Economic Developments in Slovenia

Economic Developments in SloveniaAuthor(s): Egon ŽižmondSource: Eastern European Economics, Vol. 32, No. 6 (Nov. - Dec., 1994), pp. 75-99Published by: M.E. Sharpe, Inc.Stable URL: http://www.jstor.org/stable/4379987 .

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EGON ZIMOND

Economic Developments in Slovenia

Slovenia was previously one of the six republics of the former Yugoslav federation. The collapse of Yugoslavia was actually an outcome of the breakdown of socialism and of open conflicting interests embodied by different nationalities and republics. Highly centrally controlled, the economic system did not allow any scope for republics to take independent action according to their specific interests. The centralized macroregulation caused a deterioration of economic efficiency and growing discontent, particularly in the more developed republics (2izmond 1992).

Slovenia declared its independence on June 25, 1991. After the expira- tion of the Brioni Peace Agreement, in which Slovenia agreed to suspend the move toward independence for three months, Slovenia reaffirmed the independence declaration on October 7, 1991. Slovenia entered the transition toward a market economy with some advantages compared with other socialist economies: its GDP per capita was higher; its economy was fairly open; its foreign indebtedness was lower; its labor force was relatively cheap; the levels of education, work habits, work discipline, and the ability of workers and managers were higher; it also had a more market-oriented economic system with rather independent enterprises, and so forth. On the other hand, the essential obstacles were the facts that the transition began together with the process of forming a new state that was small and that lost almost half of its external market, that it inherited considerable macroeconomic imbalances from the former Yugoslavia, and that crucial economic reforms, especially privatization of enterprises and reconstruction of banks, were greatly delayed.

After three years of independence, Slovenia has achieved some good economic results, notably, lower inflation rates, surplus in the current account, increase in international reserves, small foreign indebtedness, and changes in the economic structure, but it also faces some problems, such as a drop in GDP and employment, an increase in wages, loss-making enterprises, banking- sector problems, etc., which are discussed in this article. The article is

Professor 2ilmond, Ph.D. is affiliated with the School of Business and Economics, University of Maribor, Slovenia.

75



76 EASTERN EUROPEAN ECONOMICS

divided into five parts: real sector, public sector, monetary and banking sector, external sector, and Slovenia's development prospects.

Real Sector

Slovenia has a population of 2 million and a per-capita GDP of US$ 6,015 (estimate for 1993). Its economy is also fairly open. In 1993, the volume of external trade, exports plus imports of goods and services, was equivalent to about 124 percent of Slovenian GDP. Nevertheless, economic activity in Slovenia has been declining since 1987. From 1987 to 1992, GDP dropped by around 22 percent. The root of the current recession can be traced back to the previous economic system and to the policies of the former Yugoslav federal government (2iimond 1992).

Economic developments in Slovenia in 1991 were marked by the transition toward an independent state and a market economy and by a number of events that had negative results (IMAD 1992). These events were direct and indirect economic loss caused by military aggression against Slovenia in June 1991; loss of markets in republics of the former Yugoslavia; the war in Croatia, Slovenia's most important trade partner; interrupted connections (transport and other infrastructure facilities) with southern regions of Yugo- slavia; the confiscation of the property of Slovenian firms in Serbia; and unselective measures imposed by the EC and United States against the former Yugoslavia, which also hit Slovenian exports. In addition, the external imbalances inherited from the unsuccessful anti-inflationary program of the federal government in 1990 (2iz'mond 1991) also had to be remedied.

In 1992, the recession deepened. The main reasons were the decline of markets in states of the former Yugoslavia (in Bosnia and Herzegovina because of the war, in Serbia and Montenegro because of UN sanctions, in Croatia because of the economic consequences of the war and restricted imports) and the stabilization policy, which succeeded in lowering inflation rates and increasing foreign-exchange reserves but at the same time restricted economic activity (IMAD 1993a).

In 1993 economic circumstances finally underwent a slight improvement.

