Recent Economic Developments

This paper reviews economic developments in Slovenia during 1990–96. Slovenia experienced its first positive real GDP growth in 1993. Real GDP grew by 1.3 percent. This modest recovery began under the impetus of buoyant domestic demand, which grew by 8¼ percent; real foreign demand contracted by 6½ percent owing to a recession in Western markets. Despite the growth in real aggregate demand by more than 2 percent, the output response was dampened as domestic demand growth spilled primarily into a boom in consumer goods imports.


This paper reviews economic developments in Slovenia during 1990–96. Slovenia experienced its first positive real GDP growth in 1993. Real GDP grew by 1.3 percent. This modest recovery began under the impetus of buoyant domestic demand, which grew by 8¼ percent; real foreign demand contracted by 6½ percent owing to a recession in Western markets. Despite the growth in real aggregate demand by more than 2 percent, the output response was dampened as domestic demand growth spilled primarily into a boom in consumer goods imports.

I. Real Sector

1. Overview

Contractionary forces stemming from the disintegration of the former SFRY and the CMEA as well as the move to a more market-oriented system had induced a cumulative fall of 12 ½ percent in real GDP in Slovenia over the period 1990-91. Output fell by another 5 ½ percent in 1992—the first full year of independence—due to weak domestic demand and lingering effects of the loss of markets in the former SFRY.

Slovenia experienced its first positive real GDP growth in 1993 (Table 1 and Chart 1). Real GDP grew by 1.3 percent. This modest recovery began under the impetus of buoyant domestic demand which grew by 8 ¼ percent; real foreign demand contracted by 6 ½ percent due to a recession in Western markets. Despite the growth in real aggregate demand by over 2 percent, the output response was dampened as domestic demand growth spilled primarily into a boom in consumer goods imports. On the supply side, the recovery in real GDP was entirely on account of the service sector which grew by 4 percent.

Table 1.

Aggregate Demand and Supply

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Sources: Slovenian authorities; and staff calculations.


Citation: IMF Staff Country Reports 1996, 120; 10.5089/9781451835588.002.A001

Source: Data provided by Slovenian authorities.1/ The series are on income and expenditure for socially- and state-owned enterprises, and beginning January 1992 includes private enterprises (with more than 3 employees).

Real GDP growth accelerated to 5 ½ percent in 1994, was broad-based and sectorally more balanced than in 1993. The primary stimulus came from a rapid expansion in investment as uncertainties associated with the program for privatization of socially-owned enterprises (SOEs) receded, and merchandise export growth became positive as economic activity recovered in Europe. Earnings from tourism also expanded. Consumption demand was moderated by slower real wage growth and higher savings rates; aggregate demand expansion channeled itself strongly into real GDP growth.

2. Aggregate demand

Over the period 1992–94, aggregate demand witnessed a qualitative and quantitative change, first turning positive in 1993. The contribution of domestic and foreign components shifted in response to domestic and external conditions. Real wage growth had begun to exert expansionary pressures on private consumption demand as early as the first quarter of 1992. These pressures were especially manifest in 1993, but receded somewhat in 1994. A recovery in Western markets began in mid-1993, and registered its full impact on aggregate demand only in 1994. In the meantime, along with domestic demand expansion, export growth had created the conditions for a revival of investment expenditures.

Real aggregate demand contracted sharply in 1992 falling by 19 percent. Merchandise exports were the main source of the contraction. Private consumption expenditures also fell by 3 ¼ percent as real disposable income declined by 4 percent. The decline in income was caused by: (i) a decline in real average wage by 9 percent; (ii) a decline in total employment by 6 ½ percent; and (iii) a spillover effect on wage-indexed social transfers. Investment activity recovered only somewhat, due to the uncertainties surrounding the future of the privatization program, rising by only 5 percent. A survey of industrial enterprises reported that only 19 percent of firms indicated that credit availability was satisfactory, suggesting that financial constraints may also have been a factor dampening investment activity, in particular for newly created firms. Net capital formation remained negative for a third consecutive year.

Aggregate demand growth turned positive in 1993. The real average wage grew by 16 ½ percent in 1993 over 1992. The impact on disposable income, which rose by 7 percent, was moderated by a continuing decline in total employment. The greater purchasing power of the household sector translated into a 5 ¾ percent increase in private consumption expenditures. Gross investment growth also doubled to 11 ½ percent and net investment became slightly positive. A substantial portion of the increased consumption expenditures were, however, satiated by a rapid expansion in imports of goods (and services) which grew by 3 ½ percent. In addition, earnings from merchandise exports was negative and overwhelmed a rebound in tourism earnings; exports of GNFS fell by 6 ½ percent (see Chapter II on External Sector Developments).

Aggregate demand growth rose to 4 ¼ percent in 1994, helped by robust growth in all components. Investment expenditures rose by 15 percent as the privatization process gathered momentum and there was greater certainty about the ownership transformation program (see Chapter V on Structural Reforms). The recovery in Western markets provided a boost to merchandise exports which, together with the exports of non-factor services (primarily tourism and cross-country transportation services), recorded a growth rate of 3 ¾ percent. Private consumption demand growth slowed down to 3 ¼ percent as real wage growth was moderated by a restrictive income policy introduced in mid-1994.

The structure of household income also displayed a changing character during 1992–94. 1/ The share of wages and salaries, non-wage income and social transfers in total household income had averaged 55 percent, 17 percent and 28 percent, respectively in 1990–91. Over 1992–94, the share of wages and salaries fell to 50 percent, as the share of non-wage incomes and social transfers rose to 20 percent and 30 percent, respectively. Despite rapid growth in 1993, the level of wages and salaries was still 20 percent below its level in 1990, while other receipts were 26 percent higher and social transfers 18 percent higher than their respective levels in 1990. This partly reflected the downsizing of the work force experienced during the period and the aging of population, plus early retirement and tax breaks on the non-wage incomes (see the section on Labor Markets).

3. Sectoral composition of GDP and recent trends

Slovenia has a diversified productive structure with a high share of industry and services in value added averaging 39 and 55 percent, respectively over 1992–94 (Table 17). As a part of the former SFRY, Slovenia was the source for a large part of the manufactured output of the domestic economy as well as the exit point for exports to Western markets. In part, due to the disintegration of the internal market, there has been a gradual shift from heavy dominance of industry toward a higher share of services in GDP. 1/

a. Industry

Industrial production in Slovenia began on a downward trend during the late eighties as the economy of former SFRY faltered (Table 24). The decline continued until the middle of 1993 when a recovery, initiated by rising domestic demand, began. However, industrial production, which had fallen by over 13 percent in 1992, continued to contract in 1993, declining by 3 percent. This decline was broad-based with all three major branches of industrial activity experiencing a contraction: manufacturing output fell by 2 percent, electricity, gas and water supply by 3 percent, and construction activity by 4 percent. The turnaround in 1994 was decisive and strong. Real growth in these three branches was 7 percent, 6 ½ percent and 7 ½ percent, respectively, propelling total industrial output growth to 6 ½ percent.

The successful reorientation to the European markets, strong demand in partner countries and recovery in domestic investment contributed to the industrial expansion. The commodity composition of industrial growth reflected these factors. While the growth in final goods had already turned positive in 1993, the growth rate was, however, less than 1 percent, as a large share of private consumption demand was satisfied by imports. The recovery in capital and intermediate goods production came only in 1994 with growth rates of 13 ½ and 8 ¾ percent, respectively.

b. Services

The service sector was the first to register a positive growth rate, expanding by 4 percent in 1993. The growth moderated to 3 ½ in 1994. The share of services in value added increased from 54 percent in 1992 to 56 percent in 1994. Rapid growth in the public sector in 1992 and 1993 was a contributing factor to this expansion of the service sector. The private sector is also developing rapidly and represented 88 percent of the total number of firms, 16 percent of total employment (up from 2 percent in 1990) and 24 percent of total revenues in 1994 (Tables 3032).

Tourism, as measured by the number of nights spent by tourists, fell by almost half between 1989 and 1991, reflecting the uncertain political and security situation (Table 26). As the security environment in the region improved, tourism recovered; overnight stays by tourists in 1993 and 1994 increased by 5 ½ and 9 percent, respectively. Despite this recovery, the number of overnight stays was still 26 percent below the peak level recorded in 1990. Tourism-related industries also showed good results. Hotels and restaurants grew by 6 percent in 1993 and 8 percent in 1994, transport by 3 percent in 1993 and 6 percent in 1994.

Within the domestic market, retail turnover grew by 3 ¼ percent in 1993 and 7 percent in 1994. The share of wholesale and retail trade, repairs services remained at about 10 percent of GDP. Small, private enterprises thrived in retail trade, and had better business results than large socially-owned firms. Financial and business-related services increased by 3 percent in 1993 and 2 ½ percent in 1994.

c. Agriculture, forestry and fishing

Agriculture accounts for about 5 percent of GDP. After continued declines of 6 percent in 1992 and 3 ¾ percent in 1993, it grew by 6 ½ percent in 1994. The private sector is playing an increasingly important role in this sector, and produced 75 percent of the value added in agricultural production in 1994 as compared to 66 percent in 1989.

4. Labor market developments

In 1988, socially-owned enterprises accounted for 85 percent of total employment, and agriculture accounted for approximately half of private employment (Vodopivec and Hribar-Milic (1993)). In socially-owned firms job security was guaranteed and labor shedding was banned by law. As a corollary, hidden unemployment—workers officially employed but not performing any meaningful work—reached 13 ½ percent in 1988 (Mencinger (1989)). Other important characteristics of the pre-independence labor market include: (i) a sectoral allocation of resources tilted towards heavy industries to the disadvantage of service industries, and (ii) a relatively high labor force participation rate, in particular for women.

After 1990, total employment shrank rapidly while unemployment reached 15 percent of the labor force (Chart 2 and Table 33). This was accompanied by a reallocation of labor from large enterprises to the public sector and small firms or the self-employed. Real wages also recorded a precipitous decline during the initial years of the transition (Table 34). This adjustment, however, was short-lived and by 1994, the real average net wage was back to its 1990 level.



Citation: IMF Staff Country Reports 1996, 120; 10.5089/9781451835588.002.A001

Source: Data provided by the Slovenian authorities.

Faced with this situation on the labor market, the Slovenian authorities’ strategy has been multifaceted. First, in order to foster labor market flexibility, steps have been taken to reduce firing costs. Second, active labor policy measures have been adopted (e.g., specific employment subsidies to reduce labor cost, retraining). Third, a well-developed safety net has been maintained, including relatively generous unemployment benefits and easy access to early retirement for older workers. Fourth, and more recently, wage agreements since May 1994 have been aimed at containing wage inflation to increase labor demand.

a. Employment

Total employment has fallen sharply since 1989. Between 1990 and 1992, it fell by 13.9 percent and, subsequently declined by another 4 percent over 1993–1994. This dramatic change was accompanied by a reallocation of labor from socially-owned to private enterprises (large and small). However, sectoral reallocation within the enterprise sector was more limited (Table 33).

Over 1990–94, employment in large firms dwindled. In particular, due to restructuring and privatization, socially-owned large firms reduced their labor force by almost 45 percent. By the same token, the share of mixed and privately owned firms surged from about 5 percent to more than 25 percent of large firms’ employment (Table 36). Over the same period, the share of small firms and self-employed in total employment rose strongly from 14 percent in 1990 to 19 ½ percent in 1994.

These numbers, however, may well overestimate the undergoing transformation. Anecdotal evidence suggests that some of these changes were merely a way to circumvent labor legislation or to minimize the tax burden. For instance, many social enterprises transferred their workers and assets to private subsidiaries as a means to avoid workers’ councils veto on labor shedding. The mother company therefore became a financial holding company with a limited number of employees. Also, the growing number of the self-employed may be due to a more advantageous fiscal status (see Chapter IV on Fiscal Developments).

Sectoral reallocation has been somewhat limited. The staffing of a new administration has increased employment in the public sector by 6 ½ percent between 1990 and 1994. Within the enterprise sector, changes have been much less marked. Overall, the share of services has edged up slightly, in particular for financial services, but remains distinctly lower than the EU average (Table 2).

Table 2.

Employment by Sectors of Activity in Slovenia and the EU

(In percent)

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Source: Labor Force Survey—Statistical Office of Slovenia (1994).

The unskilled labor has borne the brunt of the labor force adjustment. In 1988, for the labor force as a whole, the average number of schooling years was 9.3, close to the average for socialist economies (Vodopivec and Hribar-Milic, 1993). Since then, the proportion of highly educated people has increased. Higher education has proved to be a useful shelter against unemployment risks, and the return on education has increased. The impact of education on unemployment (Table 3), would be even more visible if these numbers are corrected for the fact that early retirement has reduced the number of unemployed older workers who, on average, have a lower number of years of education.

Table 3.

Structure of Labor Force and Unemployment by Level of School Attainment, May 1994

(In percent)

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Source: Labor Force Survey—Statistical Office of the Republic of Slovenia (SORS)

Efforts were made even in the former SFRY to foster employment flexibility by reducing firing costs. Legislation enacted in 1988–89 gave employers the right to lay-off workers. Redundancy payments, however, remained substantial. In particular, the advance notification period for lay-offs was 24 months and workers were not expected to work during that spell, often dubbed as “paid vacations”.

The Slovenian authorities have facilitated labor shedding by reducing administrative hurdles and further lowering firing costs. In 1991, amendments to the Labor Code reduced the advance notice period to 6 months for “technologically redundant” workers. In the case of mass lay-offs, however, workers” councils have retained a significant say and firms have to prepare restructuring programs for redundant workers, co-financed by the state which reimburses up to 50 percent of the associated costs. In 1991, the government co-financed 21,223 redundant workers. A large majority were put on “paid vacation”, 2,499 received a lump-sum payment, 1,082 chose early retirement and 172 were trained (Abraham and Vodopivec (1993)).

Early retirees were offered the possibility to “buy-back” qualifying years to increase their pension benefits. Given the generous conditions offered, these measures attracted relatively large flows of new pensioners: 6,600 in 1991 and 4,600 in 1992. However, it became increasingly clear that early retirement was creating a substantial threat for long-term financial balance of the Pension Fund. Therefore, mass lay-off plans have reduced their reliance on early retirement and the influx of early retirees has ebbed in 1994 and 1995 (see Appendix II).

b. Unemployment and labor market policies

In the mid-1980s, the unemployment rate fluctuated around 1 ½ percent; it rose sharply after the beginning of the transition and peaked in December 1993 at 15 ½ percent. Since then, the unemployment rate has recorded a slow decline to 13.4 percent by May 1995. There is, however, a puzzling divergence between registered unemployment rates and estimates resulting from the Labor Force Survey. 1/ Divergences between the two indicators are not uncommon in other countries. However, for Slovenia, the difference is the most sizeable. 2/

The adjustment in labor force participation has been key to contain unemployment. Between 1990 and 1994, about 150,000 jobs were lost; the number of unemployed, however, only increased by 83,000, with the difference resulting from lower labor force participation, in particular for older workers (Table 37).

Table 4.

Unemployment Rates in Eastern and Central Europe

(1993 2nd quarter—In percent)

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Source: Koltay (1994) and Labor Force Survey—SORS (1994).

The exit rate out of unemployment is fairly low. A study of displaced workers by Orazem et al. (1995) finds that half of the displaced workers in January 1989 were still unemployed by August 1992. As a result, the proportion of the long-term unemployed (more than one year) reached 48 percent in May 1994.

Unemployment benefits are relatively generous although eligibility requirements have been progressively tightened since 1991. For the first three months, benefits represent 70 percent of the average wage during the three months preceding the unemployment spell. Thereafter, the replacement rate diminishes to 60 percent. Depending upon past employment history, the duration of entitlement ranges from 3 months (for past employment superior to 9 months) to 2 years (greater than 20 years). Benefits are normally payable on a monthly basis; workers receive a lump-sum payment if it can be used to obtain employment.

To complement unemployment insurance, assistance is provided to job seekers who are no longer eligible for unemployment benefits on a means-tested basis—income per family member below 80 percent of the minimum wage. Job seekers are also entitled to the reimbursement of moving expenses (to foster geographical mobility), to health insurance, and to certain in-kind benefits (e.g., free meals).

