Country brief 2007 Updated April 2008
Slovakia is an upper middle-income country with a population of 5.4 million and a Gross National Income per capita of $9,620 in 2006 (Atlas method). The country is located in the heart of Central Europe. Agriculture accounts for 3.6 percent of GDP, industry for 31.6 percent, and services for 64.8 percent.
Slovakia has achieved both political and economic stability since its independence following the breakup of Czechoslovakia in 1993. The economic transformation the country initiated in 1998 positioned it well for European Union accession. On May 1, 2004, Slovakia joined the European Union, and in November 2006 entered the Exchange Rate Mechanism, with the goal of joining the European Monetary Union (EMU) in January 2009. The country is now well poised to close the gap in per capita income levels with the rest of Europe.
Slovakia is one of the fastest-growing economies in the region, with GDP growth of 8.5 percent in 2006. Nonetheless, unemployment,, at 13.3 percent (2006),, remains high, even by regional standards - although jobless levels continue 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. The eastern region has a much higher incidence of poverty, as economic activity is heavily concentrated in the west, particularly around the capital, Bratislava.
The Slovak Republic joined the World Bank in 1993 by joint succession with the Czech Republic from the former Czechoslovakia. From late 1998 onwards, an active World Bank program has supported Slovakia's efforts to achieve economic growth and improve the living conditions of its people, particularly for the most vulnerable groups. Since the inception of the program, nine loans for a total amount of $424.6 million have been approved by the World Bank’s Board of Directors.
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Economy
Developments Since Independence
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 1989-1992.
Stability proved elusive, however, and, in the late 1990s, 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, as well as 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 elected in 1998 moved quickly to enact strong and convincing stabilization measures.
Good progress on the structural front since 1998 has borne fruit. The main banks and utilities have been restructured and privatized, fiscal transparency and control have improved, and quasi-fiscal activities have been curtailed. In addition, two pillars of the pension system were introduced, labor market regulation became more flexible, tax and welfare reform were implemented, and the legislative framework was strengthened. Major reforms were also introduced in the health sector. However, recent changes to the Labor Code, together with the revisions of the pension and healthcare reforms, do not improve labor market and fiscal flexibilities.
Despite these advances, important challenges remain and require fiscal consolidation and disinflation as well as structural changes so the Slovak economy can be more competitive. More remains to be done in strengthening the state administration and the legal and judicial systems.
In recent years, Slovakia’s investment climate has improved markedly. According to the World Bank’s Doing Business report in 2007, Slovakia has been one of the fastest reformers in the world, introducing ambitious reforms in almost all areas (health care, welfare, pensions, labor market, public finance management, market exit and decentralization). The reform pace, however, has slowed, as also reflected by Doing Business results for 2008.
Recent Economic Performance
In 2006, real GDP grew by 8.5 percent and inflation accelerated to 4.5 percent. Core inflation more than doubled to 2.5 percent in 2006, reflecting an increase in food and energy prices. The fiscal deficit in 2006 (the election year) increased to 3.4 percent of GDP. Of this, however, one third was attributed to the cost of pension reform. The current account deficit, at an estimated 8.3 percent of GDP in 2006, remains well under control because of foreign direct investment and technology-related imports, and is expected to contract by half in 2007. Slovakia plans to enter the European Monetary Union in January 2009.
Challenges ahead
The World Bank considers that there are four areas in which the new Government will face significant challenges and options:
- Sustaining the pace of economic growth while meeting the conditions for Euro adoption;
- Improving the quality of growth for more jobs and lasting competitiveness;
- Protecting social cohesion while promoting social inclusion and reducing poverty; and
- Strengthening public administration and using EU resources well.
