December 28, 2020 (01:47)

Slovak government relies on Recovery and Sustainability Plan

According to our experts, a feature of the economic crisis in Slovakia, which is developing against the general background of the global economic recession and the COVID-19 pandemic, is the significant dependence of the small, open Slovak economy on export earnings in industrial production, especially automotive.

The share of the automotive industry in Slovakia (Volkswagen Slovakia, Kia Motors Slovakia, PSA Group Slovakia, Jaguar Land Rover) reaches 49.5% of the industry; forms 13.9% of GDP; generates 46% of the country’s exports. In 2020, Slovakia experienced a 20% decline in car production as compared to 2019, which directly leads to a loss of 2.8% of GDP or EUR 2.2 billion. In addition, during 2021, Slovak carmakers expect additional difficulties with exports to the UK, which currently account for 5% of car sales abroad.

Economic losses of the Slovak economy according to the results of this year can range from 8 to 11% of GDP (from EUR 7.4 to 10.2 billion). The beginning of economic recovery is possible during the second half of 2021, and the level of GDP growth will not exceed 5% next year.

In these circumstances, as one of the main means of balancing public finances and stimulating the economic growth of the Slovak Republic, the funds of EU assistance are considered.

Under the new EU budget for 2021-2027 and the EU Economic Recovery Plan, Slovakia can use up to EUR 18.6 billion in additional aid, up to EUR 7.5 billion in grant aid and up to EUR 6.8 billion in highly profitable long-term loans.

First of all, current government of the Slovak Republic intends to use the funds of the assistance. To this end, on December 22, 2020, the Ministry of Finance of the Slovak Republic sent to the European Commission a draft government document “Plan of Restoration and Sustainability of the Slovak Republic” (Plán obnovy a odolnosti SR), according to which the Slovak side expects to receive EUR 5.8 billion over the next 6 years. The final agreement between the EC and Slovakia must be reached by April 30, 2021. For this purpose, the details of the agreement must be finalized no later than February 2021. The current text of the Slovak proposal and the calculation of funds are based on the political agreement of the existing parliamentary coalition.

The declared goal of the program is to ensure the long-term potential of economic growth and achieve a higher quality of life. The 400-page document is an intermediate option between the operational program (list and description of investment projects) and full-fledged projects to attract EU funds. It remains necessary to clarify the specific and detailed policy parameters of the relevant reforms and investments that need to be implemented to realize them. The first advance payment from the EC may arrive in Slovakia next year, following approval of the document. Payments will be made twice a year based on an assessment of the achievement of the set goals over the previous 6 months.

According to our experts, due to the implementation of the Recovery Plan, the annual public investment of the Slovak Republic, which is currently planned to be EUR 4 billion per year, can be increased by 25% over the next 6 years. The main expenditure items of the state program provide for the following 5 areas.

a) “Green” Slovakia – EUR 1900 million:

development of renewable energy sources and energy networks – EUR  100 million;

modernization and increase of energy efficiency of buildings – EUR  700 million;

modernization of railways – EUR 700 million;

decarbonisation of industry and use of alternative fuels – EUR 400 million;

b) Healthy living for all – EUR 1450 million:

basic and emergency assistance – EUR 1100 million;

medical care and care for the mentally ill – EUR 100 million;

long-term social medical care – EUR 250 million;

c) Effective public services and informatization – EUR 945 million:

improvement of business conditions – EUR 60 million;

judicial reform – EUR 200 million;

anti-corruption measures and security of Slovakia – EUR 200 million;

“state in a smartphone”, high-speed Internet, cybersecurity – EUR 485 million;

d) Better education for all – EUR 850 million:

accessible and inclusive education for all children – EUR 150 million;

education of the 21st century – EUR 450 million;

improving the efficiency of Slovak universities – EUR 200 million;

support for lifelong learning, development of digital skills – EUR 50 million;

f) Competitive and innovative Slovakia – EUR 700 million:

science, research, innovation and the digital economy – EUR 600 million;

atracting and retaining talent – EUR 100 million.

In modern conditions, the Slovak economic model, which is based on cheap labor and foreign investment, is exhausted. By combining investment and reform, Slovakia is trying not only to prevent economic stagnation, but also to solve the long-term problem of the country’s backwardness in a number of indicators from other EU member states.

The average income level in Slovakia is 73% of the EU average (according to Eurostat); by 2030, the government aims to increase this figure to 92% (currently the Czech Republic has 93%).

In terms of quality-of-life indicators, the most problematic areas for Slovakia are health, education and housing affordability. Thus, according to the OECD Better Life index, among 23 member countries, Slovakia ranks 22nd in terms of the quality of medicine, and 20th in terms of housing affordability. None of the Slovak universities are included in the influential academic rankings (QS, Times, ARWU) of the top 500 universities in the world.

The source considers tax and pension to be the most important reforms related to achieving the above-mentioned government goals. Their implementation, together with the reform of the system of budgetary responsibility and public investment management, can ensure the sustainability of public finances and stimulate economic growth in the Slovak Republic. According to the expert, the updated tax system should be less burdensome for economic activities and more focused on consumption, assets and negative external factors (including money laundering).

Change in the tax burden (tax per GDP) in %

The biggest challenge in the implementation of the Recovery Plan is the achievement by the Slovak side of sufficient efficiency in the use of available EU funds.

During the previous budget periods, this situation was due to insufficient justification of the purpose of funds, primarily due to the lack of structural reform projects in the economy of the Slovak Republic, as well as unsatisfactory reporting on the use of funds. Thus, out of the amount of investment resources of EUR 19 billion provided in the previous long-term EU budget for 2014-2020, Slovakia was able to use only EUR 6 billion, i.e. about EUR 1 billion per year.

Stability and completeness of EC funding can be ensured only in the case of timely and high-quality preparation of investment projects provided for in the Recovery Plan, compliance with the terms and conditions of their implementation and reporting. At the same time, according to the expert, the need to develop an investment resource of EUR 6 billion can provide a sufficiently stable political and social consensus within Slovakia to complete structural reforms and create the conditions for further economic recovery.

Given the achievement of positive dynamics in the process of preparation and implementation of investment projects at the expense of EU assistance funds, gaining the necessary experience and establishing the work of relevant governmental and non-governmental institutions, it is possible to initiate the procedure of obtaining other available investment and credit financial resources for a total of EUR 27.1 billion euro.

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