Some observers have argued that unemployment benefits are too generous, compared for instance to OECD countries. In particular, the exit rate out of unemployment rises sharply immediately before job-seekers become non-eligible for benefits. One may note, however, that the budgetary costs of unemployment benefits have been contained below 1 ½ percent of GDP, on average over 1991–94.

A key feature of labor market policies in Slovenia is the importance of active policies. Training programs, in particular, play an important role for both workers and the unemployed. The former can receive vocational on-the-job training, typically for a period of 4 to 5 months. A system of fixed-term contracts also attempts to help first-time job seekers. The unemployed receive 80 percent of the minimum wage if they enroll in a training program.

A substantial employment subsidy program aims at preventing bankruptcies and unemployment. The number of displaced workers due to bankruptcy procedures had increased drastically between 1989 and 1991, from 1,600 to 19,200. In July 1991, the government suspended the initiation of bankruptcy procedures by the Agency for Payments, Supervision and Information (APPNI), formerly the Social Accounting Service (SDK), and to preserve employment subsidized financially distressed firms. Subsequently, the flow shrank to 6,700 in 1992 and 9,700 in 1993. To restore their economic viability, these distressed firms may receive various subsidies (e.g., discount on electricity bills or tax reliefs).

c. Wages

As in other transitional economies, real wages described a U-shaped pattern, falling in the initial stage of the transition and then recovering. The fall in wages had begun as early as 1989—the cumulative fall between 1989 and 1992 was 40 percent, with a large fraction of the decline taking place in 1990. Like in other transitional economies, however, in-kind benefits provided by firms smoothed the adjustment. Over 1992–94, the recovery was as brisk as the decline itself: real net wages bottomed out in February 1992, and by end-1992, had regained a large fraction of the initial decline. Ultimately, real wages in 1994 were at the same level as in 1990 (Table 34).

The strong growth in real wages between 1992 and 1994 caused two main concerns. First, there was a fear that it would fuel inflationary pressures. Second, to contain unit labor costs firms would have to achieve strong productivity gains (Table 38). Such a high-wage/high-productivity strategy seemed undesirable in a high-unemployment context.

Collective bargaining has been the main vehicle to check wage growth. In 1993, no agreement was signed and wage inflation reached 16 ½ percent. The subsequent inflationary pressures convinced trade-unions and the Chamber of Commerce—which represents the enterprise sector—that a wage agreement was required. A March 1994 Agreement, that had been reached between the two parties, was transformed into a law by Parliament in May. Its main disposition was that nominal wage growth would be below the rate of inflation for the rest of 1994. As an incentive to comply with the Agreement, the government imposed an additional wage tax which could reach up to 100 percent of the excess wage.

The Agreement moderated wage growth to 6 percent in 1994. The results were, however, not completely satisfactory for two reasons. First, certain clauses permitted firms to grant wages exceeding the agreed-upon levels without penalty. A number of firms elected to do so; some others were willing to pay the excess-wage tax. Second, the wage agreement had a limited horizon which created the possibility that wage growth could accelerate upon the termination of the Agreement at end-year.

The Wage Agreement for 1995—which covers the period April 1995 to March 31, 1996—was signed in mid-May 1995. This Agreement has more far-reaching goals. In addition to assisting in cooling down inflation, the Agreement states that wage moderation is key to fostering employment growth. Therefore, the parties—the government, employers and employees—agreed that wages be only imperfectly indexed to prices over 1995. Given the spurt in wage growth during the “lame-duck” period between the 1994 and 1995 Agreements, the implementation of the agreement requires a reduction in nominal wages in July 1995. This reduction is to be enforced by the APPNI. The wage Agreement is also intended to be part of a broader agreement on macroeconomic policies whereby the government commits itself to deliver appropriate fiscal and monetary policy to stimulate employment growth.

The 1995 Agreement will, however, do little to alter the wage structure in Slovenia. The wage structure was compressed by workers and government interventions in the former SFRY. Under self-management practices in the former Yugoslavia, workers’ councils had a tight grasp on relative wages at the firm level. Also the government’s objective was to level down wage differentials amongst firms through the use of discretionary taxes and subsidies. For example, loss-making firms were exempt from tax payments and received subsidies.

There is some evidence that wage dispersion has increased in Slovenia, in particular, to provide a higher return to education (see Orazem and Vodopivec (1993)). Amongst sectors, however, this wage differentiation has remained limited. To gauge the magnitude of these trends, the standard deviation of average sectoral level was calculated for single-digit industries. The calculations indicate that wage dispersion increased substantially before 1991. This differentiation process subsequently came to a halt. Similar trends are being observed in other transitional economies (W. Perraudln and T. Pujol, 1995). It may be conjectured that centralized wage bargaining in an inflationary environment, where workers try to achieve perfect indexation, is unlikely to deliver a large increase in sectoral wage differentiation.

Table 5.

Standard Deviation of Sectoral Wages

(In percent)

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Source: Labor Force Survey—SORS (1994).

II. External Sector Developments

1. Background

Slovenia has a highly open economy with the ratio of external trade to GDP that averaged over 120 percent during 1992–94. Even as a part of the former SFRY, its geographical proximity to Western markets made Slovenia a springboard for industrial production and processing for these markets; with only 8 percent of the population of the former Yugoslavia, it contributed almost 30 percent of exports. The close contacts, and the existence of a sizeable market presence, conferred Slovenia with advantages that have stood it in good stead once it gained independence. Slovenia adapted its trade patterns quickly to the loss of markets in the former SFRY and the CMEA. 1/ In addition, through a number of free trade agreements with the EU and countries of Eastern and Central Europe, Slovenia has gained better access to export markets.

Estimates have been made of trade losses that Slovenia experienced from the disintegration of the former SFRY and the CMEA. 2/ Besides losses to merchandise and processing trade, uncertainties arising from the security situation caused a precipitous decline in tourism earnings and cross-country transportation, both major sources of foreign exchange earnings for the economy.

Principal developments in the external accounts over the period 1992 to the first half of 1995 relate to: (i) a persistent surplus in the current account; (ii) recovery in, and reorientation of exports from the former Yugoslavia to Western markets; (iii) recession in partner countries and import boom of consumer goods in 1993; (iv) steady rebound in tourism and transportation earnings; (v) sizeable private capital inflows from the second quarter of 1993 to the fourth quarter of 1994; and (vi) substantial accumulation of international reserves over the entire period. Following a brief description of trends, their proximate determinants are identified and analyzed.

2. Balance of payments

The balance of payments for Slovenia has been characterized by current account surpluses of varying magnitudes and large net capital inflows in 1993–94 (Table 41). Together these flows have contributed to a rapid accumulation of net foreign assets by the banking system (Chart 3). Total net international reserves of the banking system reached US$3.5 billion at end-July, 1995 rising from a meager US$0.4 billion at end-1991. Net international reserves of the BOS increased from a paltry US$112 million at end-1991 to US$1.7 billion at end-July, 1995, while the foreign assets of deposit money banks (DMBs) expanded from about US$300 million to US$1.5 billion. This sharp increase in net foreign assets over the period end-1991 to May, 1995 was financed primarily by cumulative current account surpluses (Table 6).



(in millions of US dollars)

Citation: IMF Staff Country Reports 1996, 120; 10.5089/9781451835588.002.A001

Source: Data provided by the Slovenian authorities.
Table 6.

Contributions to Reserve Accumulation

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Sources: Bank of Slovenia; and staff estimates.

a. Current account

The current account has been consistently in surplus during 1992–94 but these surpluses have varied substantially during this period (Chart 4). The current account surplus rose to 7 ½ percent of GDP in 1992 from 1 percent of GDP in 1991, only to recede to 1 ¼ percent in 1993 before rising again to about 3 ½ percent in 1994. Except for 1992, the trade account was in deficit. Thus, the current account surplus stemmed from large surpluses on the net services account related to tourism earnings.



(in millions of US dollars)

Citation: IMF Staff Country Reports 1996, 120; 10.5089/9781451835588.002.A001

Source: Data provided by the Slovenian authorities

The variations in the current account surplus cannot be explained by movements in the fiscal position. The fiscal accounts were in modest surplus (about ½ percent of GDP) in 1992–93 and slipped into a small deficit in 1994. This swing of about 1 percentage point of GDP compares to changes in the current account surplus of 6 percent of GDP. Thus, the nongovernment sector has been primarily responsible for the large current account surplus and variations in it.

The saving-investment balance offers a useful perspective for analyzing the level of, and movements in, Slovenia’s current account surplus. In 1992, the investment/GDP ratio was low owing to uncertainties related to the future course of economic policies in the newly independent country. The privatization process, in particular, was still the subject of an unresolved debate. In each subsequent year, the investment/GDP ratio has risen. Indeed it has increased by 4 ½ percentage points of GDP from 1992 to 1994. Thus, the current account surpluses can be attributed to domestic savings ratios of the private sector. Domestic savings were nearly 27 percent of GDP in 1992 and fell to 21 ¼ percent in 1993, as Slovenia experienced a consumption boom that sucked in imports, particularly of consumer durables. This drop in the savings ratio of nearly 5 percentage points of GDP explains 80 percent of the decline in the current account surplus.

(1) Trade balance

Over the period 1992–94, Slovenia had a deficit in the trade balance with the exception of 1992. The swing in the trade balance of about US$1 billion between 1991 and 1992 is fully accounted for by the redirection of exports to Germany and France following the loss of markets in the former SFRY and the CMEA. Moreover, 1992 was the first full year of independence and, for the first time, trade with republics of the former SFRY was recorded as external trade. Slovenia had a surplus, amounting to almost US$300 million, on this account. The large surplus on the trade account US$790 million (6 ½ percent of GDP) in 1992 was completely wiped out in 1993. The swing in the trade balance by almost 7 ¾ percent of GDP led to a deficit of about US$150 million (1 ¼ percent of GDP). The shift was caused by the decline in export earnings by US$600 million, due to the recession in Western markets. At the same time, a rapid expansion in domestic household incomes generated a boom in consumer goods imports, which increased by US$400 million. In 1994, the trade balance remained virtually unchanged in dollar terms as merchandise exports and imports both grew by 11 ½ percent. The recovery in Western markets was the primary cause of the expansion in exports. The growth in imports, in contrast to 1993, was focused entirely in capital and intermediate goods; consumer goods imports were almost unchanged in dollar terms.

(a) Merchandise exports

The high degree of openness of the economy and the geographic concentration of trade makes the fortunes of Slovenian exports highly susceptible to the level of economic activity in the EU; econometric estimates of the dependence of Slovenian exports earnings place the elasticity of exports earnings to import demand in four principal European trading partner countries (with a lag of one quarter) at 0.61. 1/ It is plausible that, in the period following independence, as exports have become more focused upon countries in the EU, this elasticity may have risen. The shortness of the time series precludes a firm analysis, but preliminary evidence using quarterly data for the period 1992 to the first quarter of 1995 indicates that this elasticity may be greater than unity.

In addition, exports earnings in U.S. dollar terms are also sensitive to movements of the U.S. dollar against the German mark and the Italian lira. Almost 60–70 percent of Slovenia’s exports are denominated in these two currencies. A decomposition of export values into price and quantities is presented in Table 7.

Table 7.

Decomposition of U.S. Dollar Export Values

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Sources: Data provided by Bank of Slovenia; and staff calculations.

Following the collapse of the internal market in the former SFRY, Slovenian firms were quick to expand sales to Western markets (Table 42). Merchandise exports to non-Yugoslav markets grew by 8 percent to US$4.2 billion in 1992, and to the EU by 14 percent. Total exports, including the former republics, stood at US$6.7 billion in 1992. The recession in Europe was the primary cause of a 9 percent decline in export earnings in 1993; earnings from exports to the EU fell by 5 percent. Exports to markets in the former SFRY fell by another US$545 million to US$1 billion in 1993; the only factor moderating the fall in export earnings was a reorientation to countries of the former CMEA. The recovery in Europe in 1994, coupled with a weakening of the dollar against the deutsche mark, generated a 12 percent increase in returning export values to US$6.8 billion in 1994.

The volume of export fell by 3 ½ percent in 1993 and recovered by about 5 percent in 1994. An examination of the trends, by quarter, reveals that while the decline in exports continued late into 1993, export volumes had already begun a decisively upward trend as early as the first quarter of 1993. Export volumes demonstrated a rising trend over the remainder of 1993 and throughout 1994; the index of export volumes was 14 percent lower in the first quarter of 1993 compared to the same period in 1992, but had recovered almost all the lost ground by the first quarter of 1995.

The substantial change in the geographical destination of exports is evident in the halving of the share of exports to the former SFRY and the CMEA in total exports to 15 percent and a corresponding increase in the share of the EU from 61 to 66 percent over 1992–94. Export activity within the EU is also concentrated, with four major trading partners—Germany, Italy, France and Austria—accounting for almost 90 percent of exports to the EU (and 55 percent of all exports). Croatia is a large and important trading partner accounting for 10–12 percent of total exports.

The commodity composition of Slovenian exports continues to be dominated by manufactured products which account for over 80 percent of total exports (Chart 5 and Table 43). Within manufacturing exports, however, the relative contribution of commodity groups (classified according to SITC codes) has changed in response to the differential sectoral effect of the need to shift to more competitive export markets. Sectors also differ in the degree to which they are affected by changes in exchange rates. The loss of traditional markets was most acutely felt by machinery and transport equipment sector whose share in total exports fell by 10 percent to about 30 percent in 1992. With the relative share of all other commodity groups almost constant, the share of other manufactured goods in total exports (in particular textiles, furniture and footwear) rose even at virtually constant export values.



Citation: IMF Staff Country Reports 1996, 120; 10.5089/9781451835588.002.A001

Source: Data provided by Slovenian authorities
(b) Merchandise imports

Trends in merchandise imports have been related to developments in real wages, the level of external competitiveness and the pace of investment activity. While imports were initially driven almost entirely by consumption goods, capital goods import increasingly became the principal mover after the second quarter of 1993 as investment expenditures rose. The level of external competitiveness (as measured by a CPI-based real effective exchange rate) remained virtually unchanged from 1992 to the second quarter of 1994 and, therefore, had little impact on import volumes. There is preliminary evidence that the appreciation of the real exchange rate that began in the third quarter of 1994 has generated a shift of domestic demand to imported goods.

Merchandise imports were depressed in 1991 and 1992. Uncertainties caused by the transformation process and low levels of economic activity generated a decline in imports of capital goods; slow export growth (given the high degree of processing activity) led to lower imports of intermediate goods; and the fall in real incomes that had taken place in the preceding years induced a squeeze on consumption goods imports. 1/ The resumption of real wage growth in 1992 reversed this trend and consumer imports spurted sharply in the first quarter of 1993. The boom in consumer durables was especially marked, with imports of road vehicles, which had averaged US$475 million over 1990–92, rising to over US$755 million in 1993. Imports of consumer goods moderated markedly in 1994. However, total import volumes rose even further as the recovery in industrial production in mid-1993 gave an impetus to capital-goods imports. In dollar terms, imports of capital goods rose by 11 percent in 1993 and by a substantial 22 percent in 1994. Imports of intermediate goods also recovered in 1994 increasing by 13 percent reflecting the importance of processing and re-export activity and its close relationship to export growth.

The geographical composition of imports—like that of exports—showed a continued move toward Western Europe during 1992–94 (Table 45). The share of the EC and EFTA rose from 60 percent to almost 70 percent. During the same period, the share of the former SFRY republics and CMEA dropped from 19 percent to 13 percent. The commodity composition (Table 46) mirrors the trends in imports by end-use over the period. In general, about 60 percent of imports consist of manufactured goods, of which more than half is machinery and transport equipment. Raw materials and fuels account for some 17 percent, chemicals slightly more than 15 percent, and food and live animals around 5 percent.

(2) Services

The underlying strength of the current account largely reflects the traditional strong surplus in the service account (Table 46 and Chart 6). The surplus averaged US$920 million or 7 ⅓ percent of GDP in 1988–90, but declined to 3 percent in 1991. 2/ The surplus on the services account has recovered, albeit slowly, to over US$600 million (4 percent of GDP).