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Slovakia joined the World Bank in 1993 by joint succession with the Czech Republic from the former Czechoslovakia. World Bank lending to Slovakia immediately after 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 in 2001 was to put Slovakia on a path of sustained growth to promote convergence with its Western European neighbors and improve living conditions, particularly among the most vulnerable groups of the population. The strategy focused on three broad areas for the Bank’s assistance to Slovakia from 2001-2004, to help meet the requirements of the acquis communautaire of the European Union, including completion of transformation reforms, strengthening governance and building institutions, improving social security, enhancing human development, and meeting environmental standards.
The Country Partnership Strategy for 2005-2007 outlined the priority areas of cooperation between the Bank and Slovakia, with the objective of helping Slovakia fully benefit from EU membership. While financial support had its place, the emerging partnership was based on facilitating knowledge sharing, policy advice focusing on analytical work, and technical assistance to help the Government to achieve their development objectives.
In January 2005, the Bank approved the Social and Institutional Development and Economic Management Technical Assistance (SIDEM) Program, aiming to promote social and institutional development and economic management in new EU member countries eligible to borrow from the World Bank. Slovakia utilized the SIDEM facility by drawing a EUR 5 million loan for its Human Capital Technical Assistance Project, supporting capacity building for policy-making at the Ministry of Labor, Social Affairs and Family and the Ministry of Education.
The framework of current cooperation between the Bank and the Slovak Republic is outlined in a Transition Policy Note prepared in late 2006 and discussed with the Government in February 2007. It encompasses the following potential areas for further cooperation:
- Sustaining the pace of economic growth while meeting the conditions for Euro adoption;
- Improving the quality of growth for more jobs and lasting competitiveness;
- Protecting social cohesion while at the same time promoting social inclusion and reducing poverty; and
- Strengthening public administration and using EU resources well.
Impact On the Ground
The Enterprise and Financial Sector Adjustment Loan (2001) helped Slovakia achieve macro-economic stability, sustainable economic growth, and timely EU accession through re-capitalization and privatization of formerly state-owned banks and by modernizing key laws. Read more» Key results are as follows:
Slovakia’s banking sector has been successfully restructured with World Bank support to bring it in line with EU requirements.
The social protection system has been improved and a new pension system has been introduced. With World Bank support, the Government has established a modern, cost-effective, and efficient social protection system, with particular focus on designing a multi-pillar pension system.
Public finance management has been modernized. Significant progress has been achieved in strengthening institutional capacity for the budgetary and financial management of government operations, and macro-economic analysis and forecasting capacity.
The health sector is being modernized through two Bank-supported projects aimed at fiscal stabilization and reduction of systemic debts of the health system, while at the same time focusing on particular areas such as health care financing, social and long-term care, and a health information system.
Civil society empowerment is 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.
Roma issues are being addressed. Through grants and cooperation with the Decade of Roma Inclusion, the World Bank has been actively engaged on Roma issues in Slovakia over the past several years.
EU accession is being supported. Several analytical studies have been produced in order to help Slovakia face new challenges stemming from the adoption of EU requirements in different areas (Development Policy Review, an agricultural study, a living standards assessment, a Roma study, financial sector studies etc.)
Slovakia’s competitiveness has been strengthened. The World Bank has supported and substantively contributed to Slovakia’s competitiveness strategy.
New institutions have been built, and institutional capacity strengthened. IDF (Institutional Development Fund) grants have provided assistance to build capacity in a number of institutions in Slovakia, such as the Office of the Plenipotentiary for Roma Affairs, the Regulatory Office for Network Industries, and the Ministry of Justice and Finance.
NB: Lending is per fiscal year, July 1-June 30
Active Portfolio by Sector as of June 2006
(US$ millions)
The Country Aggregate Report provides more lending data for the Slovak Republic
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Ms. Petra Vehovska
Operations Analyst
pvehovska@worldbank.org
Phone: (421-2) 57526 722
Ms. Tunde Buzetzky
Communication Analyst:
tbuzetzky@worldbank.org
Phone: (421-2) 57526 724
World Bank Office
Suche myto 1
Europeum Business Center
Entrance B - 6th floor
811 03 Bratislava
Slovak Republic
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