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 30–32).

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.

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)

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

Table 2.

Employment by Sectors of Activity in Slovenia and the EU

(In percent)

Sectors		Agriculture	Industry	Services
Slovenia	-1989	10.9	44.1	45.0
	-1993	10.7	44.2	45.1
EU average		6.3	32.9	60.8

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

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Table 2.

Employment by Sectors of Activity in Slovenia and the EU

(In percent)

Sectors		Agriculture	Industry	Services
Slovenia	-1989	10.9	44.1	45.0
	-1993	10.7	44.2	45.1
EU average		6.3	32.9	60.8

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)

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

Table 3.

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

(In percent)

Sectors	Primary school	Secondary school	Higher education
Labor Force	26.3	58.5	15.2
Unemployment	34.4	59.9	5.5

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

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Table 3.

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

(In percent)

Sectors	Primary school	Secondary school	Higher education
Labor Force	26.3	58.5	15.2
Unemployment	34.4	59.9	5.5

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)

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

Table 4.

Unemployment Rates in Eastern and Central Europe

(1993 2nd quarter—In percent)

	Slovenia	Czech Republic	Slovak Republic	Hungary	Poland
Registered	14.5	2.8	13.5	12.7	15.2
Labor Force Survey	9.1	3.9	12.4	12.0	13.8

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

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Table 4.

Unemployment Rates in Eastern and Central Europe

(1993 2nd quarter—In percent)

	Slovenia	Czech Republic	Slovak Republic	Hungary	Poland
Registered	14.5	2.8	13.5	12.7	15.2
Labor Force Survey	9.1	3.9	12.4	12.0	13.8

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)

Source: Labor Force Survey—SORS (1994).

Table 5.

Standard Deviation of Sectoral Wages

(In percent)

1985	1990	1991	1992	1993	1994
9.4	17.1	16.8	17.4	17.4	18.4

Source: Labor Force Survey—SORS (1994).

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Table 5.

Standard Deviation of Sectoral Wages

(In percent)

1985	1990	1991	1992	1993	1994
9.4	17.1	16.8	17.4	17.4	18.4

Source: Labor Force Survey—SORS (1994).

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.

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SLOVENIA: DEVELOPMENTS IN THE CURRENT ACCOUNT

(in millions of US dollars)

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

Source: Data provided by the Slovenian authorities

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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

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

Table 7.

Decomposition of U.S. Dollar Export Values

				1992	1993	1994
				(Index: 1993=100)
Total export value				109.8	100.0	112.2
Price				106.0	100.0	107.1
	Of which: Inter-currency valuation			99.8	100.0	105.7
		Partner country prices		106.2	100.0	101.4
Volume				103.6	100.0	104.8
				(Percentage change)
Total export value				…	-8.9	12.2
Contribution of: Price				…	(66)	(58)
		Of which: Inter-currency valuation		…	(-1)	(46)
			Partner country prices	…	(67)	(12)
Volume				…	(34)	(42)

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

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Table 7.

Decomposition of U.S. Dollar Export Values

				1992	1993	1994
				(Index: 1993=100)
Total export value				109.8	100.0	112.2
Price				106.0	100.0	107.1
	Of which: Inter-currency valuation			99.8	100.0	105.7
		Partner country prices		106.2	100.0	101.4
Volume				103.6	100.0	104.8
				(Percentage change)
Total export value				…	-8.9	12.2
Contribution of: Price				…	(66)	(58)
		Of which: Inter-currency valuation		…	(-1)	(46)
			Partner country prices	…	(67)	(12)
Volume				…	(34)	(42)

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.

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SLOVENIA: COMPOSITION OF TRADE

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

Source: Data provided by Slovenian authorities

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(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).

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SLOVENIA: NON-FACTOR SERVICES CURRENT ACCOUNT

(in millions of US dollars)

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

Source: Data provided by Slovenian authorities.

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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:

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SLOVENIA: DEVELOPMENTS IN THE CAPITAL ACCOUNT

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.

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Table 8.

