Books on Slovakia
% of GDP
Update No: 107 - (28/04/06)
The end for Dzurinda?
Slovakia is dominated by a pre-electoral frenzy. Like the Czech Republic, it is
holding crucial parliamentary elections 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 shows.
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 the 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
The poll, carried out by the MVK agency, confirmed the opposition, Smer, as
leading the field with 33-35 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.
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
Slovak doctors up pressure on Dzurinda with strike
Striking Slovak doctors threatened in mid-April, just two months before the
election, to withdraw more services to force the government to listen to their
demands to hike wages and stop health care sector sell-offs.
Doctors and nurses started the strike in Bratislava and four other cities on
April 13th to push for a 25 per cent pay rise.
The medics continued to provide vital care such as delivering babies and
performing life-saving surgery, but postponed minor operations and
"If the government doesn't solve this soon, we are going to have to move to
another level of strike, narrowing the services we provide," said Marian
Kollar, head of the doctors' union.
Doctors at a union news conference said that meant all patients would soon be
routed through emergency rooms.
The protest comes at a bad time for the centre-right government of Dzurinda,
which faces a tough race for re-election on June 17th, with health care a hot
campaign issue. Polls, as we have seen, show the three parties that formed
Dzurinda's cabinet have a combined support of around 30 per cent, while the
leftist opposition party, Smer, stands at 33-35 per cent.
Smer, Slovakia's Social Democrats, has promised to pour more money into health
care if it leads the next government.
The government has refused to negotiate over changes to the healthcare system
that include transforming state insurers into for-profit organisations and
selling-off state-owned laboratories, radiology centres and chemotherapy centres.
Dzurinda has also said the cabinet will not reopen the state budget to meet the
doctors' pay demands. The government says private ownership is the answer to
chronic health care debts.
Slovakia spends the fifth-lowest amount on health care of the 25 countries in
the European Union -- 5.8 per cent of its GDP in 2003, the last year for which
figures for EU members and incoming countries were available.
Doctors say hospitals lack doctors, beds and equipment such as ventilators and
pumps, and that basic doctor pay -- around US$550 a month -- has not been
adjusted in five years.
Union leaders added that doctors in seven more cities were joining the strike
and that they would hold a demonstration in the centre of Bratislava.
Analysts said it was unclear if the labour action had had any effect yet on
voter preferences. "People are dissatisfied with many things about health
care reform, and they believe the doctors have a right to strike," analyst
Martin Butora said.
"But I can imagine a negative reaction if patients start to feel hurt. So
far both sides are in their trenches."
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.
Car industry increases turnover
Turnover in the Slovak automotive industry last year increased by 6.5 per cent
year on year to 330 billion Slovak crowns, and is expected to reach 400 billion
crowns this year, the Slovak Spectator reported.
The proportion of the automotive industry on Slovakia's overall industrial
output last year represented 24.8 per cent, down from 25.3 per cent in 2004, the
SME daily wrote. Most of the output from Slovak automotive firms is exported.
Exports increased by five per cent in 2005 to 290 billion crowns and, this year,
should go up further to 340 billion crowns, the Slovak automotive industry
association ZAP SR estimated. Slovakia's car industry is represented by three
carmakers - Volkswagen in Bratislava and the new PSA Peugeot Citroen and Kia
Motors Slovakia in Trnava and Zilina, respectively. Volkswagen produces around
200,000 cars a year, while PSA plans to produce up to 450,000 and Kia around
Kia and PSA to hire 2,100 by year's end
Carmakers Kia and PSA Peugeot Citroen are in the midst of massive recruitment
drives and plan to hire more than 2,100 people by the end of this year,
especially for factory jobs such as assembly line operators, production experts
and maintenance staff, Slovak Spectator reported.
Both plants plan to start production this year. The carmakers currently employ
over 3,100 people, the Pravda daily wrote. Kia in Zilina wants to hire another
800 people between April and December, while PSA in Trnava intends to hire 1,310
people. The news that KIA was expanding operations in Slovakia brought great
fanfare from government officials, who pointed out it was an example of foreign
direct investment in the country. Government officials met with leaders of the
company last year in negotiations to have a plant built and to manufacture cars
in Slovakia, and the recruitment drive has followed. Also, the government
approved an additional 151.3 million Slovak crowns (four million Euro) in aid
for the new plant of carmaker PSA Peugeot Citroen in Trnava, Slovak spectator
Of that sum, 128.4 million crowns should go toward operational expenditures
related to the construction of the car plant. The remaining 23 million crowns
should go to the Invest Trnava company, which helped organise the carmaker's
investment in Trnava.
