The Slovak economy is on a high growth path driven by growing foreign direct investment (FDI) inflows, attracted by a favourable operating environment in a country soon to be integrated in the EU. It is striking in that connection that, with labour costs remaining the second lowest in OECD, Slovakia is set to become the top OECD manufacturer of cars per capita next year. Real GDP is growing at around a 4 per cent annual rate, exports are expanding steadily and private domestic demand is robust. The current account deficit has returned to a more easily sustainable level...

Strong growth driven by foreign direct investment; Low employment, high unemployment; The dual economy and the lagging sector; The outlook; Policy challenges...

A responsive monetary policy and the beginning of fiscal consolidation have helped to improve macroeconomic balances during 2002 and in the course of 2003. The National Bank of Slovakia (NBS) has successfully pursued its disinflation objectives over the period under review and managed to avoid a sharp appreciation of the currency in the face of large-scale capital inflows. On the fiscal side, the overdue consolidation of public finances has started, and the very large deficit of 2002 is being reined in. Yet, the heavy burden of government guarantees and soft loans from earlier years limits the government’s ability to restructure its expenditures and to increase much-needed investments in human resource and physical infrastructure development and maintenance...

This chapter first reviews the recent trends in public spending and the budget procedures which underpinned their unsustainable pattern. It then analyses the extensive set of reforms now being introduced and discusses requirements for improving their chances of success within a short time span as presently planned, in the light of other OECD countries’ experiences. It finally reviews the challenges in moving forward with reform and provides a detailed set of recommendations for specific actions to improve both the framework of fiscal policy and the operation of the public sector (Box 10)...

Slovakia has implemented two important rounds of structural reforms in the past five years. First, following the 1998 elections, which put an end to a period of dirigisme and international isolation, key liberalisation reforms resulted in growing inflows of foreign direct investment and large-scale industrial restructuring, triggering a significant improvement of trend productivity growth. There was a strong increase in unemployment during this period, notably among low-skilled workers, while wages remained lower than in comparable OECD transition economies, providing Slovakia with an important cost advantage. Then, following the September 2002 elections, a new government was formed, representing a modification of the previous coalition, and undertook a set of more politically demanding reforms destined to address the structural shortcomings that have hampered the evolution of a vigorous domestic business sector...