Components of the Capital Account

Sources: Bank of Slovenia; and staff estimates.

Table 8.

Components of the Capital Account

		1991	1992	1993	1994
		(In millions of U.S. dollars)
Capital Account		-154	176	425	536
Of which: Direct investment		41	113	116	140
	Commercial credits	-42	7	114	-152
	Household currency and deposits	-92	9	66	374
	Loans (Other sectors)	-15	59	95	226
	Loans (Official)	11	-17	88	65
Net errors and Omissions		162	-281	-3	58
Capital Account (including NE&O)		8	-105	422	594
		(As percent of GDP)
Capital Account		-1.2	1.4	3.3	3.7
Of which: Direct investment		0.3	0.9	0.9	1.1
	Commercial credits	-0.3	0.1	0.9	-1.2
	Household currency and deposits	-0.7	0.1	0.5	2.9
	Loans (Other sectors)	-0.1	0.5	0.7	1.8
	Loans (Official)	0.1	-0.1	0.7	0.5
Net errors and Omissions		1.3	-2.3	—	0.5
Capital Account (including NE&O)		0.1	-0.9	3.3	4.2

Sources: Bank of Slovenia; and staff estimates.

View Table

Table 8.

Components of the Capital Account

		1991	1992	1993	1994
		(In millions of U.S. dollars)
Capital Account		-154	176	425	536
Of which: Direct investment		41	113	116	140
	Commercial credits	-42	7	114	-152
	Household currency and deposits	-92	9	66	374
	Loans (Other sectors)	-15	59	95	226
	Loans (Official)	11	-17	88	65
Net errors and Omissions		162	-281	-3	58
Capital Account (including NE&O)		8	-105	422	594
		(As percent of GDP)
Capital Account		-1.2	1.4	3.3	3.7
Of which: Direct investment		0.3	0.9	0.9	1.1
	Commercial credits	-0.3	0.1	0.9	-1.2
	Household currency and deposits	-0.7	0.1	0.5	2.9
	Loans (Other sectors)	-0.1	0.5	0.7	1.8
	Loans (Official)	0.1	-0.1	0.7	0.5
Net errors and Omissions		1.3	-2.3	—	0.5
Capital Account (including NE&O)		0.1	-0.9	3.3	4.2

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:

Notation
KA:	Capital Account; including net errors and omissions.
KA1:	Capital Account; including net errors and omissions, excluding loans by the official sector.
PKF:	Household currency and deposits; and loans of enterprises.
HHCD:	Household currency and deposits.
IDTD:	Uncovered tolar interest rate differential.
CA:	Current Account.
IGP:	Production of total industrial output.

View Table

Notation
KA:	Capital Account; including net errors and omissions.
KA1:	Capital Account; including net errors and omissions, excluding loans by the official sector.
PKF:	Household currency and deposits; and loans of enterprises.
HHCD:	Household currency and deposits.
IDTD:	Uncovered tolar interest rate differential.
CA:	Current Account.
IGP:	Production of total industrial output.

Equation I: ^1/

$\begin{array}{l}\text{KA}\text{=}\underset{(-1.12)}{-182.4}-\underset{(0.73)}{0.11}\text{IDTD}+\underset{(0.37)}{0.03}\text{IDTD(-1)}\text{+}\underset{(1.16)}{0.08}\text{IDTD(-2)-}\underset{\text{(-4}\text{.80)**}}{\text{0}\text{.87}}\text{CA}-\underset{\text{(-0}\text{.83)}}{\text{0}\text{.90}}\text{IGP}\text{+}\underset{\text{(1}\text{.63)*}}{\text{1}\text{.95}}\text{IGP(-1)}\text{+}\underset{\text{(1}\text{.18)}}{\text{1}\text{.42}}\text{IGP(-2)}\\ \begin{array}{ll}\text{Time}\text{period:}\text{January,}\hfill & \text{1992}\text{to}\text{April,}\text{1995}\text{.}\hfill \\ \text{Number}\text{of}\text{observations:}\hfill & \text{38}\hfill \\ {\text{R}}^{\text{2}}\text{=}\text{0}\text{.59}\hfill & \text{Adjusted}{\text{R}}^{\text{2}}\text{=}\text{0}\text{.49}\hfill \\ \text{F}\text{statistic}\text{=}\text{6}\text{.08}\hfill & \text{DurbinWatson:}\text{2}\text{.02}\hfill \end{array}\end{array}$