Biofuels, more popular, are coming
Biofuels are becoming increasingly popular across Europe and it seems it will
not take long until they reach Slovakia as well, Slovak Spectator reported.
Although Slovakia already has biocomponent and biofuel producers, there is no
biofuels at the filling stations yet, because the state still lacks the
legislation to define the parameters and conditions of the biofuel market. The
Slovak refinery Slovnaft began producing biodiesel, its first biofuel, last
year. Currently, all biodiesel produced is exported. Slovnaft is now preparing
to launch the production of biogasoline. Slovnaft's main supplier of
biocomponent for its biogasoline is a Slovak company Enviral, which produces
bioethanol. The company, located in Leopoldov, won the tender to be a
biocomponent supplier for the whole group of MOL, to which Slovnaft belongs. As
a consequence, Enviral has already decided to extend its production capacities.
The overall investments should reach about three billion Slovak crowns (80
million Euro) and the project should be completed by 2007. It is hoped that
development of alternative fuels will reduce dependency on petroleum products
and give consumers a choice at the pump as well.
Central Bank ready for Euro adoption by 2008
Slovakia would meet the Maastricht criteria for Euro adoption by 2008, according
to Vladimir Tvaroska, newly nominated for vice governor of the NBS.
He explained that the country would realise benefits from its early entry in the
Eurozone since it would have a competitive advantage in terms of business
environment to neighbouring countries.
According to Tvaroska, the inflation criteria would be crucial as its particular
target was not known in advance, but depended on the economic developments in
the EU member states.
Tvaroska stressed that the central bank would have the difficult task to pursue
a monetary policy to bring down the inflation rate but at the same time it would
have to avoid being too restrictive in order not to suppress excessive economic
The Maastricht criteria on inflation stipulates that it should not be greater
than 1.5 percentage points than the average rate in the three European Union
countries with the lowest inflation, which is expected to translate into an
inflation ceiling of around 2.3-2.5 per cent year-on-year. Tvaroska stated that
current NBS policy was appropriate and the surprisingly high 7.6 per cent
year-on-year GDP growth in the fourth quarter of last year was sustainable and
not a risk for further development. Tvaroska noted that political risks were
also present for the objective of adopting the Euro in 2009 since the future
government after the early June 17 elections might not support the particular
date and might not bind itself with the required policies to meet the Maastricht
criteria. Slovakia's movement toward the Euro is among the fastest among EU
newcomers, including larger countries who have not advanced as quickly yet. A
number of them have said adopting the Euro is among their top priorities.
Slovak Telekom increases payphone charges 14%
Slovakia's dominant fixed-line operator, Slovak Telekom, will introduce a single
rate for calls made through its public payphone network as of April 1st,
increasing call prices by 14 per cent, Slovak Spectator reported recently.
Until now charges for calls depended on whether they were placed at peak time,
off-peak time or during weekends. According to the new scheme, a one-minute
local call from a payphone will cost five Slovak crowns including VAT, while a
one-minute long-distance call will cost nine crowns, and a call to a mobile
phone in Slovakia will be 16 crowns per minute, the SITA News Agency wrote.
Slovak Telekom said that interest in the public telephone service has been
falling by 33 per cent a year, and that given the number of payphones across
Slovakia, the rates so far have not recovered the cost of investments,
maintenance and repairs.
Tourist facilities sales 170 million Euro in 2005
Tourist accommodation facilities operating in Slovakia reported sales of 6.3
billion Slovak crowns (170 million Euro) last year, a 6.5 per cent increase from
the year before, Slovak spectator reported.
In 2005, 1.5 million foreign tourists visited Slovakia. Foreign tourists spent
four billion crowns on accommodation, 9.4 per cent higher than in 2004, the
Slovak Statistics Bureau reported. Turnover from accommodation at hotels and
boarding houses amounted to 5.3 billion crowns, of which 67.4 per cent was
generated by foreign tourists. The number of tourists accommodated rose by 5.7
per cent in 2005 to 3.4 million. Of this, foreign tourists made up 44.2 per
cent. Visitors from the Czech Republic accounted for the largest share of
foreign tourists, at 28 per cent, followed by visitors from Poland (13.1 per
cent), Germany (12.8 per cent), Hungary (eight per cent) and Austria (3.7 per