Facts about Slovakia

Official name of the country: the Slovak Republic
Politics: Parliamentary Republic
Population: 5 433 385 (as of September 2010)
Land area: 49,035 square kilometers (18,928 square miles)
Capital: Bratislava
Currency: Euro (Slovakia joined the Eurozone on January 1, 2009)
Financial year: 1. January - 31. December
Language: Slovak
Religion: Roman Catholics are the largest religious group (65%) but there are also Protestant groups, a Greek Catholic, Orthodox, Jewish and other groups.

Political Development

Slovakia as part of an independent Czechoslovakia which was founded in 1918 and meant a definitive separation from the then Hungarian state went on till November 1989 through a period of complicated development. It started with the first big wave of emigration at the end of 19th century (nowadays there are more than 2.5 million Slovaks in the world, most of them (1.9 mil) in the USA) through the existence of a controversial Slovak State (1939-1945), life and work of the first Slovak president Jozef Tiso (1887-1947 when he was sentenced to death), Slovak National Uprising (1944) to the beginning of the communist regime (1948) which lasted till November 1989. Under the influence of the fall of communist regimes in Eastern Europe in 1989 the totalitarian regime in Czechoslovakia also fell. That was time to start building a democratic state as well as search for ways of a peaceful division of the federation into two independent republics. The foundations for the origin of an independent Slovak Republic (SR) were laid through the Declaration of Sovereignty by the SNR (Slovak National Council, Parliament) on July 17, 1992 and subsequent passage of the Constitution of the SR on September 1, 1992. De facto and de jure the Slovak Republic originated on January 1, 1993.

1.2.2. Political Structure

A. General elections

Since the fall of the communist regime in Slovakia free elections have been held six times. Twice still within the framework of the Federation (1990 and 1992) and four times within the framework of an independent SR (1994, 1998, 2002 and 2006).

1.2.3. Foreign Policy Orientation of the SR

Before joining the European Union, main determinants of the Slovak foreign policy were successful completion of association process into EU and NATO. Slovakia joined the NATO in March 2004 and the EU in May 2004. Membership in the EU and in the NATO has substantially altered the relations between Slovakia and its external environment. Foreign and security policy of the Slovak Republic has become foreign and security policy of a member country of the EU and NATO influencing also the bilateral relations of the Slovak Republic.

1.3.1. Macroeconomic Characteristic of the Slovak Republic

An independent Slovak economy has been in operation for more than twelve years and it has not fought with recession yet. The transformation from a planned economy into a market oriented one was successful. Slovakia's accession to the European Union may be interpreted as confirmation that its economy has successfully adopted the critical mass of changes necessary to be perceived as an equal partner by more developed countries. Though transformation process of the Slovak economy is still not complete.

The growth of the Slovak economy in the last ten years was one of the fastest in the countries of Central and Eastern Europe. However, lagging behind the real parameters of the European Union average is still quite significant. It will probably take several tens of years to catch up. If we look at the level of gross domestic product per capita on a purchasing power parity basis, the Slovak economy produces less than 50% of the EU average. Due to an expected inflow of direct foreign investments we suppose that the rate of economic growth in Slovakia will overtake the dynamics of GDP in the EU-15 countries in the following years. High public finances and foreign trade deficit are characteristic for the majority of new EU member countries. This also applies to Slovakia and in the last ten years it led to restrictive measures and efforts for structural changes. These changes took place in both public finances and the entrepreneurial environment, mainly related to the taxation system, social welfare, state budget management, public finances and price liberalization of goods and services until now regulated. In 2005 the macroeconomic development of Slovakia was an object of several positive international evaluations. The rating of the Slovak Republic was increased by several well-known rating agencies.

1.3.2. Gross Domestic Product

The year 1993 was not only the first year in which the Slovak economy functioned on its own but at the same time it was also the last year of its transformation recession which had started in 1991. After the decrease of the creation of GDP in 1991 and 1992 (by 14.6% and 6.5% respectively), in 1993 the creation of GDP decreased by 3.7% i.e. the volume of GDP created in 1993 only represented 76.9% of its amount in 1990. During the whole period from 1991 to 1993 the drop in the creation of GDP was connected with a lowering of domestic demand represented by its all main constituents. Relatively the strongest impact was caused by a lowering of the final consumption of households and of the gross formation of fixed capital.

The effects of restrictive measures were gradually exhausted and the subsequent growth of domestic demand also accelerated the dynamics of GDP - during the period 2001 to 2005 average annual rate of growth was 4.6 percent. In 2005, Slovakia's GDP was $47.4 billion with growth rate at 6.0 percent and per capita GDP was $8,710.

Foreign Trade

The solid growth in real GDP in 2004 was on the heels of a strong year-to-year growth in net exports. A combination of the high real growth in the export of goods and services (22.5%) and the acceptable real growth in imports (13.4%) was more that enough to balance a moderate decline in domestic demand. At present, Slovakia exports to the EU almost 86 percent of its production and imports more than 71 percent of its total imports. In 2005, Slovakia's total exports were $31.9 billion and imports $34.4 billion.

