phase, the human factor, and
insufficient knowledge of the area chosen for the plant.
FOOD & DRINK
11 more Slovak food producers export to Russia
The Russian Federation has granted licences for food exports to Russia to 11
Slovak food processing companies, bringing the number of Slovak companies
exporting to Russia to 22, the Slovak spectator reported.
The certificates involve producers of dairy and meat products, Russian Deputy
Agriculture Minister, Alexander Petrovic Kozlov, said after a meeting with
Slovak Agriculture Minister, Zsolt Simon. Food exports to Russia are impossible
without a certificate or a licence from the Russian Federal Food Authority.
"Russia's market is interesting for Slovakia because of its size and
geographic proximity. We believe that other Slovak producers will be allowed to
export to Russia in the future," Simon said, opening other possibilities
for Slovak foodstuffs.
Transport ministry launches internet project
The Slovak Transport Ministry will launch a project in April to increase
high-speed internet use across the country by providing 240 million Slovak
crowns (6.4 million Euro) in subsidies to users, the Slovak spectator reported.
Under the plan, called Internet for Education, the ministry will give new
internet users a subsidy of 6,016 crowns (160 Euro) per person over a two-year
period. The money is to be distributed in monthly payments to high-speed
internet users. Finance Minister, Ivan Miklos, explained at a press conference
that the project aims to increase IT literacy and access to high-speed internet
among young people from 15 to 25 years of age. The Transport Ministry subsidies
will go to 5,000 applicants from each of Slovakia's eight regions or a total of
40,000 new applicants across the country.
S&T and SBS win SAP project in Slovakia
Austrian systems integrator Systems Integration & Technology Distribution
(S&T) announced that it has won a project to implement and maintain an
SAP-based centralised financial information system for all 20 Slovak state
universities, New Europe reported.
The project, worth around 15 million Euro, will run over two years and will be
carried out jointly by S&T and Siemens Business Systems (SBS). The revenue
split is not known. S&T has been active in Slovakia for more than a decade.
Last year SAP integrator and process-consulting specialist focusing on the
public sector, manufacturing and processing clients as well as utilities, has
made S&T one of the top three SAP systems integrators in Slovakia, according
to S&T. As part of the deal, S&T and SBS will design a system that
enables the education ministry and the universities to run centralised financial
information systems which will help to simplify their financial, logistical and
HR management and budgeting.
T-Mobile Slovensko gross profit of 6.125bn
Slovak mobile phone operator T-Mobile Slovensko's earnings before interest,
taxes, depreciation and amortisation (EBITDA) amounted to 6.125 billion Slovak
crowns (165 million Euro) in 2005, up by 24 per cent year-on-year, T-Mobile
Slovensko General Director, Robert Chvatal, announced at a news conference in
Bratislava, TASR News Agency reported.
The company saw its total 2005 revenues increase by 10 per cent year-on-year to
14.49 billion crowns. Revenues from mobile and data services reached 13.591
billion crowns last year, up by 12 per cent year-on-year. T-Mobile Slovensko had
2.022 million active clients at the end of December 2005, an increase of six per
cent year-on-year. For the same period, the number of customers using the
operator's invoicing services rose by more than 21 per cent year-on-year to
787,000. Monthly average revenue per customer (ARPU) was 593 crowns, up by 2.2
per cent year-on-year. T-Mobile Slovensko has introduced broadband internet
access FLASH-OFDM technology, the first mobile operator in Slovakia to do so.
T-Mobile Slovensko, Slovak Telecom, a subsidiary company of the Deutsche Telekom
AG owns a 100 per cent stake in the company and is one of the world's leading
mobile communication companies.