Equation II:

$\begin{array}{l}\text{KA1}\text{=}\text{-}\underset{\text{(-1}\text{.23)}}{\text{113}\text{.2}}\text{+}\underset{\text{(0}\text{.56)}}{\text{0}\text{.03}}\text{IDTD(-2)}\text{-}\underset{\text{(-5}\text{.57)**}}{\text{0}\text{.79}}\text{CA}\text{+}\underset{\text{(1}\text{.85)*}}{\text{1}\text{.73}}\text{IGP(-2)}\\ \begin{array}{ll}\text{Time}\text{period:}\text{January,}\hfill & \text{1992}\text{to}\text{April,}\text{1995}\text{.}\hfill \\ \text{Number}\text{of}\text{observations:}\hfill & \text{38}\hfill \\ {\text{R}}^{\text{2}}\text{=}\text{0}\text{.54}\hfill & \text{Adjusted}{\text{R}}^{\text{2}}\text{=}\text{0}\text{.50}\hfill \\ \text{F}\text{statistic}\text{=}\text{13}\text{.15}\hfill & \text{DurbinWatson:}\text{1}\text{.99}\hfill \end{array}\end{array}$

Equation III:

$\begin{array}{l}\text{PKF}\text{=}\text{-}\underset{\text{(-1}\text{.45)}}{\text{83}\text{.2}}\text{+}\underset{\text{(3}\text{.05)**}}{\text{0}\text{.78}}\text{IDTD}\text{+}\underset{\text{(1}\text{.94)*}}{\text{1}\text{.16}}\text{IGP}\text{(-2)}\\ \begin{array}{ll}\text{Time}\text{period:}\text{March,}\hfill & \text{1993}\text{to}\text{April,}\text{1995}\text{.}\hfill \\ \text{Number}\text{of}\text{observations:}\hfill & \text{26}\hfill \\ {\text{R}}^{\text{2}}\text{=}\text{0}\text{.45}\hfill & \text{Adjusted}{\text{R}}^{\text{2}}\text{=}\text{0}\text{.41}\hfill \\ \text{F}\text{statistic}\text{=}\text{9}\text{.58}\hfill & \text{DurbinWatson:}\text{1}\text{.92}\hfill \end{array}\end{array}$

Equation IV:

$\begin{array}{l}\text{HHCD}\text{=}\underset{\text{(3}\text{.70)**}}{\text{14}\text{.86}}\text{+}\underset{\text{(4}\text{.07)**}}{\text{0}\text{.93}}\text{IDTD}\\ \begin{array}{ll}\text{Time}\text{period:}\text{March,}\hfill & \text{1993}\text{to}\text{April,}\text{1995}\text{.}\hfill \\ \text{Number}\text{of}\text{observations:}\hfill & \text{26}\hfill \\ {\text{R}}^{\text{2}}\text{=}\text{0}\text{.41}\hfill & \text{Adjusted}{\text{R}}^{\text{2}}\text{=}\text{0}\text{.38}\hfill \\ \text{F}\text{statistic}\text{=}\text{16}\text{.59}\hfill & \text{DurbinWatson:}\text{2}\text{.02}\hfill \end{array}\end{array}$

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.

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.

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)

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

Table 9.

Proportion of Tax-Payers for Each Marginal Tax Rate

(In percent)

Taxable Income (I)	Marginal	Percent of Tax payers		Percent of Revenues
	Rate	1991	1993	1991	1993
I < 0.5 AW	19	57.0	54.0	21.2	21.3
0.5 AW < I < AW	28	35.8	36.7	48.6	43.2
AW < I < 2 AW	35	6.4	7.9	22.5	23.3
2 AW < I < 4 AW	40	0.7	1.2	6.0	9.1
I > 4 AW	45	0.1	0.2	1.7	3.1

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

View Table

Table 9.