(in millions of US dollars)

Citation: IMF Staff Country Reports 1996, 120; 10.5089/9781451835588.002.A001

Source: Data provided by Slovenian authorities.

Principal contributors to the surplus on the services account are tourism earnings and receipts from cross-country transportation. Tourism and transport sectors registered a drastic decline in 1991, as a result of the breakup of the former SFRY and the deterioration in the security situation in the region. Total receipts fell by almost US$680 million to 8 percent of GDP. The situation improved greatly in 1992, when tourism receipts almost doubled to US$670 million and processing fees increased by 18 percent to US$180 million. These favorable developments more than offset a further 20 percent decline in transport receipts and total receipts from non-factor services rebounded to US$1.2 billion or 11 ½ percent of GDP in 1992. The recovery in both sectors has been steady over 1993–94. Some of the increase in receipts, especially in 1994, is due to valuation changes caused by the depreciation of the U.S. dollar against European currencies. 1/ The quantity magnitudes, however, reflect the rebound more clearly. Registered night stays by foreign tourists in Slovenia, which had peaked at almost 4,000 thousand in 1989, fell precipitously to 970 thousand in 1991. The recovery began in 1992 and registered stays recovered to around 2,500 in 1994. Non-factor expenditures, which consist mainly of transport and travel expenditures, have averaged 3–5 percent of GDP in recent years.

Receipts and expenditures for factor services account for a small part of the current account balance (1–2 percent) contributing an overall deficit to the total. With relatively small direct and portfolio investment into and out of Slovenia, interest receipts and payments constitute over 95 percent of the investment income account. Due to measurement and recording problems, payments on account of labor incomes to non-residents (in particular, to migrant labor from Croatia) may be underestimated.

Private transfers and labor remittances fluctuated between US$70–100 million per year until 1991, when they virtually dried up as a result of the uncertain environment in Slovenia. The recovery was swift and nearly complete with inflows averaging US$100 million in 1993–94. Official transfers, consisting mainly of technical assistance, averaged a little over US$60 million over 1992–94.

b. Capital account

(1) Trends in and composition of capital flows

Reflecting similar trends in other economies in transition in Central and Eastern Europe, a net outflow of capital from Slovenia occurred in 1990 and 1991. 1/ 2/ In the case of Slovenia, these outflows were almost entirely a reflection of the uncertainties associated with the break-up of the former SFRY. Net capital inflows resumed in 1992 (even though net errors and omissions showed a large outflow) and became substantial in 1993 and 1994 averaging US$480 million or 3 ¾ percent of GDP (Chart 7). Compared to other transitional economies, however, the composition, nature and the tinder underlying factors for the flows are somewhat different. In particular, these flows were predominantly private in nature. A breakdown of these components is presented in the following table:



Citation: IMF Staff Country Reports 1996, 120; 10.5089/9781451835588.002.A001

Source Data provided by Slovenian authorities.1/ Includes net errors and omissions.2/ Defined as the nominal interest rate on 31–90 day time deposits minus the German interest rate on 3-month time deposits less than 1 million marks minus the annualized exchange rate crawl (to proxy for expectations of movements in the exchange rate).3/ Defined as household currency and deposits and loans of enterprises.4/ Defined as the difference between the nominal interest rite on foreign exchange deposits in Slovenia and the interest rate on German 3 month time deposits less than 1 million marks.
Table 8.

Components of the Capital Account

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Sources: Bank of Slovenia; and staff estimates.

In a number of the other transitional economies, the net outflows of the late 1980s and the early 1990s were associated with large debt service payments and difficulties in obtaining new financing due to political uncertainties. Similar factors were at work in the former SFRY; however, the introduction of “internal convertibility” under which citizens could purchase foreign exchange freely led to a large exodus of households’s foreign currency holdings abroad in 1990 and 1991. The recorded capital account (excluding net errors and omissions) for Slovenia displayed a net outflow of a little over US$150 million in 1991. Direct foreign investment all but dried up. Outflow of currency and deposits by households contributed two-thirds to the total net outflow of US$150 million. 1/ This substantial accumulation of currency and deposits was ripe for a return as soon as domestic political and economic conditions stabilized.

Following a return to political and monetary stability in 1991, the capital account (excluding errors and omissions) turned around in 1992. Net capital inflows were roughly equivalent to the outflows in 1991. Direct investment tripled to US$115 million, albeit from the low level of 1991, and together with loans of enterprises (net of repayments amounting to US$60 million), accounted for all of the surplus of US$175 million (1 ½ percent of GDP). The privatization of socially-owned houses and apartments induced a return of about US$120 million on account of household currency and deposits in the first four months; an outflow of an almost equal amount in the remainder of the year, due to varying and often negative uncovered interest differentials, left the contribution of this source negligible for the year as a whole. Large errors and omissions (US$280 million or 2 ¼ percent of GDP) preclude a more useful categorization of the transactions in the balance of payments in 1992. The contribution of the capital account to reserve accumulation in 1992 was small.

The capital account increased sharply in 1993 to US$425 million or 3 ⅓ percent of GDP. An important source of the change was the regained access to commercial credits by importers which contributed over US$100 million to the surplus. Inflows of currency and deposits by households and short-term loans by enterprises (about US$65 million each) were also important contributors to the inflow; loans by the official sector added another US$90 million. Direct foreign investment remained unchanged. The turnaround in inflows on account of households came around the middle of 1993, also the peak season for tourism in Slovenia. 2/

The capital account surplus grew even larger in 1994 to US$535 million or 3 ¾ percent of GDP. Inflows of currency and deposits grew to a veritable deluge in the first semester; net inflows amounted to US$375 million for the year as a whole, while loans by the enterprise sector (classified largely as “long-term”) more than doubled to US$225 million. Pre-payments on imports moderated the surplus by about US$150 million and may have been a response to expectations of a nominal appreciation set in motion by the slowdown in the rate of crawl of the exchange rate in mid-1994.

(2) Capital flows: An empirical analysis

The preceding account provides an indication of the factors that could help explain trends in the capital account. Econometric analysis of possible determinants of the capital account is, of course, subject to several caveats: (i) the balance of payments data is subject to statistical misclassifications; (ii) the available time series are of short length and high frequency; and (iii) the underlying structural relationships could still be in flux. Nonetheless, a preliminary analysis may shed some light, providing a more rigorous underpinning to policy judgements that need to be made in any case, and a foundation for further analysis.

Various measures of the capital account were used: (i) the capital account, including errors and omissions (KA); and (ii) the capital account, including errors and omissions but excluding loans by the official sector (KA1). Two narrower measures were also examined, focusing on private capital inflows: (i) Household currency and deposits and loans of enterprises (PKF); and (ii) Household currency and deposits only (HHCD).

With regard to explanatory variables, it is evident that movements in the capital account would be governed by secular changes in the economic (and political environment) and, given the high degree of openness of the capital account, by short-term variation in interest rates. The role that the return to political and economic normalcy may have played in the resumption of the inflows is evident in the early rise in the level of direct foreign investment which is typically governed by long-run considerations. Similar factors affected commercial credits received by importers though expectations about future movement in the exchange rate may also have played a role. It is to be expected that capital inflows are positively correlated with interest rate differentials, and the level of economic activity (increased investment expenditures would be financed by loans abroad and consumption expenditures may be financed by inflows of currency and deposits).

Two measures of interest rate differentials were used: (i) uncovered tolar interest rate differentials, defined as the nominal interbank rate in Slovenia minus the interbank rate in Germany minus the annualized rate of exchange rate crawl (to proxy for expectations of movements in the exchange rate); and (ii) interest differentials between domestic foreign currency and German time deposits. 1/ The level of economic activity was proxied by indices of industrial production (both total and capital goods). Rising activity, particularly investment, is expected to increase foreign borrowing or import financing. The large magnitude of the errors and omissions in 1991 and 1992 and the fact that the classification of foreign exchange flows between the current and capital transactions may not be completely reliable suggests that any empirical estimation of the determinants of the capital account as a whole would have to grapple with the issue of measurement error; the current account and tourism receipts were used to proxy, inter alia, for measurement errors, with a negative expected correlation.

OLS regressions were estimated using monthly data with contemporaneous and (a maximum of two period) lagged values of the regressors for the period January 1992 to April 1995. Equations were also estimated for the period January 1993 to April 1995 when the contribution of net errors and omissions was relatively small. Non-significant variables were sequentially dropped to obtain a parsimonious representation. The estimated equations are reported below:

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Equation I: 1/


Equation II:


Equation III:


Equation IV:


The estimated equations, despite the data caveats, provide a reasonably good fit to the data. For the period as a whole, the current account and lagged industrial production are statistically significant determinants of the broad measures of the capital account, overshadowing interest differentials, suggesting that measurement problems may dominate the analysis at this high aggregated level. 1/ In general, the narrower measures of the flows do not provide as good a fit to the data as the broader measures for the longer sample period. However, contemporaneous values of both measures of interest rate differentials persistently appear as statistically significant. 2/

The goodness-of-fit and the diagnostics of the estimated equations improve substantially when private capital flows are the dependent variables and the time period is truncated to March 1993 to April 1995. 3/ In addition to interest rate differentials, which remain highly significant, lagged values of industrial production also become significant explanatory variables for PFK. Almost all variables, with the sole exception of interest rate differentials, drop out when HHCD is used as the dependent variable suggesting that interest differentials may have been the primary factor behind these inflows.

3. External dept

Slovenia has made considerable headway in regularizing its creditor relations. The apportionment of debt of the former SFRY among its successor states continues to be an ongoing process and involves a complicated set of issues. The determination of Slovenia’s share has employed a number of principles. According to BOS data, using a final beneficiary principle, Slovenia’s total medium- and long-term debt assumed from the former SFRY was US$1,765 million at end-1991. 1/ By end-1994, medium- and long-term debt amounted to US$1,659 million, of which about 30 percent was owed to multilateral institutions (excluding the Fund), 20 percent to Paris Club creditors, and 40 percent to commercial banks (Table 47). 2/ Fund credit to the former SFRY was divided among the successor states in accordance with the Fund quota key with Slovenia’s share at 16.39 percent. The same principle was used by the World Bank to determine Slovenia’s share of the debt of the former SFRY that could not be allocated according to the final beneficiary principle.

a. Official creditors

With regard to bilateral official creditors, initial contacts between the Slovenian authorities and the Paris Club secretariat commenced in June 1992. 3/ These contacts—conducted through an exchange of letters between the MOF and the secretariat—sought to determine the principles for allocating Slovenia’s share of the official bilateral debt of the SFRY. No Agreed Minute was signed by the creditor governments and Slovenia, as is customary under a Paris Club rescheduling; also there was no reconciliation of the amounts owed to individual official creditors.

The exchange of letters, inter alia, established principles to be observed in bilateral negotiations between the Republic of Slovenia and individual Paris Club creditors. These principles were: (i) Slovenia would assume 16.39 percent of the unallocated debt of the former Yugoslavia; (ii) the terms and conditions of the original rescheduling agreements would continue to apply; (iii) repayments on existing late payments on the consolidated debt would be staggered over a period of three years; and (iv) creditors had no objection to the use of the final beneficiary principle, where practicable. However, in defining Slovenia’s share, debt owed or guaranteed by entities located on Slovenian territory should also be taken into account; and (v) internally transferred obligations would be settled on a bilateral basis with the caveat that, if they were effected without the prior consent of the creditor, the substitution of the debtor would be invalid.

Point (iv) has been a source of problems in reconciling amounts owed and completing bilateral negotiations. This point establishes two criteria for allocation: (i) a final beneficiary criterion; or (ii) a territorial criterion. The former criterion is determined by the economic benefit derived from the loan or associated project rather than the territory wherein the bank borrower/guarantor might be located. Implementation of the final beneficiary principle was considered possible because all borrowings by the former Yugoslavia were registered with the national bank of each republic or autonomous provinces and records were maintained by domestic commercial banks of borrowings and repayments made by final beneficiaries. However, over the various reschedulings of the original official debt by Paris Club creditors, a complicated and varied set of relationships arose between the National Bank of Yugoslavia (NBY), domestic commercial banks and creditors. The NBY and domestic commercial banks were variously named as the guarantor, agent and borrower. In addition, interlocking relationships arose between commercial banks and final beneficiaries in various republics and have been a source of dispute. Lack of agreement between Slovenia and some creditors on the primacy of these two criteria led in some cases to a prolonged dispute over the amount of Slovenia’s debt.

Bilateral negotiations began at different dates with official bilateral creditors and are in various phases of completion. Initial negotiations with Belgium, France, Germany and the Netherlands have been completed but require review by a parliamentary committee, signature and, finally, ratification by the Slovenian parliament.

b. Commercial creditors

Commercial bank debt of the former SFRY was restructured under the New Financing Agreement (NFA) in 1988 and, as of June 2, 1995 amounted to US$4.6 billion. Based on the final beneficiary criterion, Slovenia’s obligations were estimated at US$377 million. Under the terms of the NFA, commercial banks in the various republics were named as debtors and bound by a “joint and several” liability clause, with the National Bank of Yugoslavia as the guarantor. Thus, each individual bank could be held liable by creditors for the entire amount owed under the NFA. Owing to the complications, inter alia, arising from the clause, Slovenia and commercial bank creditors were unable to reach agreement on Slovenia’s share of the debt. Pending the resolution of the issue, once principal repayments began to come due in January 1994, Slovenia limited debt service payments to debt owed by Slovenian final beneficiaries and on the unallocated debt (using the Fund quota key). These amounts were placed in a fiduciary account with Dresdner Bank, Luxembourg.

On June 8, 1995 an agreement in principle was reached between the International Coordinating Committee (ICC) representing creditors and Slovenia. Under the terms of this agreement Slovenia would assume 18 percent of the outstanding debt. 1/ The agreement has to be approved by two-thirds of the creditors. It will then have to be ratified by the Slovenian parliament. The actual amount of Slovenia’s debt would depend on the strength of the U.S. dollar between now and completion of the deal, and to a lesser extent on the ongoing process of debt reconciliation. This amount would be further reduced owing to the exclusion of “connected persons” from the transaction. Connected persons were defined on two lists prepared separately by the U.S. State Department—the OFAC list—in conjunction with enforcing sanctions on Serbia/Montenegro and by an arbitrator proposed by Slovenia and accepted by the ICC.

The agreement involves the issue of new Slovenian bonds, denominated in U.S. dollars and deutsche marks, in exchange for claims held by eligible creditors. Connected persons are not eligible for this exchange. The transaction is structured as a “qualified asset transaction” and no cash payment would take place. Thus, the sharing provisions of the NFA are avoided. The new bonds issued by Slovenia will consist of two series: (i) a “Base Series” in a principal amount equal to 18 percent of the maturities falling due under the NFA; and (ii) an “Additional Series” with the market value of the principal amount, upon issuance—Additional Series Market Value. (ASMV)—to equal 18 percent of the past due principal and interest under the NFA. The final maturity date (2006) for the new bonds would be the same as that for the NFA. Thus, the bonds would be repaid over 11 years—presuming the deal is closed towards the end of this year—instead of the original 13 years. All bonds are to bear interest at LIBOR plus 13/16 percent. Interest rate on the “Additional Series” will be reset when the first interest payment comes due, if required, at a spread over LIBOR (not to exceed LIBOR plus 1 ½ percent) to ensure that, at the reset date, these bonds will have a market value equal to the ASMV.

The agreement in principle stipulates that, with the consent of creditors holding more than two-thirds of Refinancing Loans, Slovenian entities would be released of the “joint and several” liability clause of the NFA. It also provides for Slovenia to “indemnify and hold harmless” the Agent and members of the ICC if they are subjected to legal expenses on account of the intended transactions in the agreement.

4. Trade system 2/

Slovenia maintains a relatively liberal exchange and trade regime. Pending the effectiveness of the new Law on Customs Tariffs, the tariff regime of the former SFRY’s remains in effect with tariff rates varying from 0 to 25 percent. Including import surcharges, weighted tariffs average 14 percent in 1994. Slovenia imposes quotas on imports of certain textiles and agricultural products. Import duties have been reduced temporarily by 50 percent for imports of raw materials and intermediate products, and by 80 percent for capital goods, provided the items imported are not produced domestically. In November 1992, the equalization tax on imports was reduced from 8 ½ percent to 1 percent. There is also a 1 percent customs clearance fee.