GDP and Expenditures on GDP

Data on the gross domestic product in Slovenian currency (Slovenian tolars, SIT) and U.S. dollars in recent years are given in Table 1. From 1987 to 1992, GDP dropped by 22 percent. The decline in GDP was mostly due to four reasons. The first was the loss of markets. In the two years after its independence, Slovenia lost around three-quarters of its market in the former



NOVEMBER-DECEMBER 1994 77

Table 1

Gross Domestic Product In Slovenia (current prices and exchange rate)

Million SIT Million US$ US$ per capita Real growth (%)

1987 905 12,283 6,174 1988 2,709 10,737 5,369 -1.7 1989 34,945 12,112 6,058 -1.8 1990 196,139 17,326 8,671 -4.7 1991 349,558 12,678 6,334 -9.3 1992 1,003,783 12,347 6,186 -6.0 1993 1,356,000 11,974 6,015 1.0

Sources: Bank of Slovenia; Statistical Office of the Republic of Slovenia.

Yugoslavia and almost half of all its external markets if we take into consideration also the markets lost in states of the former Soviet Union. The second was the global recession. The next reason was stabilization policy, which succeeded in lowering inflation rates and in increasing international reserves but at the same time hindered economic activity. The last factor was the delay in implementing urgent economic reforms, especially the privatization of socially owned enterprises and the restructuring of banks.

The structure of GDP by sectors is shown in Table 2. In 1992, real value added dropped in most sectors (especially in the most important, manufacturing and trade). In 1993, real value added increased in all services (from GtoO).

Data on the cost structure of GDP are given in Table 3. The shares of compensation to employees and net indirect taxes increased, while the share of net operating surplus dropped sharply.

Expenditures on GDP are evident from Table 4. From 1990 to 1993, the share of domestic consumption increased and the share of the foreign balance decreased by 14.7 points. Especially evident are increases in the shares of domestic private and government consumption. Even if the amount of external trade dropped, mainly because of the drop in the former Yugoslav market, there was a surplus on trade of goods and services.

Data for the first quarter of 1994 show that the depression is ending because economic activity has been growing by 4.7 percent on an annual level. It is also encouraging that the structure of the Slovenian economy is becoming more and more similar to the structure of developed economies. From the structure of value added by sectors it is evident that the share of industry (mining, manufacturing, electricity, gas and water supply) and construction fell from 41 percent in 1991 to 34 percent in 1993, while the share of all services increased from 46 percent to 61 percent.




Table 2

Sectoral Structure of GDP (%) 1992 1993

Real Real Structure growth Structure growth

A. Agriculture, forestry, hunting 5.0 -10.0 4.8 -3.5 B. Fishing 0.0 -25.0 0.0 0.0 C. Mining 1.7 4.0 1.5 -8.8 D. Manufacturing 29.7 -14.5 26.1 -2.0 E. Electricity, gas, and water supply 2.3 -5.0 2.7 -3.2 F. Construction 4.1 -10.0 3.6 -4.0 G. Wholesale and retail trade, repair

of vehicles 10.5 -11.0 10.4 4.0 H. Hotels and restaurants 2.4 8.0 3.1 10.0 1. Transport, storage, and

communications 6.5 13.0 6.3 4.0 J. Financial intermediation 3.3 -17.4 3.4 9.0 K. Real estate, renting, and

business services 10.7 2.8 12.2 3.0 L. Public administration, defence,

social security 3.9 10.0 4.4 4.5 M. Education 3.6 -4.0 3.7 2.0 N. Health and social work 5.6 5.0 5.9 2.1 0. Other community, social, and

personal services 3.4 -4.5 3.7 0.4

1. Total value added 92.8 -6.0 91.8 1.0 2. Imputed bank services -1.7 - -1.8 3. Import duties 3.2 3.8 - 4. Indirect taxes and other adjustments 5.6 6.2 5. Total adjustments 7.2 8.2 6. Gross domestic product (1 + 5) 100.0 -6.0 100.0 1.0

Source: Monthly Bulletin, Bank of Slovenia.