Proportion of Tax-Payers for Each Marginal Tax Rate

(In percent)

Taxable Income (I)	Marginal	Percent of Tax payers		Percent of Revenues
	Rate	1991	1993	1991	1993
I < 0.5 AW	19	57.0	54.0	21.2	21.3
0.5 AW < I < AW	28	35.8	36.7	48.6	43.2
AW < I < 2 AW	35	6.4	7.9	22.5	23.3
2 AW < I < 4 AW	40	0.7	1.2	6.0	9.1
I > 4 AW	45	0.1	0.2	1.7	3.1

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)

Source: Slovenian authorities.

Table 10.

Social Security Contributions, 1991–95

(In percent of net wages)

		1991	1992	1993	1994	1995
Pensions		28.80	28.80	30.84	31.0	31.0
Health insurance		13.80	18.15	13.80	12.80	12.70
Unemployment		3.40	3.40	3.40	1.30	0.80
Maternity leave		—	—	—	0.20	0.20
	Total	46.0	50.35	48.04	45.3	44.70

Source: Slovenian authorities.

View Table

Table 10.

Social Security Contributions, 1991–95

(In percent of net wages)

		1991	1992	1993	1994	1995
Pensions		28.80	28.80	30.84	31.0	31.0
Health insurance		13.80	18.15	13.80	12.80	12.70
Unemployment		3.40	3.40	3.40	1.30	0.80
Maternity leave		—	—	—	0.20	0.20
	Total	46.0	50.35	48.04	45.3	44.70

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.

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)

Source: SORS, various publications.

^1/Including old-age, disability and survivors.

^2/FY1995 Budget.

Table 11.

Social Transfers

(As a percentage of GDP)

	1991	1992	1993	1994	1995 1/
Pension 2/	11.0	12.7	13.0	13.7	13.6
Health	5.0	7.2	7.5	7.3	7.0
Unemployment benefits	1.3	1.3	1.6	1.4	1.0

Source: SORS, various publications.

^1/Including old-age, disability and survivors.

^2/FY1995 Budget.

View Table

Table 11.

Social Transfers

(As a percentage of GDP)

	1991	1992	1993	1994	1995 1/
Pension 2/	11.0	12.7	13.0	13.7	13.6
Health	5.0	7.2	7.5	7.3	7.0
Unemployment benefits	1.3	1.3	1.6	1.4	1.0

Source: SORS, various publications.

^1/Including old-age, disability and survivors.

^2/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)

Source: Slovenian authorities.

^1/Other than unemployment benefits.

Table 12.

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

(As a percent of GDP)

		1992	1993	1994	1995 Budget
Total		2.23	3.24	2.79	2.85
Banks		—	0.68	0.86	0.73
Enterprises		0.32	0.82	0.57	0.74
Social security net		1.74	1.49	1.11	1.14
	Passive programs 1/	0.60	0.42	0.40	0.44
	Active programs	1.14	1.08	0.71	0.69
Amortization of debt		0.17	0.26	0.26	0.25

Source: Slovenian authorities.

^1/Other than unemployment benefits.

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Table 12.

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

(As a percent of GDP)

		1992	1993	1994	1995 Budget
Total		2.23	3.24	2.79	2.85
Banks		—	0.68	0.86	0.73
Enterprises		0.32	0.82	0.57	0.74
Social security net		1.74	1.49	1.11	1.14
	Passive programs 1/	0.60	0.42	0.40	0.44
	Active programs	1.14	1.08	0.71	0.69
Amortization of debt		0.17	0.26	0.26	0.25

Source: Slovenian authorities.

^1/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)

Source: Slovenian authorities.

^1/In millions of deutsche marks.

Table 13.