The new Law on Customs Tariffs will be effective January 1, 1996. Tariff reductions are contemplated in the new law. Protection for import-substituting industries will be practically unchanged from the current low levels as tariff rates will be low and will apply only to imports from countries with which Slovenia does not have a free-trade agreement. The new average tariff rate would be reduced to 10 ½ percent (compared to the existing rate of 12 ½ percent) based on 1994 import patterns. The tariff structure would also be rationalized. The equalization and customs clearance taxes will be abolished.

Slovenia became a full member of the GATT on October 30, 1994 and is implementing all obligations. It also signed the Marrakesh agreement and became a founding member of the World Trade Organization (WTO) on December 23, 1994; the agreement was ratified by Parliament in June 1995. Slovenia has implemented all tariff and other obligations, with the exception of those relating to agricultural products, stemming from WTO membership starting January 1, 1995. In the area of financial services, Slovenia will harmonize with the frameworks of the General Agreement of Trade and Services (GATS) and the EU.

The process of joining the EU began with exploratory discussions in December 1993 and negotiations for associate membership commenced on March 15, 1994. Following the completion of technical discussions, an association Agreement was initialed in June 1995. Harmonization of the rules of origin with the EU is under way; this would lead to some diminishing of competition from non-EU members.

With regard to the likely impact of obligations and privileges arising from membership in the various international forums, in particular on the balance of payments, preliminary analyses suggest that the impact on export performance is expected to be marginal; the effect on imports is expected to small initially, but rising over the medium-term. It is also expected that stiffer competition from large firms will lead to some sectors being dominated by larger firms.

In an effort to gain market access and reduce the geographical concentration of exports, Slovenia has entered into free trade agreements with a number of countries of Central and Eastern Europe including the Czech Republic, Slovak Republic, Hungary and Poland. Slovenia also has a free trade agreement with EFTA and intends to pursue the possibility of free trade agreements with the Baltic states (contacts have already been initiated with Latvia and Lithuania) and intends to join the CEFTA.

III. Monetary and Exchange Rate Developments

1. Overview

Slovenia has made excellent progress toward nominal stability since introducing the tolar at the time of monetary independence (October 1991). Double digit monthly inflation was reduced to around ½ percent by mid-1995 and the tolar exchange rate against the DM has stabilized (Chart 8). Real money aggregates fell initially but as confidence in the tolar was won, a strong sustained recovery in demand for money occurred, doubling real money balances during 1992–95 and beginning a “tolarization” of the economy (Table 49 and Chart 9). Slovenia’s approach to monetary policy was based on a monetary anchor with the money supply regulated via a reserve money program which targeted inflation through regulating growth of narrow money. Exchange rate policy shifted from an initial float, to a real rule from mid-1992 to mid-1994, and finally unannounced nominal stability.



(Monthly Percentage Change)

Citation: IMF Staff Country Reports 1996, 120; 10.5089/9781451835588.002.A001

Source: Data provided by the Slovenian authorities1/ Exchange rate in the bank-enterprise market.



Citation: IMF Staff Country Reports 1996, 120; 10.5089/9781451835588.002.A001

Source: Data provided by the Slovenian authorities

Monetary policy has gone through three major stages since monetary independence. 1/ In the initial stage (October 1991 through mid-1992), the BOS reduced reserve money to eliminate a large monetary overhang and to limit exchange rate depreciation. After losing three fourths of its initial value from October 1991 to January 1992, the tolar exchange rate stabilized during February-June 1992. The sharp fall in the real value of reserve and narrow money and the exchange rate would lay the foundation for lower inflation, a current account surplus, and a subsequent revival in real growth. Progress in the fight against inflation was achieved first. Inflation fell from 20 percent per month in October 1991 to about 2 ½ percent per month by mid-1992.

In the second stage (mid-1992 through mid-1994), BOS’s goals were to gradually reduce inflation and to protect external competitiveness and thereby orchestrate a revival in real output. A reserve money program was used to reduce inflation while a real exchange rate rule was implemented to protect competitiveness. Large sterilized purchases of international reserves and a complicated set of monetary regulations and policies were designed to induce banks to acquire international reserves. The nominal exchange rate depreciated approximately in line with inflation during this period, so that the real rule was realized (Chart 10). While inflation continued to fall during the second half of 1992, little progress was made in reducing inflation during 1993–94. Core inflation reached a plateau of about 1.1 percent per month while administered price inflation declined during 1993–94 accounting for the somewhat lower inflation in 1994 compared to 1993.



Citation: IMF Staff Country Reports 1996, 120; 10.5089/9781451835588.002.A001

Source: Data provided by the Slovenian authorities1/ A decline indicates a depreciation.

Sterilization became increasingly expensive in the face of swelling external surpluses and pressures for an appreciation. Furthermore, an incomes policy was adopted in May 1994 to offer another means to protect competitiveness. The third and current stage of monetary policy started in the last quarter of 1994 when the BOS reached the end of its willingness to sterilize. As a consequence the exchange rate stabilized against the DM (and appreciated against the U.S. dollar) and monthly inflation was halved to below ½ percent by mid-1995.

2. Establishing the new currency (1991/mid-1992)

In the first months after introducing the Tolar in October 1991, the BOS confronted difficult macroeconomic problems: double digit monthly inflation; a highly indexed economy (including broad money); no international reserves; low confidence in the new currency; and an absence of credibility in the BOS. The authorities’ main goal was to bring inflation down quickly from near hyper-inflationary levels. The BOS also wanted to acquire sufficient international reserves to facilitate trade, give itself more flexibility in monetary policy, and to enhance its credibility. The BOS managing board adopted a reserve money program to control inflation along with a floating exchange rate regime (Mencinger (1993), Bole (1995)).

From October 1991 to January 1992 the tolar lost three-fourths of its value, dropping from an initial level of SIT 13 per DM to SIT 50 per DM. This reflected the unfavorable macroeconomic conditions and the lack of confidence. The BOS changed reserve requirements, set-up controls over the central bank’s refinancing instruments, and subsequently reduced by 90 percent outstanding refinancing credits to banks. These polices led to a 30 percent nominal decline in reserve money and a 55 percent decline in real reserve money by January 1992.

In response, nominal variables began to stabilize in early 1992. The first sign was that the nominal exchange rate steadied at about SIT 51 per DM during February-June 1992. During February-April 1992, reserve money hovered at approximately its October 1991 level. Monthly inflation fell by two-thirds from its end-1991 level to 5 percent in April 1992. At this point, the BOS initiated its reserve money program that has remained in place ever since. Inflation was halved again to an average of 2 ½ percent per month during the second half of 1992.

Aided by an overshooting of the real exchange rate, a current account surplus of 7 ½ percent of GDP emerged during 1992 permitting Slovenia to substantially increase its foreign assets. The BOS acquired US$400 million during October 1991-June 1992, while commercial banks more than doubled their holdings of international reserves to nearly US$400 million by June 1992. In mid-1992 banks had to convert some of their foreign assets into tolars to obtain sufficient liquidity for their operations, owing to the BOS’s strict monetary policy.

3. Monetary developments in mid-1992 to 1994

During the second major phase of monetary policy, the primary goal remained the reduction in inflation, but the objective of promoting an economic recovery became more important (Bole (1995)). Large output declines that commenced in 1990 had continued into 1992, creating uncertainty as to when the economy would turn around. A more ambitious approach to controlling inflation based on an exchange rate anchor—now a viable option with international reserves 60 percent larger than base money—was rejected. It was feared that a nominal exchange rate anchor would lead to an excessive real currency appreciation, lower exports, and further depress output. Furthermore, the BOS was concerned that it did not have either the credibility or the requisite accompanying policies in place—specifically incomes policy—to support use of the exchange rate as a nominal anchor.

Reserve money programming was refined and became the primary means of controlling inflation. The reserve money programs was based on an unannounced inflation target, although it was widely known that the BOS was seeking to lower inflation. Reserve money growth would be slowed in the next month if inflation exceeded the described path. To further promote economic growth, the reserve money program was calibrated to accommodate increases in demand for money, particularly transaction demand (see Appendix I). Thus the monthly rate of increase in reserve money was increased with real growth in household income and real growth in transactions (when these data became available with a one to two month lag).

The other major aspect of monetary policy was an unannounced goal to depreciate the exchange rate to keep the real exchange rate constant (Bole (1994)). The BOS wanted the economy to retain the competitive edge that had resulted from the large currency depreciation in late 1991. The BOS also wanted support from a restrictive incomes policy to restrain real wage growth to assist in protecting external competitiveness—this was not forthcoming, however, until 1994. Additionally, fiscal surpluses during 1992–93 helped make room for sterilization.

The BOS had mixed results in achieving its inflation targets during 1993–94 as inflation appeared stuck in the range of 1–2 percent per month. End-year inflation was 23 percent in 1993 and was reduced to only 18 percent by end-1994 (compared to a budget target of 13 percent). The reduction in inflation that did occur in 1994 was entirely due to a decline in administered price increases; core inflation was 12 ½ percent in both 1993 and 1994. During 1994, administered price inflation was halved to 5 percent.

During 1993–94, Slovenia encountered entrenched inflation, reminiscent of other countries that used a gradual money-based approach to reduce inflation. Further decreases in inflation were stymied by the nominal depreciation of the exchange rate. The BOS was successful in preserving the real exchange rate for two years (from mid-1992 to mid-1994) through its sterilization intervention, but at a great cost. 1/

4. Monetary developments in 1994 to mid-1995

The BOS gradually initiated a major change in monetary and exchange rate policies during the second half of 1994. Several factors contributed to this change. Faced with substantial surpluses in the exchange market in 1994, the BOS intervened on a large scale to achieve its implicit exchange rate objective, while sterilization was undertaken to achieve its monetary target. Consequently both the BOS and banks began to acquire international reserves at an accelerated pace in 1994. 2/ The policy dilemma became increasingly frustrating and expensive as BOS profits began to plummet. 3/ During the second quarter of 1994, an incomes policy designed to limit wage increases to productivity gains was adopted by the Government and approved by Parliament. To some extent this introduced additional flexibility in the conduct of exchange rate policy. The need for a strict real exchange rate rule to maintain external competitiveness was lessened.

In mid-1994 the BOS developed and sold a new product—a warrant—in part to enhance its sterilization capabilities. 4/ With this instrument, the BOS was able to offset liquidity injections caused by foreign exchange purchases and repurchase operations (REPOs). 5/ However, when the bills became due in December 1994, the BOS only sterilized about two-thirds of the liquidity that was released (through REPOs). In addition, the BOS allowed banks—under the control of the Bank Rehabilitation Authority (BRA)—to sell foreign exchange directly to the BOS to decrease the level of outstanding liquidity loans to these banks. Finally, the BOS adopted a more passive approach to reserve money management by giving banks increased options to obtain tolar liquidity through direct sales of foreign exchange to the BOS. This series of activities amounted to unsterilized purchases of international reserves. Consequently, the BOS was regularly above its reserve money target from October 1994 to mid-1995. The growth of reserve money accelerated reversing the previous trend established during 1992–94. Reserve money growth, which had slowed to a 12-month rate of increase of 34.9 percent by end-September 1994, jumped to 56.9 percent at end-December 1994 and 71 percent at end-May 1995. Broad money growth did not increase and remained virtually unchanged as net foreign assets expansion slowed.

These policy changes appear to have been a trial balloon for the BOS to see if lower domestic interest rates and a less stringent monetary stance would solve their capital inflow problems. The outcome was surprisingly positive and reinforced the BOS’s policy stance. As expected, the pressure for nominal appreciation of the exchange rate did subside and the exchange rate stabilized, notwithstanding the slowdown in BOS sterilized interventions. A decline in both nominal and real interest rates occurred and capital inflows begin to ease. The BOS also imposed inward capital inflow controls in February 1995. These controls do not appear to have contributed to a decline in capital inflows during February-Nay, 1995, although it is impossible to quantify the impact. 1/ After several months core inflation declined substantially to below ½ percent per month during April-July 1995.

5. Instruments of monetary Policy

The BOS was extremely active on a broad number of fronts modifying and refining its refinancing facilities on a regular basis and selling its own bills to achieve an array of policy goals. While its main objective was to implement its reserve money program, the secondary goals for the refinancing facilities and sale of bills included inducing depreciation of the exchange rate, providing liquidity support to rehabilitation banks, and influencing interest rates. For the most part, the BOS did not use interest rates to ration access to its refinancing facilities or determine the volume of its sales of bills. Instead, the BOS established conditions for access to its refinancing facilities requiring BOS securities as collateral and requiring banks using its facilities to purchase foreign exchange from exporters at a specified exchange rate. The BOS auctioned either the quantity of foreign exchange to be purchased from exporters or the exchange rate for the transactions rather than auctioning access to its refinancing facilities via interest rates.

Reserve requirements were unchanged during 1993 and 1994 and restructured in April 1995. Reserve requirements were decreased on demand deposits, increased on medium-term deposits, lowered on longer term deposits, and eliminated altogether for deposits of more than one year maturity. 1/ For a period from November 1994 to June 1995 the BOS imposed excess reserve requirements on banks paying higher-than-average interest on tolar deposits (see section 8 below). There are no reserve requirements on foreign exchange deposits, instead there are foreign exchange cover regulations, these were raised slightly in 1995. 2/

BOS bills were an integral part of monetary policy. At the time of monetary independence the BOS possessed no Government securities in its portfolio to implement monetary policy as only limited Government securities existed. Tolar currency was originally issued in exchange for dinars of the FYR in October 1991. With BOS policy oriented towards sterilizing a portion of its foreign exchange purchases beginning in mid-1992, the BOS undertook to sell its own bills. Three basic types of BOS bills have been sold: tolar denominated, foreign exchange bills, and twin bills (with tolar and foreign exchange components). The foreign exchange bills are purchased with foreign exchange, have maturities from 60. to 120 days, and since May 1994 from 180 to 360 days. Tolar and twin bills are purchased with tolars. Tolar bills have a maturity of 2 to 60 days; twin bills have maturities of 3 to 6 months. Half the twin bills are repaid in foreign exchange. Bills are made available on-tap rather than sold by auction. Interest payments were indexed to inflation or exchange rates (see below). Foreign exchange bills were sold mostly to banks to help them meet foreign exchange cover regulations.

In June 1994 the BOS introduced a new bill which specified a nominal interest rate (17 percent) for the first time, with a maturity of six months. Removable warrants were attached to this bill that stipulated that if inflation were above a designated level (13 percent), the warrants could be used to purchase the next issue of foreign exchange bills or tolar bills at a discount. These warrants increased the effective rate of return and, therefore, were a substitute for explicit indexation or a higher nominal interest rate. The discount was based upon the deviation of actual inflation from the designated level when used to purchase tolar denominated bills, or alternatively the deviation of the actual DM exchange rate depreciation from designated inflation. Thus, the warrants provided protection against higher-than-designated inflation or exchange rate depreciation that was less than designated. When the original bills matured in December 1994, another series was issued at only one third the original volume. The third issue of warrants was offered in June 1995 carrying a 9 percent per annum rate of interest and inflation designation of 0.6 per month (7.4 percent per annum).

The major refinancing Instruments consisted of Lombard loans for which BOS bills were used as collateral; liquidity loans which served as a window of last resort for rehabilitation banks and banks that are net borrowers in the interbank market; short-term loans against foreign exchange bills; and foreign exchange operations. 1/ Foreign exchange operations consisted of outright purchases, repurchase agreements (REPOs), and temporary purchase of BOS foreign exchange bills. 2/

The Lombard interest rate was set well below interbank market rates and instead used to influence the exchange rate (Table 52). They were nominal interest rates while all other BOS interest rates were indexed to inflation in the case of tolar denominated facilities and bills or exchange rate depreciation in the case of foreign exchange denominated bills. For liquidity loans, there was virtually no spread between refinancing rates and interest payments on BOS bills. Instead of using interest rates to ration refinancing facilities, access to the facilities was regulated by conditions designed to influence the exchange rate. The BOS stipulated that banks must purchase a specified amount of foreign exchange from exporters within a limited period and at a specified exchange rate in order to use the Lombard facility, special 14-day liquidity loans to rehabilitation banks, normal REPOs, and temporary foreign exchange purchases. 3/ The BOS auctioned these instruments based on either the exchange rate or the amount of foreign exchange to be purchased. In this manner the BOS designated its immediate objective for. the exchange rate and assured that tolars were supplied at this rate.