Table 3

Cost Structure of GDP (%) 1990 1991 1992 1993

1. Gross domestic product (2 + 5 + 6) 100.0 100.0 100.0 100.0 2. Net indirect taxes (3 - 4) 11.0 11.7 12.2 14.2 3. Indirect taxes 14.3 14.4 14.1 15.7 4. Subsidies 3.3 2.7 1.9 1.6 5. Compensation of employees 59.4 63.1 64.0 67.2 6. Gross operating surplus (7 + 8) 29.5 25.2 23.8 18.7 7. Consumption of fixed capital 16.8 18.9 20.3 18.2 8. Net operating surplus 12.8 6.2 3.6 0.4





Table 4

Expenditure on GDP (%)

1990 1991 1992 1993

Gross domestic product (1 + 2) 100.0 100.0 100.0 100.0 1. Domestic consumption 84.2 87.8 91.1 98.9

Prvate consumption 48.8 51.7 51.5 56.3 Government consumption 17.5 18.8 21.3 22.5 Gross fixed investments 18.0 18.8 17.3 18.3 Change in stocks -1.2 -3.6 -0.2 0.6 Statistical errors and omissions 1.1 2.1 1.1 1.1

2. Foreign balance 15.8 12.2 8.9 1.1 Exports of goods and services 85.6 93.0 63.7 62.6 Imports of goods and services 69.8 80.8 54.8 61.5


The Structure of Ownership and the Size of Firms

In recent years, important changes in the structure of ownership and the size of firms is also noted (see Table 5). In 1992 socially owned enterprises still provided 82.3 percent of employment and produced 70.7 percent of the turnover. Nevertheless, their significance dropped in comparison with 1991. Private enterprises expanded strongly following a major relax- ation of restrictions. Small enterprises with less than 100 employees predominated (92.1 percent), but they employed only 16.3 percent of all workers and produced only 19.0 percent of the turnover. The majority of workers and turnover are still concentrated in big firms with more than 500 employees.

Employment and Unemployment

Slovenia's population is experiencing quick structural changes, as illustrated by data in Table 6. The shares of active and employed popula- tions in the total population dropped, while the shares of pensioners and the unemployed, which in 1993 together already represented 29.3 percent of the total population, increased. The ratio between the employed on the one hand and the sum of pensioners and the unemployed on the other dropped from 2.12 in 1990 to 1.30 in 1993. This fact produced dual effects: an increase in government expenditures for social security, and an increase in labor costs because this part of the government expenditures is financed by contributions from gross wages.




Table 5

Enterprises in Operation by Ownership and Size (1992)

Enterprises Employed Turnover

number % number % SIT billion %

Socially owned 2,635 13.0 430,151 82.3 1,825 70.7 Private 16,404 80.8 28,457 5.4 295 11.4 Cooperatives 169 0.8 4,040 0.8 41 1.6 Mixed 1,094 5.4 60,081 11.5 421 16.3 Total 20,302 100.0 522,729 100.0 2,582 100.0

Small 18,697 92.1 85,442 16.3 491 19.0 Medium 1,142 5.6 148,508 28.4 554 21.4 Big 463 2.3 288,779 55.3 1,537 59.6

Source: SDK Information, March 1993.

Table 6

Structural Changes of the Slovenian Population (data in thousands, yearly averages)

Number Shares in % Growth (%)

1990 1993 1990 1993 1993/90

Active population 954.4 889.2 47.8 44.6 -6.8 Employed population 909.7 760.1 45.5 38.1 -16.4 Pensioners 384.1 (455.3) 19.2 22.8 15.9 Registered unemployed 44.6 129.1 2.2 6.5 189.3 Total population 1,998.1 (1,995.8) 100.0 100.0 -2.1

Sources: Monthly Bulletin, Bank of Slovenia; IMAD I 993b.

Data on employment and unemployment are presented in Table 7. From 1990 to 1993 the number of employed dropped by 16.4 percent: in enterprises and institutions it dropped by 19.9 percent, while in the small private sector it increased by 4.5 percent. The biggest drop was noted in the socially owned sector of enterprises. Only a part of this drop was absorbed by increased employment in the private sector, while the number of pensioners and the unemployed sharply increased. In October 1993, the number of unemployed reached the highest level, 137,000 or 15.4 percent of the active population, and since then it has been diminishing. In March 1994, there were 130,000 unemployed.