Long-Term Government Securities

(Outstanding - 12/31/94)

	Issue Date	Maturity	Indexed to	Payable	Amount 1/
RS1	5/1/90	12/31/97	DM	SIT	151
RS2 (exporters)	10/1/90	12/1/00	DM	SIT	220
RS8	6/30/93	5/31/03	—	DM	84.9
RS11 (foreign exchange deposits-indiv.)	1/1/93	7/15/00	ECU	SIT	53.4
RS4 (foreign exchange deposits-banks)	1/1/93	6/30/23	DM	SIT	836.6
RS5 (bank rehabilitation)	1/1/93	12/3½2	DM	SIT	1,585
3-year notes	9/20/93	9/20/96	ECU	SIT	4.8

Source: Slovenian authorities.

^1/In millions of deutsche marks.

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Table 13.

Long-Term Government Securities

(Outstanding - 12/31/94)

	Issue Date	Maturity	Indexed to	Payable	Amount 1/
RS1	5/1/90	12/31/97	DM	SIT	151
RS2 (exporters)	10/1/90	12/1/00	DM	SIT	220
RS8	6/30/93	5/31/03	—	DM	84.9
RS11 (foreign exchange deposits-indiv.)	1/1/93	7/15/00	ECU	SIT	53.4
RS4 (foreign exchange deposits-banks)	1/1/93	6/30/23	DM	SIT	836.6
RS5 (bank rehabilitation)	1/1/93	12/3½2	DM	SIT	1,585
3-year notes	9/20/93	9/20/96	ECU	SIT	4.8

Source: Slovenian authorities.

^1/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

Source: Slovenian authorities.

^1/Growth rates compare 1995 Q1 to the 1994 average.

^2/Ratio of public sector wages to private sector ones.

Table 14.

Wages and Employment in the Public Sector

	1992	1993	1994	1995 Q1 1/
Employment (in thousands)	129.8	139.8	143.3	145.0
Nominal wage growth (in percent)	202.8	53.8	22.6	15.2
Real wage growth (in percent)	0.5	16.2	2.3	4.8
Relative wage 2/	1.25	1.29	1.22	1.23
Real wage index (1990=100)	78.0	90.6	92.7	97.2

Source: Slovenian authorities.

^1/Growth rates compare 1995 Q1 to the 1994 average.

^2/Ratio of public sector wages to private sector ones.

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Table 14.

Wages and Employment in the Public Sector

	1992	1993	1994	1995 Q1 1/
Employment (in thousands)	129.8	139.8	143.3	145.0
Nominal wage growth (in percent)	202.8	53.8	22.6	15.2
Real wage growth (in percent)	0.5	16.2	2.3	4.8
Relative wage 2/	1.25	1.29	1.22	1.23
Real wage index (1990=100)	78.0	90.6	92.7	97.2

Source: Slovenian authorities.

^1/Growth rates compare 1995 Q1 to the 1994 average.

^2/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.

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SLOVENIA: SEASONAL PATTERNS IN GOVERNMENT EXPENDITURES

(in billions of tolars)

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

Source: Data provided by the Slovenian authorities.

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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

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

Table 15.

Modified Personal Income Tax Rates 1995

Taxable Income (I)	Marginal tax rate
I < 0.5 AW	17 percent
0.5 AW < I < AW	35 percent
AW < I < 1.5 AW	37 percent
1.5 AW < I < 2 AW	40 percent
2 AW < I < 3 AW	45 percent
I > 3 AW	50 percent

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

View Table

Table 15.

Modified Personal Income Tax Rates 1995

Taxable Income (I)	Marginal tax rate
I < 0.5 AW	17 percent
0.5 AW < I < AW	35 percent
AW < I < 1.5 AW	37 percent
1.5 AW < I < 2 AW	40 percent
2 AW < I < 3 AW	45 percent
I > 3 AW	50 percent

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.

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.

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)

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

Table 16.