There were several facilities and policies that supplied liquidity to the rehabilitation banks. These banks were partially relieved of fulfilling reserve requirements during April 1993 till mid-1995. 1/ The BOS also set up special facilities for these banks, including one-day and 14-day liquidity loans for which interest rates were often below time deposit rates.

To supplement sterilization policy, the BOS imposed capital controls in February 1995. These required enterprises that borrowed abroad (less than 5 year loans) to either immediately use the proceeds to finance imports or deposit 40 percent of the tolar equivalent of proceeds into unrenumerated tolar accounts. Longer term loans were not subject to any restrictions. The main impact of this regulation appears to have been to induce enterprises to arrange longer maturity loans.

6. Inflation and demand for money

The reasons why core monthly inflation seemed to stagnate during 1993–94, after having fallen so sharply in 1992, is a difficult question to answer. Tracing the movements in the nominal exchange rate, monetary aggregates, and wages-administered prices provide a reasonably plausible explanation for the observed inflation patterns in 1992 and 1993. The lack of progress in reducing inflation in 1994 is, however, not well explained by these variables. The sudden drop in inflation during 1995 appears to be attributable to the stabilization of the nominal exchange rate.

During 1992, a number of economic variables combined to induce a large decline in monthly inflation. The nominal exchange rate depreciated slowly—RPI inflation during 1992 was 93 percent while the nominal exchange rate depreciated 38 percent—and administered prices increases were below core inflation. The accumulated impact of these trends led to a sharp drop in inflation up to mid-1992 and another drop at the end of 1992. It is hard to characterize the impact of monetary aggregates. Although real money aggregates increased sharply, this increase appears to have been an accommodation of an increase in demand for money.

During the second half of 1992, several policy shifts occurred. Although these shifts did not offset the inflation gains made in 1992, they had a negative impact on inflation reduction in 1993. After a short period (February-June 1992) of nominal exchange rate stability against the DM, the nominal exchange rate began to depreciate again during the second half of 1992. In 1993, the exchange rate depreciated by 27 percent while inflation was 23 percent during the year. Adjustments in administered prices contributed 10 percentage points to inflation in 1993. 2/ Growth in real narrow money declined during 1993, growth in real M2 accelerated sharply, and real broad money grew at about the same pace in 1993 as in 1992. Again, these real increases in monetary aggregates appear to have reflected growth in real money demand.

In 1994, the nominal exchange rate depreciated more slowly—only a 4 percent depreciation took place in 1994 compared to inflation of 18 percent. Growth in real money aggregates continued in 1994 but at about half the pace of 1993. Administered prices increased at half the pace of 1993 contributing to a 5 percentage point decline in the overall inflation rate.

A substantial decline in inflation occurred beginning March-June 1995. Core inflation fell to an average of 0.4 percent during March-June 1995 compared to 1.2 percent per month during the same period in 1994. The main factor appears to be the exchange rate. The nominal exchange rate against the DM not only stabilized but appreciated by 5 percent from December 1994 to May 1995.

A possible explanation for this pattern of inflation reduction is that the exchange rate depreciation coupled with expectations and a highly indexed economy hindered progress. Evidence appears to point to the exchange rate as the main determinant of inflation. Granger causality tests confirm that the exchange rate influences inflation (Appendix I). The time lag is short, two months. As expected, the impact of the exchange rate on core inflation is much stronger than overall inflation. The reverse causality of core inflation on the exchange rate is found to oscillate, the effect is positive and significant for one month lag and negative and significant for two months lag. This bidirectional causality is to be expected given the formulation of the reserve money program and the real exchange rate rule that prevailed during most of the time period under consideration. Additionally, Granger causality tests indicate bidirectional causality between reserve money and the exchange rate. Granger causality tests indicate only a weak causal relationship exists between narrow money and inflation in both directions. 1/ No causality was detected between inflation and tolar time deposits, M2, foreign exchange deposits, or broad money.

Econometric estimates indicate that the demand for narrow money is stable and adjusts rapidly to changes in price levels. Real narrow money also increases with real household income, is inversely related to real interest rates, and increases with the exchange rate. 1/ Another interesting finding is that the time trend in this difference equation is positive and significant. This points to a sustained increase in demand for money and remonetization of the economy that is not explained by the variables included in the econometric equation. This interpretation is supported by the rapid rise in tolar time deposits relative to foreign exchange denominated deposits. In 1994, foreign exchange denominated deposits increased only 12 percent in DM terms (20 percent in tolar terms), while tolar time deposits rose by 80 percent. Econometric tests of M2 indicate an unstable equation, which was expected given the high degree of indexation of tolar time deposits. The econometric estimates of broad money indicate a stable function. However, the indexation of tolar time deposits to inflation and of foreign exchange deposits to the exchange rate renders broad money supply highly endogenous and thus an unsuitable nominal anchor.

7. Capital inflows and sterilization

Balance of payment surpluses presented a major complication for management of monetary policy, leading to a large accumulation of international reserves as banking system holdings of foreign assets quadrupled to US$3.3 billion during mid-1992 to mid-1995. The nature of the inflows varied over the period (see Chapter on External Sector Developments). During mid-1992 to mid-1994 the BOS resisted pressures for an exchange rate appreciation through active sterilization. The BOS directly increased its net foreign assets and induced banks to increase their net foreign assets, successfully implementing an unannounced real exchange rate rule. During 1992 this required extensive sterilization. The BOS increased its international reserves mainly by selling BOS bills, leading to a large increase in BOS net foreign assets and a decline in BOS net domestic assets (Chart 11). In 1993 when external surpluses moderated, BOS sales of bills declined and BOS net foreign assets rose at a more moderate rate. In 1994, net foreign assets of the BOS increased rapidly and sales of BOS bills rose leading to a fall in net domestic assets of the BOS. The net foreign assets of the banking system increased rapidly during 1992, fell during 1993, and increased again during 1994 (Chart 12). Net domestic assets of the banking system were almost constant in 1994 as broad money growth was entirely due to net foreign assets increases.



Citation: IMF Staff Country Reports 1996, 120; 10.5089/9781451835588.002.A001

Source: Data provided by the Slovenian authorities


Citation: IMF Staff Country Reports 1996, 120; 10.5089/9781451835588.002.A001

Source: Data provided by the Slovenian authorities.With increases in the stock of outstanding BOS bills, increased interest expenditures virtually eliminated BOS profits in 1994. According to the BOS Annual Report, BOS profits were 0.8 percent of GDP in 1992, they tripled to 2.5 percent of GDP in 1993, and nearly disappeared in 1994 falling to 0.1 percent of GDP. Two-thirds of the 1993 profits of the BOS were unrealized capital gains resulting from the large currency depreciation. The profit decline in 1994 reflected the high sterilization costs and the modest level of nominal exchange rate depreciation (7 percent).

BOS balance sheet changes indicate the extent to which the BOS was oriented towards sterilization (Table 50). Net foreign assets increased by SIT 110 billion from end-1993 to May 1995 while reserve money increased by only SIT 35 billion, leading to a considerably drop in net domestic assets. The decline in net domestic assets was mostly brought about by net sales of BOS bills of SIT 60 billion from end-1993 to May 1995, of which 60 percent were foreign exchange bonds.

8. Interest rates

Interest rates—both deposit and lending rates—have been positive in real terms throughout the transition period 1991–94. The main reason was the indexation of financial assets which focused attention on the real component. The rate of return on tolar instruments was indexed to the previous month’s domestic inflation, plus a real interest rate premium (r); thus the ex-post rate of return was actual inflation in the previous month plus (r). These deposits could also indexed to exchange rate movements with a real rate of return (d). The real rate of return en foreign currency indexed assets was about 25 percent below the real interest rate on tolar indexed assets during 1993–94; in 1995 the gap between (r) and (d) closed (Chart 13). Moreover, the ex-post rate of return on tolar assets has exceeded the ex-post rate of return on foreign exchange deposits from mid-1993 to mid-1995. Inflation has exceeded depreciation of the tolar-DM exchange rate throughout this period (except for November 1993), providing a higher nominal return to assets indexed to domestic inflation than to assets indexed to the DM.



Citation: IMF Staff Country Reports 1996, 120; 10.5089/9781451835588.002.A001

Source: Data provided by the Slovenian authorities.

The rate of return on tolar assets relative to foreign assets has three elements—country or credit risk, exchange rate risk, and interest rate differentials. Interest rates on DM deposits in Slovenia were below German deposit rates by as much as 2 percentage points during 1993 and most of 1994; this gap narrowed as German rates fell. This data would suggest that banks in Slovenia did not have to pay a premium to attract DM deposits, which is a possible measure of country/bank risk. Thus, country credit risk does not appear to be a major contributing factor for interest rate differentials.

Exchange rate risk may also be a factor explaining interest rate differentials. During the period mid-1992 to mid-1994, the nominal exchange rate depreciated against the DM roughly in line with inflation differentials. Interest rate differentials, therefore, incorporate expected movements in the exchange rate. As the nominal exchange rate gradually stabilized from mid-1994 to mid-1995, interest rate differentials narrowed.

An alternative reason for the high rates of return on tolar assets may have been the tight monetary policy. Interest rates are generally regarded as a barometer of monetary policy. Their high real level could imply that monetary policy was restrictive in Slovenia during the period 1992–94. Certainly, domestic interest rates dropped during mid-1994 to mid-1995 as domestic credit conditions were eased.

Another explanation for high real domestic interest rates can be found in the structure of the banking system and overall financial markets. High tolar deposit rates may reflect bank competition for tolar deposits to maintain market shares at the expense of maximizing profits. Some banks relend their tolar deposits on the interbank market to banks short of liquidity, such as the rehabilitation banks, at an interest rate only slightly above deposits rates. 1/ Other banks purchased foreign exchange assets for which foreign interest rates were below the domestic interest rate, even as the exchange rate crawl slowed.

The BOS was concerned that interest rates were too high and took several actions to lower then. Lombard interest rates were kept below market rates throughout and were lowered when inflation fell. 2/ During 1993–94, real interest rates on liquidity loans were gradually lowered from 10 percent to 6 percent. The BOS considered the main reason for the high tolar deposit rates was competition for tolar deposits by banks. Effective November 1994 (enacted June 1994), additional reserve requirements were imposed on banks whose interest rates on short-term tolar deposits exceeded the average by the banking system. This regulation was rescinded effective end-June 1995. In December 1994, the BOS brokered a voluntary agreement among the banks to reduce their short-term tolar deposit rates. A second agreement came into force in April 1995. 3/ Beginning in the fourth quarter of 1994, real interest rates on the interbank market began to recede quickly. Commercial bank real interest rates did not decline until the second quarter of 1995. Combined with the decline in inflation, nominal interest rates were cut to one third of their previous level. 4/

The reported spread between lending and deposit rates of around 12 percent during 1992–94 were also quite high. 1/ The deposit and lending rates reported by the BOS represent the mid-point between the highest and lowest interest rates offered by banks rather than an appropriately weighted average. Thus, the implied interest rate spread may have an upward bias as most transactions might be with preferred customers who receive both higher deposit rates and pay lower lending rates. In addition, lending rates exhibit very little variation with maturity, while deposit rates have a substantially greater range. For example, in 1994, the real lending rates had an average range of 1 percent compared to 15 percent for real deposit rates. Thus, depending on the liquidity of borrowers and the maturity composition of deposits the actual spread could be substantially smaller.

Support for the view the spreads are narrower than reported is provided by the low level of net interest income reported by banks in 1994 (2 ½ percent of assets). Net interest income is not a pure measure of domestic interest rate spreads as it mixes net interest income on both tolar and foreign exchange interest rates. Available information does not permit a separation of these two sources of net interest income. Banks also had a large share of non-interest bearing assets (see Chapter on Structural Reforms), principally because they have a high desired capital asset ratio. Non-performing loans are no longer a significant reason for spreads either.

IV. Fiscal Policy

Slovenia has achieved impressive results in building a fiscal apparatus and maintaining fiscal balance since 1991. Independence created an administrative vacuum because of the emphasis placed on federal and local administrations in the former Yugoslavia. The new fiscal administration was able to exert control on fiscal expenditures swiftly.

l. Fiscal operations since independence

Slovenia was faced with many of the problems encountered by other transitional economies. Transitional economies from Eastern and Central Europe experienced substantial fiscal deficits which, as a percent of GDP, reached double-digit levels in Albania, Bulgaria and the Slovak Republic. These deficits stemmed primarily from lower revenues as a percentage of GDP. 1/ In contrast, Slovenia was able to maintain revenue collection and recorded a string of fiscal surpluses from 1991 to 1993 (Table 53). Generous welfare spending and a costly restructuring of the banking and enterprise sectors boosted expenditures, while disruptions in tax administration threatened revenues. However, Slovenia began the transition with a relatively strong fiscal position since substantial transfers to the federal budget of the former Yugoslavia, which amounted to on average about 9 percent of GDP during 1988–1990, were eliminated. These fiscal savings were used to create a fiscal administration and finance structural reforms.

a. Taxation

All transitional economies experienced a decline in revenues relative to GDP, bordering on collapse in certain cases. Hungary and Poland experienced revenue declines equivalent to 6–8 percent of GDP; in Bulgaria and Romania revenue losses reached 20–30 percent of GDP. The causes of these falls were twofold: an erosion of the corporate tax base and a decline in effective tax rates, reflecting tax evasion, weak tax administration, or policy decisions.

In Slovenia, by contrast, budget revenues which averaged 44 percent of GDP during 1988–90, exceeded 46 percent of GDP on average during 1991–94. Two factors were instrumental in this stronger revenue performance relative to other transitional economies. First, Slovenia has relied more heavily on wage and consumption taxes, rather than on corporate taxes or dividends from state-owned firms. Second, this favorable tax structure has been effectively implemented by a well-performing tax administration, the Agency for Payments, Supervision and Information (APPNI).

(1) A high reliance on indirect and wage taxes

In Slovenia, the tax burden is high and borne mainly by wage-earners and consumers. As a corollary, revenues from other taxes (e.g., corporate or property taxes) are lower than in other countries (Table 58). The personal income tax (PIT) is de facto a wage tax. In theory, this tax is fairly broad-based. 1/ Wages and salaries represented 73 percent of registered household incomes (excluding social transfers and capital income) in 1994 and 87 percent of the tax base in that year. By contrast, the taxation of profits from individual entrepreneurs or small businesses amounted to only 2 ½ percent of PIT revenues in 1994.

Relatively low taxes on non-wage incomes reflects a slow adjustment of the tax system to the new economic environment and has also created a distributional concern—wage earners and other occupational groups are not on an equal footing for tax purposes. This is due, in particular, to lenient treatment of fringe benefits and of incomes of the self-employed. Fringe benefits are appealing because they are often undervalued and they are also legally exempt from social security contributions. 2/ For the self-employed, the assessment of certain categories of income for tax purposes is somewhat blurred (e.g., professionals, consultancy work).

Introduction of taxes on capital gains and interest income has been postponed until 1997, except for capital gains on real estate transactions and dividend income. These exemptions create other loopholes on the income tax base. In addition, as pointed out in IMF (1993), such tax exemptions also affect the return on financial and non-financial assets, encouraging financial decisions based on tax arbitrage. 3/

The undue reliance on wage taxation has obvious drawbacks. In order to generate high revenues, marginal tax rates are fairly high and increase steeply to SO percent. As Slovenia’s income distribution is skewed towards low income (Table 9), households bearing the top marginal rates are few in number. In addition to five tax brackets, the PIT provisions are further complicated by numerous exemptions.

Table 9.

Proportion of Tax-Payers for Each Marginal Tax Rate

(In percent)

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Source: Slovenian authorities.Note: AW = average wage in the economy.

