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Since the establishment of the Slovak Republic in January 1993, Slovakia has continued the difficult transformation from a centrally planned to a modern market-oriented economy. This reform slowed in the 1994-98 period due to the crony capitalism and irresponsible fiscal policies of Prime Minister Vladimir Meciar's government. While economic growth and other fundamentals improved steadily during Meciar's term, public and private debt and trade deficits soared, and privatization, often tarnished by corrupt insider deals, progressed only in fits and starts. Real annual GDP growth peaked at 6.5% in 1995 but declined to 1.3% in 1999. Much of the growth in the Meciar era, however, was attributable to high government spending and over-borrowing rather than productive economic activity. The economy grew 5.5% in 2004, the strongest growth in Central Europe for the fourth consecutive year, and is predicted to expand by more than 5% annually in 2005-2007. Headline consumer price inflation dropped from 26% in 1993 to an average rate of 7.5% in 2004, though this was boosted by hikes in subsidized utilities prices ahead of Slovakiaís accession to the European Union. In July 2005, the inflation rate dropped to 2.0% and is projected at less than 3% in 2005 and 2.5% in 2006. The current account deficit, a long-standing problem, shrank to $1.4 billion, or 3.4 percent of GDP in 2004, from its recent peak at $1.9 billion, or 8.8 percent of GDP in 2001. A drop in the trade deficit accounted for most of the improvement. In 2004, Slovakia's trade deficit amounted to 3.4% of GDP, up from 1.9% of GDP in 2003, but much less than the gap of 10.3% in 2001. The foreign trade balance is now largely influenced by strong growth in capital good imports related to foreign investments in the country. This trend will likely begin to reverse in 2006 when those investments begin production and selling abroad. Slovakiaís total foreign debt was $23.7 billion at the end of 2004, up $5.4 billion from the 2003. The increase in the level of debt was caused largely by exchange rate losses of the dollar. Foreign direct investment (FDI) in Slovakia has increased dramatically. Cheap and skilled labor force, low taxes, a 19% flat tax for corporations and individuals, no dividend taxes, liberal labor code and a favorable geographical location are Slovakiaís main advantages for foreign investors. FDI has grown by 600% since 2000 to around $13.6 billion or $2,540 per capita by the end of 2004. Germany is Slovakia's largest trading partner, purchasing 28.7% of Slovakia's exports and supplying 23.8% of its imports in 2004. Other major partners include the Czech Republic (13.2% imports and 13.3% exports), Italy (5.6% and 6.4%), Russia (9.4% and 1.2%), and Austria (4.3% and 7.8%). Slovakia imports nearly all of its oil and gas from Russia and its export markets are primarily OECD and EU countries. More than 75% of its trade is with EU members (73% imports and 85% exports). Slovakiaís exports to the United States made up 4.8% of its overall exports in 2004, while imports from the U.S. account for 1.6% of its total purchases abroad. |
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