Slovenia: Gross Domestic Product by Sector

(In millions of dinars/tolars. current prices)

		1989	1990	1991	1992	1993	1994
Agriculture, forestry, fishing, and hunting		1,521	9,233	17,224	49,631	64,804	82,570
Mining		284	2,023	4,081	17,156	14,692	16,511
Manufacturing		12,823	58,422	110,511	298,095	395,894	498,980
Electricity, gas and water supply		757	5,084	14,926	24,362	37,143	46,678
Construction		1,623	8,598	13,015	38,621	60,689	76,986
Wholesale and retail trade		2,392	21,388	32,802	105,172	148,838	187,927
Hotels and restaurants		755	4,485	6,678	24,260	36,614	46,662
Transport and communication		2,203	12,824	22,284	65,818	105,454	131,905
Financial intermediation		1,209	6,262	13,132	34,394	51,820	63,533
Real estate and other business services		3,130	20,202	34,253	95,429	129,164	155,462
Public administration and defense		1,390	6,413	11,111	40,405	60,460	73,412
Education		1,304	6,731	12,011	43,612	66,429	80,268
Health and social work		1,941	9,931	16,510	47,376	75,708	91,660
Other community and personal service		1,106	5,912	11,053	48,888	76,999	88,532
Total value added		32,438	177,507	319,590	933,218	1,324,706	1,641,087
Minus: Imputed bank service		751	3,057	6,876	16,586	28,338	30,861
Plus: Import duties		1,213	9,733	12,555	32,550	51,860	64,736
Plus: Indirect taxes		2,045	11,958	24,287	56,079	86,745	125,038
Gross domestic product		34,945	196,139	349,558	1,005,261	1,434,974	1,800,000
Agriculture		1,521	9,233	17,224	49,631	64,804	82,570
Industry		15,487	74,127	142,533	378,235	508,418	639,155
Services		15,430	94,148	159,834	505,353	751,483	919,362
	Market services	…	…	…	367,720	543,979	669,340
	Government and non-profit services	…	…	…	137,634	207,506	250,022

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

View Table

Table 16.

Slovenia: Gross Domestic Product by Sector

(In millions of dinars/tolars. current prices)

		1989	1990	1991	1992	1993	1994
Agriculture, forestry, fishing, and hunting		1,521	9,233	17,224	49,631	64,804	82,570
Mining		284	2,023	4,081	17,156	14,692	16,511
Manufacturing		12,823	58,422	110,511	298,095	395,894	498,980
Electricity, gas and water supply		757	5,084	14,926	24,362	37,143	46,678
Construction		1,623	8,598	13,015	38,621	60,689	76,986
Wholesale and retail trade		2,392	21,388	32,802	105,172	148,838	187,927
Hotels and restaurants		755	4,485	6,678	24,260	36,614	46,662
Transport and communication		2,203	12,824	22,284	65,818	105,454	131,905
Financial intermediation		1,209	6,262	13,132	34,394	51,820	63,533
Real estate and other business services		3,130	20,202	34,253	95,429	129,164	155,462
Public administration and defense		1,390	6,413	11,111	40,405	60,460	73,412
Education		1,304	6,731	12,011	43,612	66,429	80,268
Health and social work		1,941	9,931	16,510	47,376	75,708	91,660
Other community and personal service		1,106	5,912	11,053	48,888	76,999	88,532
Total value added		32,438	177,507	319,590	933,218	1,324,706	1,641,087
Minus: Imputed bank service		751	3,057	6,876	16,586	28,338	30,861
Plus: Import duties		1,213	9,733	12,555	32,550	51,860	64,736
Plus: Indirect taxes		2,045	11,958	24,287	56,079	86,745	125,038
Gross domestic product		34,945	196,139	349,558	1,005,261	1,434,974	1,800,000
Agriculture		1,521	9,233	17,224	49,631	64,804	82,570
Industry		15,487	74,127	142,533	378,235	508,418	639,155
Services		15,430	94,148	159,834	505,353	751,483	919,362
	Market services	…	…	…	367,720	543,979	669,340
	Government and non-profit services	…	…	…	137,634	207,506	250,022

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)

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)