Social Security contributions are earmarked for Pension and Health Funds and for unemployment benefits (Table 10). According to the law, contributions provide the financing of legally defined entitlements for pensioners and health insurees. Contribution rates have declined since 1992, and were set at 44.7 percent of the net wage in 1994, including 31 percent for pensions and 12.7 for health insurance. Accordingly, combined with the PIT, the marginal tax rate reaches 55 percent for average-wage earners. The self-employed have more latitude concerning social security contributions since they are allowed to choose their tax rates (15 ½ or 13 ⅓ percent) and define their tax base. The self-employed can, for instance, legally define their taxable income at the minimum wage, whatever their actual income. Choice of the minimum wage would simply reduce their future pension entitlement which is relatively generous for low income groups. As a result, most of the self-employed choose to minimize their contributions.

Table 10.

Social Security Contributions, 1991–95

(In percent of net wages)

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Source: Slovenian authorities.

Taxes on goods and services represent another pillar of the tax system. They comprise three distinct categories: a general sales tax, excise taxes and customs duties. On average, during the period 1992–94, tax revenues from these three categories rose by 7 ½ percent, 4 percent and 3 ½ percent, respectively. Slovenia is amongst the few Eastern European economies that still rely upon a sales tax instead of a VAT. The general rate for goods is set at 20 percent with reduced rates for construction materials (10 percent), capital goods (5 percent), and basic staples (5 percent). A luxury rate of 32 percent is applicable to certain items (jewelry, luxury cars, etc.). As for services, a 5 percent tax is levied, with the exception of some financial services (3 percent). Excise taxes are low by European standards, particularly for wine. In 1994, new taxes were introduced on cigarettes and alcohol. Low rates on oil derivatives relative to other European countries attract car drivers from neighboring Italy.

Customs duties represent an important share of revenues because of the high degree of openness of the Slovenian economy and relatively high duties. A reshuffling of these taxes, required for European integration, will be implemented on January 1996. Since there is currently no tax on exports, the major impact of the planned reform is an across-the-board reduction in import tax rates. Tax revenues are expected to shrink by 2–3 percent of GDP.

As mentioned, Slovenia’s budget does not rely upon corporate tax revenues which raised on average less than 1 percent of GDP during the period 1991–94. Moreover, unlike other communist countries, the state budget did not receive dividends from state- or socially-owned firms. Therefore, total budget revenues were hardly affected when firms became unprofitable following the restructuring of the economy. 1/ In September 1994, corporate tax rates were lowered from 30 to 25 percent with retroactive impact from January 1994. At the same time, some of the numerous tax exemptions and tax holidays granted to specific sectors (e.g., agricultural enterprises, small businesses) were eliminated. Lower corporate tax rates were intended to place Slovenia on a more equal footing with Croatia whose corporate tax rate is 25 percent.

Corporate tax revenues as a percent of GDP are expected to rise at a slow pace. Indeed, the impact of improving profitability will be delayed by the carry-over of past losses. This situation may improve significantly once firms are privatized. Indeed, it is sometimes suggested that generating losses is a device used by managers to lower firms’ value before privatization.

(2) The tax administration(s)

Over the 1991–1994 period, the Slovenian tax administration has performed extremely well despite the split responsibilities between the APPNI and the Ministry of Finance (the Bureau of Public Income). The former deals with legal entities, while the latter administers taxes borne by natural persons (individuals and unincorporated businesses).

The APPNI is an independent body reporting to Parliament. It has wide ranging powers over firms, which go well beyond its tax collection responsibilities. These include, in particular, operation of the payment system—to be taken over by the BOS—and auditing of socially-owned firms. The APPNI manages and, to a certain extent, controls the accounts of all legal entities. Acting as a bank, it transfers funds between accounts in a highly effective manner—transfers are available within a day. At the same time, and unlike a bank, the APPNI has the legal power to stop certain transfers. Indeed, it performs audits of the financial statements of entities and has to ensure that certain obligations (including corporate tax payments, and pension contributions) are given priority treatment. It also deducts from enterprise accounts tax payments related to wages. To illustrate this encompassing role, the APPNI has successfully deterred fraudulent transfers of assets during the privatization process and enforced the wage agreements of 1994 and 1995.

The Bureau of Public Income has more modest objectives and powers. It was created only in 1992, when a new law brought community tax offices under a central administrative umbrella. The Bureau has suffered from an inability to impose stiff penalties on tax evaders since these can only be determined by an economic court. Consequently, tax compliance for non-wage earners has been a problem. Estimates by Slovenian authorities indicate that delayed payments represent almost 50 percent of the amount due. It might well be just a delay due, for instance, to the progressive computerization of the tax system, but it could also be indicative of a certain reluctance to pay taxes amongst non-wage earners.

There is a widespread consensus that the tax administration needs to be unified under the auspices of the Ministry of Finance. Such a reform has been envisaged since 1992, in particular, to facilitate the introduction of a VAT (see below). This unification has not yet been completed.

b. Expenditures

General government spending increased from 43 ½ percent of GDP, on average, during 1988–1990 to around 46 percent of GDP on average during 1992–94. This increase reflects costs associated with maintaining a well-developed safety net, restructuring banks and enterprises, and building of a new tax administration.

(l) Social safety net

As in many transitional economies, the budgetary costs associated with the social safety net (pensions, health expenditures and unemployment benefits) have soared since the beginning of the transition. From 1991 to 1994, social safety net costs have increased by 5 percent of GDP to 22.4 percent of GDP in 1994 (Table 11). Pensions and health insurance expenditures have been the main factors accounting for the increased cost of the social safety net. Unemployment benefits despite high unemployment peaked at only 1 ½ percent of GDP in 1993, and with lower unemployment in 1994, fell by 0.2 percent of GDP.

Table 11.

Social Transfers

(As a percentage of GDP)

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Source: SORS, various publications.

Including old-age, disability and survivors.

FY1995 Budget.

The causes for the rising cost of Slovenian pensions are analyzed in Appendix II. Early retirement, as a substitute for unemployment benefits for older workers, played a key role in increasing pension costs. Early retirements led to a substantially greater number of pension recipients and to a decline in activity rates of older workers. This eroded the number of contributors to the pension system. Slovenia has also shown a strong commitment to maintaining the standard of living of pensioners relative to workers; pension benefits have been tightly linked to the average wage.

The cornerstone of Slovenia’s health policy has been to maintain full coverage for the entire population. By law, Slovenian citizens are entitled to a basic package of health insurance benefits, either directly or as family members. This principle also applies to the unemployed. However, benefits and coverage vary across age groups and according to the specific disability/treatment. To contain expenditures, Slovenia decided in 1992 to evolve from a state-provided health care system to a health insurance system. The agency in charge of public health, the Health Institute (HI), is responsible for the financing, but does not necessarily provide directly health services. The HI has initiated an across-the-board reduction in expenditure growth by encouraging competition and relying on private health service providers selected through a system of tenders. It is also targeting fast-rising expenditures (e.g., drug consumption, orthopaedic expenditures) for remedial action.

In 1994, 90 ½ percent of the health services were covered by the basic insurance compared to 98 ½ percent in 1992. The uncovered fraction can be supplemented by voluntary insurance, public or private. The HI itself offers various packages and has enrolled 1.2 million members in the voluntary program in 1994. In addition, private companies also may insure co-payments. Currently, private companies have sold less than 50,000 insurance policies.

The compulsory component of health insurance is financed mainly by contributions levied on employers and employees (6.1 percent of net wages each); employers contribute an additional 0.5 percent for occupational illnesses and work injuries. For other groups, insurance is paid by the Pension Fund municipalities, underlining the solidarity element of the system.

(2) Restructuring cost

The budgetary costs of restructuring programs rose until 1993 and then declined slightly in 1994 (Table 12). The most remarkable feature of these costs in Slovenia has been the emphasis placed upon active labor market policy (e.g., retraining policy). The government has also intervened to facilitate enterprise assistance and bank restructuring. Various sectors benefitted from government assistance, including steel mills, the mining industry, and more recently the railways.

Table 12.

Government Expenditures on Restructuring Programs of Enterprises and Banks, and for Social Safety Net 1992–95

(As a percent of GDP)

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Source: Slovenian authorities.

Other than unemployment benefits.

In 1993, the MOF recapitalized three major banks, which represented more than 60 percent of the banking sector assets. Non-performing loans on balance sheets of these banks were replaced by 30-year government bonds (indexed to the deutsche mark) and earning 8 percent interest (Table 13). Restructuring bonds represent the bulk of the government domestic debt. To spread restructuring costs over a long period of time, the government has issued long-duration bonds. Therefore, the budgetary cost barely exceeds interest payments.

Table 13.

Long-Term Government Securities

(Outstanding - 12/31/94)

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Source: Slovenian authorities.

In millions of deutsche marks.

(3) Fiscal administration

Prior to independence, the republican fiscal administration was meager and was squeezed between self-managed communities and the federal administration. Self managed communities accounted for approximately two-thirds of public expenditures and were quite independent. With independence, the federal administration of the former SFRY vanished and its activities (e.g., defence) were taken over by the new Slovenian administration. The system of self-management has largely disappeared and the local governments play only a minor role. Resources have come increasingly under the central government’s control. Between 1992 and 1994, the local governments accounted for 5 ¼ percent of GDP or approximately one-ninth of total general government expenditure. As a result, their share of tax revenues has diminished.

In order to meet the new obligations created by independence, the number of government employees rose by 12 percent between 1991 and 1994. The bulk of these new employees were utilized by the central government administration. In addition, a few thousand employees from non-profit organizations (e.g., university teachers, research, health care) or local governments were transferred to the central government’s payroll.

To attract and retain talented civil servants, Slovenia has granted high salaries, although their relative position in the wage spectrum of the economy has deteriorated since the beginning of the transition (Table 14). Nonetheless, in 1994, wages in the public sector surpassed enterprise wages by approximately 30 percent. A large fraction of this differential reflects higher living costs and higher qualifications. 1/ To some extent, the need to build up a new administration quickly has been an underlying rationale for maintaining this differential. However, over time the authorities will need to be satisfied that the optimal allocation of skilled labor is achieved between the public and private sectors.

Table 14.

Wages and Employment in the Public Sector

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Source: Slovenian authorities.

Growth rates compare 1995 Q1 to the 1994 average.

Ratio of public sector wages to private sector ones.

c. Fiscal stance

During 1988 and 1990, Slovenia’s budget, including transfers to the federal budget of almost 9 percent of GDP, was balanced. After independence, these transfers were used to cover additional spending for the safety net (4 ½ percent of GDP) and economic restructuring (2 ½ percent of GDP). In addition, the new administration has also increased payroll expenditure by 1 percent of GDP and other spending (mainly for defence and new infrastructure) by 3 percent of GDP. Higher taxes (2 ½ percent of GDP) more than compensated potential imbalances, resulting in a small surplus—averaging ½ percent of GDP—over the period 1991–94. Overall, the fiscal stance has been neutral during 1991–94.

With regard to the components of the Budget, however, there has been a progressive deterioration in the financial balance of the Pension and Health Funds. This was largely counterbalanced by an improvement in the overall surplus of the central government. As a result, for FY 1994, the overall budget deficit of the consolidated general government amounted to 0.2 percent of GDP (against 0.8 percent in the Budget Law), including surpluses for the central government (0.4 percent of GDP) and local governments (0.1 percent of GDP) and deficits in Pension and Health Funds (0.7 percent of GDP).

In 1994, the stance of fiscal policy changed as the budget moved from a surplus into deficit—a swing of about 1 percent of GDP even as real growth accelerated to 5 ½ percent. Despite actual growth being higher than forecast, the scope for automatic stabilizers was reduced by the government’s actions both on the revenue and expenditure sides. Higher-than-expected real growth boosted tax revenues, which were 2 ½ percent of GDP higher than expected although unchanged from the 1993 outcome. Strong collection of sales taxes and customs duties were chiefly the reason for this over-performance. The government also budgeted reduced social security contributions in 1994. Thus, health insurance and unemployment contributions declined by 1 ½ percent of GDP relatively to an unchanged contribution scenario. This is consistent with the government’s medium-term strategy to reduce wage taxation.

In 1994, expenditures edged up by ½ percent of GDP to 47.3 percent. Pension and disability expenditures increased by 0.7 percent of GDP due to a continuing influx of early retirees and indexation of benefits upon real wages. A pressing need for new infrastructure investments also led to substantial capital expenditures (up by 0.8 percent to 3.1 percent of GDP). Simultaneously, in order to contain the budget deficit, subsidies to the private sector were pared back by ½ percent of GDP. By year-end, however, central and local governments took advantage of the higher-than-expected tax revenues to increase expenditures substantially.

Although budget figures indicate a sharp reduction in public sector wages in 1994, this is mainly due to a delay in wage payments. Starting in May 1994, the payment of wages was pushed back by about a week, to the 6th or 7th of the following month. Thus, December 1994 wages which were only paid in early January 1995 and were not included in the fiscal out-turns for 1994. This accounting convention created a one-time reduction in wage expenditures in 1994, amounting approximately to 0.6 percent of GDP. If one eliminates this effect, payroll costs would have been stable around 5.2 percent of GDP. In addition, during the last quarter of 1994 civil servants were granted a 22 ½ percent rise in average wages which would burden the 1995 Budget.

Fiscal policy, in addition to its procyclical stance in 1994, also had a pronounced seasonal pattern owing to a lengthy budgetary process. Since independence, parliamentary passage of the budget has been increasingly delayed. The budget vote took place in April, 1991, and slipped to May, 1994; the 1995 budget was passed in late June. As the Cabinet is granted by law some latitude over the timing of budgetary debates and discussions can be postponed until a political consensus is achieved. Thereafter, under existing parliamentary procedures, budget debates require at least 85 days before the final vote takes place.

The timing of Parliament’s approval of the budget largely determines the seasonal patterns of budgetary expenditures. To alleviate potential disruptions, the previous year’s total expenditures are authorized, prorated until the new Budget Law is passed. During the high inflation period, authorized expenditures were determined in real terms. This is no longer the case, which imposes a more stringent constraint upon non-mandated expenditures such as investment. Expenditures on pensions and health insurance are defined separately and are unaffected.

The timing of budgetary process induces a marked seasonal pattern in government expenditures (Chart 14). Typically, an overall surplus is recorded during the first semester, and expenditures rise sharply during the second half of the year. Moreover, during the second half, ministries also have an incentive to exhaust their allocated budgets, making advance payments in preparation for a period of stringency, during the first semester of the following year. The law facilitates this behavior by allowing for the inclusion in December expenditures of some expenditures which only occur in the following year. Hence, a marked deficit in December each year.



(in billions of tolars)

Citation: IMF Staff Country Reports 1996, 120; 10.5089/9781451835588.002.A001

Source: Data provided by the Slovenian authorities.

2. Fiscal reform

As the 1995 Budget indicates, past trends are likely to continue. Analysis of this budget reveals that major dilemmas confront fiscal policy. The government needs to reduce the level of taxes and modify their composition to alleviate the tax burden shouldered by wage earners and to facilitate EU integration.

a. 1995

For 1995, the projected deficit (0.5 percent of GDP) for the general government also corresponds to a surplus for the central government (0.4 percent of GDP) and for the local governments (0.1 percent of GDP) and a deficit for Pension and Health Funds (0.9 percent of GDP). In order to combine lower taxes with a roughly balanced budget, considerable expenditure discipline will be required.

The 1995 Budget Law envisages lover revenues than in 1994 by ½ percent of GDP, to 43.2 percent of GDP. In fact, developments during the first five months of the year suggest that annual revenues may exceed projected levels. Indeed, revenues were running ahead of expectations in almost every tax category during the January-May period. Growth of personal income tax has surpassed the initial budget forecast by about 6 percent, due to two factors. One, budget forecasts assume a relatively low elasticity of taxes to households’ income (the implicit elasticity is close to 1) despite the progressivity of the PIT. Two, wage inflation has been somewhat higher than expected through the first five months of 1995. This also led to higher social security contributions. Corporate taxes are buoyant despite the retroactive tax cut from 30 percent to 25 percent. Firms had paid the 1994 tax installments based upon the former 30 percent rate, thus the final payment in March 1995 was meager. Afterwards, in April and May, revenues grew robustly, indicating marked improvements in firms’ profitability. Given current trends, tax revenues are likely to exceed the budget forecast.