Major destinations of Slovak export are Germany (26.1%), Czech Republic (14.1%), Italy (7.1%) and Austria (6.6%). While major imports are from Germany (21.0%), Czech Republic (12.7%), Russia (10.7%) and Poland (4.1%). All the figures are for the year 2005.

Monetary Policy and Financial Sector

The National Bank of Slovakia is the authority responsible for the monetary policy of the Slovak Republic. It is independent of the government and is responsible for monetary and foreign exchange policy as well as for the regulation and supervision of the banking sector. Interest rate controls were eliminated and after the abolishing of credit limits of individual banks in January 1996, the monetary policy started to be implemented exclusively through indirect instruments. The regulation and management of the banking sector were continually reinforced.

As at December 2006, there were seventeen banks, one branch of foreign bank, one hundred and thirty-one providers of free cross-border banking services, and ten representative offices of foreign banks, operating in the Slovak banking sector. The majority of the banks have with foreign capital interests. During the last decade the participation of the state, private capital and foreign capital on the subscribed capital of banks was balanced. The privatization of the banks was a long-term politically sensitive issue. However, the high volume of bad debts in state banks eventually forced the government to sell them. Re-structuring costs exceeded SKK100bn. The biggest banks were joined by Austrian and Italian investors.

2004 was a breaking year for a new segment of the financial market. In January 2004, parliament passed the Law on the Old-Age Pension Scheme, allowing the government to launch preparatory works on the second pillar of the pension scheme. The year 2005 saw emergence of the old age pension savings market.

The monetary policy, which is entirely in the hands of the National Bank of Slovakia (NBS), remained rather loose in 2004. It can be characterized as a policy of gradual reduction of interest rates aimed at preventing the crown from appreciating too fast and at encouraging private consumption and economic growth. In the financial market interest rates declined in 2004 as a result of the pressure from foreign currency speculators on the crown's exchange rate and the central bank's effort to stimulate domestic demand. During 2004, the Slovak crown was one of the most attractive and the most stable currency in Central Europe. However, the capital market remained the only tender spot of Slovakia's financial market in 2004. In spite of an intense effort on the part of its administrators, it still seems unable to recover from the crisis it experienced in the second half of the 1990s.

The new government established after June 2006 election has promised to follow the Maastricht criteria and maintain the target date of 2009 for Euro adoption.

Sector of Enterprises

The first wave of the coupon privatization was finished while the Czechoslovak Federative Republic still existed. In order to prevent excessive atomization of ownership the Slovak government decided to cancel the second wave of privatization and replaced it by direct sales. The majority of enterprises were sold to their management and employees for preferential prices with a possibility of spreading the installments over 10 years. The sales were known for being insufficiently transparent and they were perceived as unfair.

Progress in the area of restructuring enterprises in the Slovak Republic was not completely satisfactory. Together with a group of highly profitable enterprises there are still many loss-making enterprises which need restructuring to survive. The main reasons for insufficient restructuring are weak banking sectors, insufficient procedures within the framework of bankruptcy and a lack of foreign capital.

The so-called third wave of privatization was generally expected, during which the new owners of enterprises would sell the decisive shares to strategic investors. First signs can be seen not only in valuable enterprises but also in relatively prosperous businesses. Relatively low overhead expenses, a cheap and educated labor force, associated membership in EU (and perspectives of full-fledged membership) resulting in advantages of access to European markets, and last but not least the much more transparent domestic and foreign policies of the new governmental cabinet, still constitute advantages for Slovakia. Profitability data from the enterprise sector were positive in 2001. It is important that in spite of a decrease in foreign demand the creation of profit continued in export oriented fields.

Nowadays there is a continuing discussion on the improvement of the entrepreneurial environment. Based on various surveys, firm managers are not satisfied with frequent changes in legislation, low enforcement of the law, corruption and the high tax burden. After the rationalization of the banking sector attention will have to be paid to the sphere of enterprises, because investment, especially in the area of small and medium size businesses, will be necessary for the creation of new jobs.

In the years 2003 and 2004 the government passed several legislative measures which should positively influence the entrepreneurial environment. They include the tax reform - the introduction of flat tax rate of 19%, act on commercial register, reform of the pension system, national strategy of support for direct foreign investments and small and medium size. State incentives extended to foreign investors, attracted Kia Motors to invest more than €1.1 billion in car manufacturing plant in Slovakia.

Labor Market

After the beginning of the transformation process unemployment in Slovakia rose much faster than in the Czech Republic although the macroeconomic and structural policies during the existence of the Czechoslovak Federative Republic were the same in both republics. This can be explained by a high dependency of the Slovak Republic on exports to countries of former COMECON countries, the important position of the armaments industry which was administratively suppressed and reliant upon the import of cheap raw materials and energy from the Soviet Union and later Russia. All these factors led to a sharp decrease in employment. A number of labor forces did not decrease as much as in the Czech Republic because their pensions were lower than in the Czech Republic.

The decrease of unemployment started in the period of the stabilization of the economy in 1994 and 1995. This positive development resulted mostly from the creation of new working positions. However, the unemployment rate in Slovakia is still second highest among EU25 countries. Long-term unemployment is widely spread especially in people with low education. Due to the continuing potential for the high increase of labour productivity it is expected that in the future, unemployment will decrease just gradually.