		1989	1990	1991	1992	1993	1994
Agriculture, forestry, fishing, and hunting		4.4	4.7	4.9	4.9	4.5	4.6
Mining		0.8	1.0	1.2	1.7	1.0	0.9
Manufacturing		36.7	29.8	31.6	29.7	27.6	27.7
Electricity, gas and water supply		2.2	2.6	4.3	2.4	2.6	2.6
Construction		4.6	4.4	3.7	3.8	4.2	4.3
Wholesale and retail trade		6.8	10.9	9.4	10.5	10.4	10.4
Hotels and restaurants		2.2	2.3	1.9	2.4	2.6	2.6
Transport and communication		6.3	6.5	6.4	6.5	7.3	7.3
Financial intermediation		3.5	3.2	3.8	3.4	3.6	3.6
Real estate and other business services		9.0	10.3	9.8	9.5	9.0	8.6
Public administration and defense		4.0	3.3	3.2	4.0	4.2	4.1
Education		3.7	3.4	3.4	4.3	4.6	4.5
Health and social work		5.6	5.1	4.7	4.7	5.3	5.1
Other community and personal services		3.2	3.0	3.2	4.9	5.4	4.9
Total Value Added		92.8	90.5	91.4	92.8	92.3	91.2
Minus: Imputed bank service		2.1	1.6	2.0	1.6	2.0	1.7
Plus: Import duties		3.5	5.0	3.6	3.2	3.6	3.6
Plus: Indirect taxes		5.8	6.1	6.9	5.6	6.0	6.9
Gross domestic product		100.0	100.0	100.0	100.0	100.0	100.0
Value added		100.0	100.0	100.0	100.0	100.0	100.0
Agriculture		4.7	5.2	5.4	5.3	4.9	5.0
Industry		47.7	41.8	44.6	40.5	38.4	38.9
Services		47.6	53.0	50.0	54.2	56.7	56.0
	Market services	…	…	…	39.4	41.1	40.8
	Government and non-profit services	…	…	…	14.7	15.7	15.2

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

View Table

Table 17.

Slovenia: Structure of Gross Domestic Product by Sector

(In percent)

		1989	1990	1991	1992	1993	1994
Agriculture, forestry, fishing, and hunting		4.4	4.7	4.9	4.9	4.5	4.6
Mining		0.8	1.0	1.2	1.7	1.0	0.9
Manufacturing		36.7	29.8	31.6	29.7	27.6	27.7
Electricity, gas and water supply		2.2	2.6	4.3	2.4	2.6	2.6
Construction		4.6	4.4	3.7	3.8	4.2	4.3
Wholesale and retail trade		6.8	10.9	9.4	10.5	10.4	10.4
Hotels and restaurants		2.2	2.3	1.9	2.4	2.6	2.6
Transport and communication		6.3	6.5	6.4	6.5	7.3	7.3
Financial intermediation		3.5	3.2	3.8	3.4	3.6	3.6
Real estate and other business services		9.0	10.3	9.8	9.5	9.0	8.6
Public administration and defense		4.0	3.3	3.2	4.0	4.2	4.1
Education		3.7	3.4	3.4	4.3	4.6	4.5
Health and social work		5.6	5.1	4.7	4.7	5.3	5.1
Other community and personal services		3.2	3.0	3.2	4.9	5.4	4.9
Total Value Added		92.8	90.5	91.4	92.8	92.3	91.2
Minus: Imputed bank service		2.1	1.6	2.0	1.6	2.0	1.7
Plus: Import duties		3.5	5.0	3.6	3.2	3.6	3.6
Plus: Indirect taxes		5.8	6.1	6.9	5.6	6.0	6.9
Gross domestic product		100.0	100.0	100.0	100.0	100.0	100.0
Value added		100.0	100.0	100.0	100.0	100.0	100.0
Agriculture		4.7	5.2	5.4	5.3	4.9	5.0
Industry		47.7	41.8	44.6	40.5	38.4	38.9
Services		47.6	53.0	50.0	54.2	56.7	56.0
	Market services	…	…	…	39.4	41.1	40.8
	Government and non-profit services	…	…	…	14.7	15.7	15.2

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