The 1995 budget attempts to rein in government expenditures, as part of a longer term effort to contain expenditures below 44 percent of GDP by 1997. The 1995 budget is a first step in this direction. Expenditures are planned to decline to 46.2 percent of GDP in 1995, compared to 47.3 percent in 1994. The stabilization of the restructuring costs is expected to facilitate this expenditure reduction.

In 1995, central government wage expenditures are expected to grow by more than 60 percent. Reasons for this increase are manifold. First, as already explained, one month of 1994 salaries were shifted to 1995, thereby increasing wages by about 9 percent in 1995. Second, the transfer of civil servants from non-profit organizations or local governments’ budget to the State budget may add another 15 percent to payroll costs. Third, wages are still growing rapidly. Indeed, the protracted effect of the 1994 wage agreement in the public sector has increased civil servants’ salaries by about 15 per cent during the first quarter of 1995, far above the inflation rate.

Pension expenditures were envisaged in the budget to decline slightly to 13.6 percent in 1995. However, this projection has been jeopardized by Parliament’s rejection of proposals to diminish benefits. To alleviate stringent liquidity problems, the central government has increased transfers to the Pension Fund, earmarked for the payment of war veterans and farmers pensions. Liquidity would also be provided more directly through a repurchase agreement of securities held by the Pension Fund.

Increasing central government transfers to the Pension Fund call into question a fundamental tenet of the Pay-As-You-Go (PAYG) Pension Fund: its budget is supposed to be financed by contributions not through budgetary transfers.

Overall, after five months, the general government has accumulated a surplus representing SIT 8.5 billion against SIT 16.8 billion for the same period in 1994. Yet, this does not indicate a deterioration of the general government’s fiscal position; it reflects the delayed payment of wages in May 1994 and reduced corporate tax revenues in March 1995.

b. The need for tax reform

In 1992, the Slovenian government mapped out an ambitious tax reform program. One of the major goals outlined in this plan was to facilitate Slovenia’s integration within the EU. Although this objective is still high on the agenda, other preoccupations have emerged. In particular, the reduction of wage taxes has become an issue of growing importance.

(1) Consumption and wage taxation: recent reforms and main issues

The authorities have become increasingly concerned that excessive wage taxes may threaten Slovenia’s competitiveness particularly of low value-added activities. As a result, in addition to support for specific producers, 1/ the government has embarked upon a long-term reduction in wage taxes. Obviously, the success of its strategy depends upon its ability and its willingness to control pension and health expenditures (see below). On the tax side, the government’s approach is multifaceted. It includes some minor changes in the structure of the PIT. In the medium term, the introduction of a VAT is considered essential, since it would permit to increase consumption taxes and lower taxes on wages. Such a strategy, however, is faced with considerable technical difficulties, and raises various distributional issues.

In the short run, minor changes in the tax base and tax rates for the PIT and social security contributions have taken place. In 1995, tax brackets were modified to achieve lower rates for low-income earners and higher ones for the high-wage earners. The new rates are as follows.

Table 15.

Modified Personal Income Tax Rates 1995

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Source: Ministry of Finance.Note: AW = average monthly wage in the economy.

To expand the tax base, exemptions are limited to 11 percent of the average wage. The effective rate is, therefore, close to the marginal rate. Between 1991 and 1994, other tax reliefs were progressively lowered from 10 percent to no more than 3 percent. In order to close some loopholes, new taxes have been introduced on certain incomes (e.g., contractual work, which used to be a vehicle to avoid paying social security contributions).

Introduction of a VAT requires substantial changes in the organization and creation of a unified tax administration. Indeed, a major advantage resulting from a VAT-based system is that it provides the tax administration with a much better knowledge about financial flows between firms if VAT and corporate tax administration cooperate. Therefore, it enhances the effectiveness of tax controls on firms and reduces the scope for tax evasion. Complex tax issues and concerns about the risk to tax collections have been pivotal in the administration’s decision to postpone the introduction of a VAT until 1997.

A new VAT will face limits in the amount of incremental revenues it might yield. A small open economy like Slovenia is significantly exposed to cross-border shopping and cannot impose significantly higher consumption taxes than its neighbors. Consumption taxes are already high: the ratio of sales tax (including excise) to private consumption reached 25 percent in 1994. Admittedly, a VAT would broaden the tax base since certain categories of investment and public consumption also bear taxes. Still, most observers calculate that an effective rate around 16 to 18 percent is required for a budget neutral switch from a sales taxes to VAT. This leaves little scope to increased revenues stemming from the change to the VAT to finance lower custom duties or to introduce a lower rate for basic items.

Even if it were possible to increase consumption taxes and lower wage taxes, the impact on wage cost and competitiveness could be limited. This argument hinges directly on the functioning of the labor market and developments in real net wages. In a competitive closed economy where workers consume their wage income, a revenue-neutral switch from a (flat-rate) wage tax to a (flat-rate) consumption tax does not have any impact. Since consumption is assumed to equal wages, the tax base is unaltered and nominal wages increase to compensate for the tax-induced increase in the cost of living. Ultimately, real net wages remain unchanged and the impact on the real economy is nil.

Any significant impact from a switch from wage taxation to a VAT stems from certain distributional shifts, inadequately described under the previous assumptions. The most relevant ones are as follows.

  • - Labor market imperfections: Some inertia in wage determination may lead to a reduction in real net wages following the introduction of a VAT. However, in Slovenia wages are highly indexed, and with a short lag to prices.

  • - Wage earners vs. other income earners: Consumption in Slovenia is much higher than wages. In 1994, households’ purchases of goods and services represented more than twice the amount of wages and salaries that they received. Thus a VAT would broaden the tax base and, in particular, pensioners and the self-employed would bear higher taxes. A larger tax base would also allow a reduction in marginal tax rates, thereby limiting their distortionary effect. From this angle, the main advantage of a VAT is that it could facilitate the taxation of certain groups which evade the PIT.

  • - Replacing wage taxes by a VAT would also favor the manufacturing sector against the service industry for three reasons. First, exporters bear wage taxes not a VAT; the opposite holds for importers. Hence, introducing a VAT is akin to a devaluation. Second, a VAT also differs from the existing sales tax in that, to avoid cascading, existing tax rates on all services are fairly low (5 percent or below), to the benefit of certain segments of the service industry, with high value-added and low intermediate consumption. A VAT would eliminate this advantage. Third, investment goods would become tax exempt to the benefit of the capital-intensive industries in the manufacturing sector.

  • - The redistribution between households with different incomes is probably less relevant. A European-style VAT would eliminate the 32 percent tax rate on luxury goods, thereby limiting its redistributive effects. To alleviate this potential concern, one may note that luxury tax revenues amount to less than 4 percent of the general sales tax revenues. Thus, a consumption tax is probably the best tax instrument to achieve redistributive goals. One may consider instead specific taxes on luxury cars or taxes on wealth.

(2) Controlling expenditures by setting proper microeconomic incentives 1/

In the long run, the most significant challenge to a sound fiscal policy stems from its well-developed social transfers—the pension and health systems. The ageing of the Slovenian population places financial pressures on both the health care and pension systems. According to the HI, the health-related costs for the elderly (above 65) are three and a half times higher than for persons between 7 and 40 years of age. Current demographic forecasts indicate that the ratio of the two groups will increase from 26 percent to 38 percent within 15 years.

An avenue for reform is to increase the reliance on the private sector and to set proper microeconomic incentives. Concerning pensions, the following considerations are examined in the Appendix II. First, Slovenia could increase the share of fully-funded pensions, as its financial markets mature. Second, the existing incentives for early retirement should be phased out as unemployment recedes. Eliminating early retirement could more than offset the adverse financial consequences of the ageing population.

With regard to health care, Slovenia has already introduced voluntary insurance and is planning to increase its role, up to 18–20 percent by year 2000. Arguably, this will not be sufficient to cap expenditure growth. Certain costs will be extremely difficult to contain. In particular, doctors and other specialists are relatively poorly paid compared to their European counterparts. Closer ties with Europe and more competition from the private sector might produce competitive pressures for relative salaries of health care providers to rise, further increasing health costs. 2/

The main risk of the current co-insurance system is that widespread insurance diminishes incentives to reduce medical consumption. With the compulsory scheme, households bear part of the cost for health services and are inclined to reduce their consumption. A second layer, which allows for co-insurance, reduces or even eliminates these incentives if it does not screen its participants adequately—higher consumption should be matched by higher premiums. Currently, it may be argued that this is not the case. Indeed, the voluntary side of the health insurance also plunged into deficits in 1994. In more general terms, a tight screening of the population seems to contradict the HI’s policy which aims at increasing coverage to the entire population.

V. Structural Reform

1. Financial sector reform

a. Overview

The financial system in Slovenia consists of 33 banks, 11 savings institutions, and 74 savings cooperatives. The stock exchange offers shares for about 50 private companies, BOS bills, and certain issues of Government bonds. An interbank money market has existed since end-1992. The BOS and the Government have actively promoted the development of more efficient financial markets through rationalization, regulation, and supervision of banks. Rehabilitation of the large financially troubled banks has progressed.

b. The payments system

Perhaps one of the main constraints on the development of diversified financial markets is the expensive and anachronistic payments system inherited from the former-Yugoslavia. The APPNI 1/ operates the payments system on the same basis as was done prior to independence. It is also responsible for tax collection from enterprises, monitors enterprises financial performance, and collects information on transactions.

The APPNI operates several accounts for each bank and registered enterprise and all transactions—other than cash payments—must pass through the APPNI. Cash payments above a certain level are prohibited to prevent tax avoidance. The APPNI automatically deducts its transaction fees and tax liabilities from enterprise accounts based upon calculations of its staff. Thus, the APPNI operates a system of presumptive withholding taxation of enterprises in conjunction with the payments system. This system is expensive; the APPNI charges 0.1 percent on each transaction. Transactions revenues cover all the agency’s expenditures. Thus, transactions fees are used to cross subsidize other activities of the APPNI’s, creating a tax-wedge which is nearly prohibitive for short-term financial transactions—such as in the interbank market.

Technical assistance from FAD and STA, as well others including the U.S. Treasury, have counselled replacing the APPNI with a separate payments system owned by users (mainly the BOS, banks, and the stock exchange) and reverting tax administration to the Ministry of Finance. 2/ The Government plans such a replacement during 1996–97. This reform will lower fees considerably, increase the quality of banking services provided, and is expected to improve the liquidity and depth of financial markets through a boom in transactions. The regulatory and statistical functions now performed by the APPNI will need to be either distributed to other agencies or new sources of financial support will need to be found for the APPNI.

c. Interest rates and indexation issues

Immediately following monetary independence, the BOS decided to continue to index financial assets to inflation or exchange rate depreciation. The BOS calculated that with unanticipated falling inflation, indexation would lead to a faster decline in interest rates than under a regime of nominal interest rates (Bole (1995)). Accordingly, all interest rates of commercial banks, in the interbank money market, or on Government securities, BOS bills, and most refinancing rates, were indexed. The index was published by the BOS with tolar denominated assets indexed to the previous month’s inflation and foreign exchange denominated accounts indexed to the BOS’s official exchange rate (an average of the previous 2 month’s market exchange rate). Banks set real interest rates on tolar assets (r) and on foreign exchange denominated assets (d) when accepting time deposits, making loans, or transacting in the money market. Demand deposits were only partially indexed at 40 to 50 percent of the previous month’s inflation (until mid-1995 when they became fully nominal). While the rates on BOS bills and liquidity loans were indexed, Lombard and discount rates were not indexed and were kept low, generally between the interest rates on time deposits and demand deposits. The BOS wanted to offer an attractive interest rate so as to be in a position to ration use of these facilities via conditions designed to influence the exchange rate.

Both bank deposit and lending rates on tolar assets were high compared to rates on foreign exchange denominated assets. For instance during 1994 the annualized real interest rate on time deposits was 7 ½ to 11 percent (depending upon maturity) compared to 5 percent on foreign exchange time deposits. With the slowing crawl against the DM in 1994, the rate of return on tolar assets (28 percent to 32 percent) exceeded by 16 percentage points the tolar rate of return on Slovenian DM deposits (12 percent). This was higher than the uncovered interest rate differential in 1993. Consequently, foreign exchange deposits in DM terms expanded less during 1994 (12 percent) than in 1993 (33 percent). Tolar time deposits increased four fold faster (80 percent) than the rate of increase of foreign exchange deposits in tolar terms (20 percent) in 1994.

Beginning in the second quarter of 1995 the BOS adopted the goal of eliminating indexation. They began by eliminating indexation for assets below 30 days maturity and by requiring that the rates of interest on short-term deposits and loans be published in nominal terms. In addition, the indexation period for longer dated maturities was lengthened from the previous month to the average of the previous three months.

d. Bank financial operations

In aggregate, commercial banks had low profits in 1994. Gross profits of commercial banks were SIT 4.5 billion in 1994 or 5 percent of equity. This was an improvement over 1993 when aggregate profits were slightly negative. As banks under rehabilitation account for about 40 percent of total assets, their improved financial performance had a large effect on the total.

The main reason for the low profitability in 1994 was the small level of net interest income in 1994 equivalent to only 2 ¾ percent of total assets. 1/ This apparently resulted from a large share of non-interest earning or low interest earning assets—roughly 40 percent of the total assets. 2/ This explanation is, however, insufficient. If all interest income was attributable to the tolar denominated loans, the average rate of return would be 24 percent compared to reported average lending rates of 38 percent in 1994. This implies that the reported average lending rate—the average between the highest and lowest rates charged—overstates rates actually paid. It is possible that many loans were granted to preferred customers at more competitive interest rates. Additionally, doubtful and problematic loans accounted for 16 percent of assets at end-1994 and only partial interest payments were received. Provisions were made against these loans. Provisioning against these loans amounted to SIT 11.0 billion in 1994 or 1.0 percent of assets. Thus, provisioning was not a major factor for the reported wide spreads.

Another explanation is a currency mismatch of assets and liabilities. As of end-1994 foreign exchange assets were 139 percent of foreign exchange liabilities, while tolar assets were only 69 percent of tolar liabilities. 3/ Thus, although tolar deposits were approximately equal to tolar loans, there was a large currency mismatch of other assets and liabilities. This is due to the positive net foreign assets of commercial banks and the high share of foreign exchange denominated Government securities in the portfolios of the banks.

e. Bank Rehabilitation Agency

Progress has been made in resolving the financial difficulties of several problem banks. Three banks, that had originally accounted for about two thirds of banking system assets, were declared insolvent during 1992–93: Lubljanska Banka (LB), Kreditna Banka Maribor (KBM), and Komercialna Banka Nova Gorica (KBNG). A Government study indicated that several factors were responsible for these banks’ poor financial condition: (i) non-performing loans to Slovenian enterprises; (ii) non-performing loans to enterprises in other Republics of the former Yugoslavia (primarily through branches in those republics); (iii) foreign currency deposits whose proceeds were deposited at the National Bank of Yugoslavia (NBY) ; and (iv) excessive operational costs due to over-staffing and inefficiency. After providing emergency liquidity, the Government established the Bank Rehabilitation Agency (BRA) with a mandate to restructure these banks, return them to solvency, and eventually privatize them. LB and KBM were brought under the care of the BRA during 1993 and KBNG in 1994 (after alternative arrangements fell through).

Prior to the BRA take-over of these banks, the BOS initiated several actions to keep the banks afloat. The BOS created special refinancing facilities exclusively to provide liquidity to these banks. In total the BOS supplied credit to LB and KBM equivalent to 3.2 percent of GDP in 1992 and an additional 1.2 percent of GDP during the first half of 1993. In addition, the BOS gave these banks partial exemption from reserve requirements in April 1993.

The BRA initially issued Government bonds worth 12.2 percent of GDP in January 1993 in exchange for non-performing loans of Slovenian enterprises and for claims on the NBY. These 30 year bonds were DM-linked and were not marketable for 5 years. At the same time, the BRA acquired non-performing loans of approximately 100 Slovenian enterprises and set up its own workout unit to collect the outstanding loans either through rescheduling or liquidation of the enterprises. About half the affected enterprises were in the process of liquidation as of mid-1995. At least partial payments were being made by the others. The BRA also replaced the top management of the banks and the new managements initiated restructuring programs in the banks.

In July 1994, the BRA split both LB and KBM into an old bank and a new bank. Old LB and old KBM consisted entirely of assets and liabilities associated with branch operations in other republics of the former Yugoslavia and other financial relations with enterprises in these republics. Assets exceed liabilities in the balance sheets of old LB and old KBMN. Their assets, however, consist of presently uncollectible loans to enterprises in other republics, while their deposits liabilities are to residents of these same republics. The Government considers the financial obligations of old LB and old KBM subject to inter-governmental negotiation as part of the separation agreements with the former Yugoslavia. The other major structural change was a merger between the new KBM and KBNG in January 1995.

The two new banks—LB and KBM—were marginally profitable in 1994—a major improvement over 1993—and now complied with reserve requirement regulations (LB in December 1994 and the merged KBM in May 1995). Liquidity loans to these banks were halved in April 1995 to SIT 7 billion. At end-1994, the new banks exceeded the capital adequacy ratio requirement. The still low level of profits reflects currency mismatch between assets and liabilities, remaining operational inefficiencies, and continued need to provision against non-performing loans. The long position in foreign exchange was due in large measure to the unmarketable Government bonds issued by the BRA which accounted for about 30 percent of LB’s assets and 40 percent of KBM’s assets. The Government’s intention to issue redenominated tolar bonds in exchange for these bonds will provide a vehicle to partially alleviate this source of losses. The BRA intends to put the banks on a sound financial footing before initiating privatization procedures.

f. Bank supervision

The BOS established an active Bank Supervision Department that closely monitored banking activity and vigorously enforced prudential regulations. All banks other than the old LB and old KBM were in compliance with all existing regulations in mid-1995.

The minimum capital regulations will require DM 51 million for a fully operating bank license effective September 1995. This is double the previous minimum capital requirement, which was also doubled in September 1994. The objective of the increases was to force bank mergers. Instead, banks have managed to increase their capital and no mergers have taken place. Effective August 1, 1994, the BOS increased the capital adequacy requirement from 6 ¼ percent to 8 percent on risk weighted assets (in accordance with Basel standards). On average the capital adequacy ratio was 17 percent in mid-1995, with the lowest still 9 percent. Banks, therefore, appear over-capitalized, which in part could account for their low levels of profitability.

The regulations covering provisioning also follows Basel standards and are fully complied with. At mid-1995, provisions equaled SIT 90 billion (about 6 percent of total assets), slightly above the minimum level required on non-performing assets. 1/ The maximum credit exposure to a single borrower or group was lowered to 25 percent from 30 percent of equity capital effective August 1, 1994. The maximum ratio of capital investment plus fixed assets to equity capital was lowered from 1.0 to 0.6. Other prudential regulations cover licenses, accounting standards and documentation, and external auditing. Although no new licenses were issued in 1994, several were issued in 1993. 2/

Banks and savings institution are required to supply data for off-site inspections. A full scope inspection of all banks and savings institutions was in process or had been completed by mid-1995. Once these are completed the BOS plans to initiate a program of bi-annual full scope on-site inspections of each bank and savings institution. The BOS has considerable powers to enforce compliance with prudential regulations and reserve requirements.

g. Government stock operations

The bond market consists only of a very limited number of Government bonds competing with a wider selection of BOS bills. Bonds issued to the rehabilitation banks (DM 1.4 billion) are non-tradeable for 5 years (until 1998). Bonds issued to banks in exchange for claims on NBY (DM 0.9 billion) are non-tradeable for 3 years (until 1996). These two bond issues represent 80 percent of the outstanding government bonds. Four smaller bond issues (RSI, RS2, RS8, and RS11) are traded on the stock exchange (with a total value of DM 0.5 billion). Short-term government securities are traded over-the-counter.

The equity market is very small with only about 50 companies. Most shares are not heavily traded. Market capitalization at end-1993 was DM 220 million in shares and DM 590 million in bonds, of which 90 percent were Government bonds. Market share capitalization rose to DM 460 million in 1994 and for bonds to DM 590 million. Turnover of shares in 1993 was DM 735 million and of bonds DM 807 million. Turnover of shares in 1994 was DM 614 million and of bonds DM 394 million. Trading is dominated by over-the-counter transactions of BOS bills. The decline in turnover during 1994 in comparison to 1993 was attributed to the increase in over-the-counter trading of BOS bills associated with the warrant bills. The stock market is expected to expand following privatization.

2. Ownership transformation. privatization and enterprise reform

a. Introduction

Slovenia is in the process of dismantling the system of social ownership of capital and worker management of enterprises carried over from the SFRY. The absence of a clear distinction between the owners, managers and workers created a situation in which the generation of investible resources and financial viability of an enterprise were subordinated to the objectives of wage escalation and maintenance of inviable levels of employment. The situation was sustained by the access loss-making enterprises frequently had, as owners, to the banking sector. Total accounting losses of enterprises were 19 percent of GDP in 1992. Following an intense debate as to the appropriate methods, a law on ownership transformation was adopted in late 1992 for instituting well-defined ownership and eventual privatization of the socially-owned and mixed enterprises.

b. Legal basis and organizational structures

Slovenia has chosen a hybrid form of privatization which has elements of worker buy-outs and voucher-based mass privatization schemes. The two institutions responsible for supervising, restructuring and assisting the process of privatization are the Agency for Restructuring and Privatization of the Republic of Slovenia (Agency for Privatization, hereafter “Agency”) and the Development Fund (SKLAD). The Bank Rehabilitation Agency (BRA) has also been involved in asset resolution of the loss-making firms in the portfolio of the rehabilitation banks under its auspices.

The Agency monitors and controls, sets guidelines for and approves the privatization programs of socially-owned enterprises (SOEs). SKIAD is responsible for the financial restructuring (to be followed by privatization) of enterprises in its portfolio and is intended to be a temporary depository for the shares of SOEs to be sold to investment funds at auctions organized by it. It also serves as a financing facility for development projects.

The legal basis for the privatization of fully or partially socially-owned companies is the Law on Ownership Transformation (passed in November 1992 and amended in June 1993). Amendments to the law were adopted in 1994 and 1995 to accelerate the privatization process which provide for the Agency to take over the process of ownership transformation of enterprises that failed to submit voluntary privatization program by the deadline of December 1994. They also allow for enterprises to be transferred to SKLAD if the auditing process for them is not completed in a time period specified by the APPNI. Excluded from the law in 1992 were 98 enterprises that were in the portfolio of SKLAD (for details see below) and companies providing special public services (regulated by the Law on Public Service Companies) and banks, insurance companies, enterprises engaged in gambling and those undergoing bankruptcy procedures.

Important supporting legislation included the Company Law, Law on the Securities Market, Law on Mutual Funds and Investment Companies and the Bankruptcy Law.

c. Enterprises under SKLAD

In order to respond more quickly to the problems of especially distressed enterprises, to avoid massive bankruptcies when laws and proper procedures were not well developed, in 1992 the Government invited application, and accepted a total of 98 enterprises to be transformed into commercial companies owned by SKLAD. These firms included some of the largest loss-makers with problems arising from loss of former Yugoslav markets, over indebtedness, and excess labor. These enterprises had 55,000 employees, about 10 percent of business employment, with debt over DM 2 billion and losses at DM 650 million, against their book value of DM 700 million in 1992.

Following legal audits and evaluation of their operational and financial performance, the fundamentally viable enterprises were earmarked for immediate privatization; financial restructuring was essential for those that had serious financial problems and the remainder were candidates for liquidation. By June 1995, SKLAD was still the majority shareholder in 42 enterprises. Of the cases that have been resolved, 12 enterprises have been placed under bankruptcy procedures. A total of 21,000 workers (38 percent of those employed by the 98 enterprises) were released. Losses were reduced from DM 650 million (3.4 percent of GDP) in 1992 to DM 150 million (0.7 percent of GDP) in 1993, and to DM 90 million (0.4 percent of GDP) in 1994.

SKLAD seeks to relinquish ownership or liquidate substantially the remaining enterprises in its portfolio; the sale of an additional 20 enterprises is expected by end-1995. In the meantime, efforts are underway to further restructure these firms by reductions in the labor force, infusion of new financing, debt reduction and restructuring. SKLAD would like to keep these enterprises viable and will undertake limited capital expenditures where it is absolutely necessary (DM 10 million was invested in 1994). Final negotiations are underway for the participation of the EBRD in some of the enterprises.

Under the amendments to the Law on Ownership Transformation two types of enterprises would be eligible for transfer to SKLAD: (i) enterprises which do not complete the audit of their opening balance sheets in the specified time period automatically revert to SKLAD. Sixteen enterprises were received under this category and are intended for liquidation by end-1996; and (ii) enterprises which did not prepare their own autonomous privatization programs by the December 1994 deadline, are first taken over by the Agency and proposed for transfer to SKLAD. About 100 to 150 such cases are expected in 1996.

SKLAD is responsible for organizing auctions of shares of enterprises in its own portfolio and enterprises with second approval of their privatization programs. Three such auctions were held at the Ljubljana Stock Exchange in December 1994, March 1995 and July 1995. In these auctions, SIT 2.7 billion, SIT 11.5 billion and SIT 6.7 billion worth of shares of enterprises, were sold to authorized investment funds. Investment funds can bid for the shares of enterprises with 2 percent increase or decrease at a step of the initial offering price. The initial offering price is based on opening balance sheet of an enterprise. The purchasing price, on average, paid for by investment funds was 94 percent of the initial offering price.

Besides its role in mass privatization and restructuring of enterprises, SKLAD started long-term financing of new projects in 1995 to support private sector in the creation of new employment opportunities. In mid-1995, DM 50 million was available to SKLAD for this purpose. SKLAD is handicapped in assisting large investment projects; it also faces a paucity of good project proposals from the private sector.

d. Socially-owned enterprises

The main objective of the Law on Ownership Transformation is to transform enterprises with socially-owned capital into companies with known owners, chiefly private individuals and institutional owners. The law provides for a combination of free distribution and commercial privatization of shares of these enterprises according to the following formula: 20 percent to the Development Fund for transfer to the investment companies and funds at a later date, 10 percent to the Restitution Fund, 10 percent to the Pension Fund, 20 percent to workers, and the remaining 40 percent for commercial sales (through public offerings of shares, public tender, public auction or sale to insiders on preferential terms). The employees’ shares have been distributed in the forms of vouchers to the population at large, the amount depending upon years of participation in the labor force. The vouchers can either be used to buy shares in the enterprise in which the worker is employed, to buy shares of authorized investment funds or to acquire shares of companies during public bidding. Shares of other firms can not be bought directly. The law allows for the entire or partial sale of the company, with the three funds being compensated from the proceeds of the sale.

A total of 1,400 SOEs, along with their 1,000 daughter companies, with an estimated social capital of US$10 billion fell under the Law on Ownership Transformation. After long delays, the pace of privatization of the SOEs accelerated in 1994. The Agency had received around 1,300 autonomous privatization programs with an estimated social capital of US$9 billion by the deadline of December 31, 1994. About half of these programs were submitted in December alone. By May 1995, about 215 programs with social capital of US$900 million had second approval (meaning end of the privatization program and court registration), 478 programs with social capital of about US$3 billion had first approval but not the second approval, and 686 programs were in procedure for first approval, and 13 programs had been transferred to SKLAD. Companies in good financial status applied for privatization earlier regardless of their size and took less time for second approval. There were about 300 companies, mostly small enterprises which did not submit their autonomous privatization programs. Under the amended laws, the Agency is responsible for carrying out the privatization process for them. A majority of these enterprises are expected to enter bankruptcy or liquidation proceedings.

Internal buyouts were by far the most popular mode of privatization with 90 percent of small- and medium-sized enterprises choosing this option. This method was not viable for large enterprises. These enterprises would necessarily have to resort to a public offering of shares since an internal privatization would be too expensive for the workers and managers. Of the enterprises that submitted privatization programs, a total of 126 enterprises applied for a public offering of their shares. By May 1995, 30 enterprises had completed their public offerings, 25 were in process, and the rest waiting for approval by the Agency. For large enterprises, financial support from the banking sector were necessary. The lack of financing made the private sector’s participation in manufacturing industry difficult.

Investment funds are viewed as a counterbalance to the insider ownership in the privatization process. Privatization investment funds were approved and licensed by the Securities Exchange Agency under the Law on Mutual Funds and Investment Companies (adopted in January, 1994). These funds were allowed to issue equity to acquire ownership certificates from the public which they would, in turn, use to obtain the 20 percent shares of enterprises earmarked for them from SKLAD.

In 1994, twenty three investment management companies were set up to manage about sixty investment funds. The funds are closed-ended; shares of these funds will not be traded on the stock exchange until 1997. The shares of enterprises will be traded only among investment funds, the Pension Fund and the Restitution Fund. By May 1995, the total amount of ownership certificates collected by the investment funds was an estimated SIT 226 billion; 37 funds had completed their collection of ownership certificates. In turn, investment funds had issued shares totalling SIT 229 billion; there is a large variation amongst the funds with some funds having sold all of their shares while others have been able to sell very little.

Investment funds have undertaken a major role in providing information to the public about the opportunities available for investment of ownership certificates. The Government has made efforts to advertise the privatization process abroad and foreigners can enter the process through tender offers or as strategic investors. There is, theoretically, no limit to the amount of foreign participation. However, the decision whether to allow a foreign collaborator rests with the enterprise. Most of the interest for investment in Slovenia firms has come from firms in trading partner countries.

e. Reform of state-owned enterprises

Efforts are under way to convert enterprises in the public service sector into joint stock companies after a determination on the share of state and social ownership has been made. The privatization of the socially-owned component will be implemented under the Law on Ownership Transformation. Besides die law for the railroad sector and the decree on the Transformation of Postal Services (both sectors are to remain largely state-owned) which were adopted by the Parliament in 1993, the Government is at various stages of preparation and processing of laws for the energy, roads, telecommunications, ports and airports, and air and maritime transportation subsectors. The Government also aims to reduce the share of state ownership in the medium term. The Ministry of Economic Affairs has instructed the Agency for Privatization to divest the shares of the state when privatizing the social capital in enterprises with mixed ownership.

The process of consolidation of ownership of state-owned enterprises in the Treasury has been initiated. While the Law on Method and Financing of Transportation of Railway Subsector and on Ownership Transformation of Public Services of Slovenia Railways establish the operating principles for the railroad sector, laws on the other subsectors are expected to be processed and passed in 1996.

f. Enterprises under the BRA

The BRA took over assets involving claims on enterprises in the lowest financial reliability classes from the banks in 1993 and has been managing them under the Instructions on the Treatment of Assets. Among the total 105 companies, 15 companies had debts over DM 10 million each. The BRA tried to sell the assets at a discount, reschedule debt, or convert claims into capital investment in the enterprise for sale at a later date. It aimed at the financial rehabilitation of enterprises and reduction of public debt. The debt of 5 companies was resolved with a reduction in public debt by DM 196 million by May 1995. Forty-five companies were under bankruptcy procedures.

Table 16.

Slovenia: Gross Domestic Product by Sector

(In millions of dinars/tolars. current prices)

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Source: Statistical Office of the Republic of Slovenia. Year 1994—estimates of the Institute of Macroeconomic Analysis and Development.
Table 17.

Slovenia: Structure of Gross Domestic Product by Sector

(In percent)

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Source: Statistical Office of the Republic of Slovenia. Year 1994—estimates of the Institute of Macroeconomic Analysis and Development.
Table 18.

Slovenia: Cost Structure of Gross Domestic Product

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Source: Statistical Office of the Republic of Slovenia; Years 1994—estimates of the Institute of Macroeconomic Analysis and Development.
Table 19.

Slovenia: Supply and Use of Resources

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Source: Statistical Office of the Republic of Slovenia; Years 1994—estimates of the Institute of Macroeconomic Analysis and Development.
Table 20.

Slovenia: Expenditure on Gross Domestic Product

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Source: Data provided by the Slovenian authorities.

Preliminary estimates by Institute of Macroeconomic Analysis and Development.

Table 21.

Slovenia: Income and Expenditure of Households

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Source: Institute of Macroeconomic Analysis and Development.