Table 7

Employment and Unemployment (yearly averages)

1990 1993 1993/90(%)

1. Enterprises and institutions 782,222 626,807 -19.9 Business 647,861 486,838 -24.9 Govemment 134,361 139,969 4.2

2. Small private sector 127,521 133,323 4.5 3. Total employed (1 + 2) 909,743 760,130 -16.4 4. Registered unemployed 44,623 129,087 189.3 5. Unemployment rate (%) 4.7 14.5 6. Active population (3 + 4) 954,366 889,217 -6.8


Losses in the Enterprise Sector

The financial position of the Slovenian enterprise sector has followed a deteriorating trend since 1987. Losses in the business sector mounted to SIT 31.4 billion in 1991, or around 9 percent of GDP. In 1992 losses reached SIT 151.9 billion, 15.1 percent of GDP, and in 1993 they dropped to SIT 115.9 billion, 8.5 percent of GDP.

The majority of losses were incurred by socially owned enterprises. In 1993, losses in industry accounted for 61 percent of total losses, mainly in firms producing machines, steel, electrical machines and appliances, vehicles, and finished wood products, as well as in metal fabrication and coal mining. The financial troubles of enterprises were compounded by the banking sector, which was already burdened with many nonperforming loans and charged high real interest rates as a consequence.

Inflation

From 1980 to 1989 the average yearly rate of inflation in the former Yugo- slavia mounted to 108.7 percent (Kra6un 1991). The inflation rate was the highest in 1989, 1,306.3 percent. When the monthly rate reached 58.8 percent in December 1989, the federal government, led by Ante Markovic, launched an anti-inflation program of the heterodox type with shock therapy. This program quickly brought down inflation to almost 0 percent in April 1990. However, incomes and demand management policies began to relax again, and inflation increased after that month. From December 1989 to December 1990, the rate of inflation was 1 19 percent. Similar rates were registered in Slovenia.




Table 8

Inflation Rates In Slovenia (percentage)

Producer prices

Retail prices Cost of living industrial agricultural

1991 117.7 115.0 124.1 108.2 1992 201.3 207.3 215.7 213.6 1993 32.3 32.9 21.6 18.7 Apr.94/Sept.91 318.6 324.5 293.5 287.9a Dec.92/Dec.91 92.9 92.0 76.2 74.1 Dec.93/Dec.92 22.9 22.8 18.6 18.8 Apr.94/Dec.93 6.1 7.2 4.5 2.6b

Source: Statistical Office of the Republic of Slovenia. aFebruary 1994/September 1991. bFebruary 1994/December 1993.

From December 1990 to September 1991, retail prices in Slovenia rose by 108.9 percent. Since October 1991, after monetary independence was declared, monthly inflation rates declined fiom 21.5 percent in October 1991 to 1.4 percent in August 1992. From August 1992 to April 1994, the average monthly inflation rate was only 1.8 percent. Some data on inflation rates are given in Table 8.

The main goal of the economic policy, macroeconomic stabilization, was implemented mainly through restrictive monetary policy and a floating exchange rate, that is, without a shock policy (Mencinger 1994). Fiscal policy supported stabilization only by achieving a surplus in the public sector, although incomes and expenditures ofthe public sector nevertheless increased in real terms, while the government supported stabilization through the control of prices of oil and oil products, public utilities, electricity, basic food, housing, as well as transportation and postal services. Otherprices in Slovenia are freely determined. Let us add also the lowering of customs and import duties, which lowered import costs, to the set of stabilization measures.

There are several reasons why inflation was still high in Slovenia by intermational standards. Taxes and government expenditures rose, financial discipline was still lacking, there was an ongoing depreciation of the tolar, from time to time there was an increase in prices in public monopolies, especially energy, but most of all there was a rapid growth of wages.

Wages

In comparison with 1990, average nominal wages in 1991 in Slovenia increased by 82.5 percent and the cost of living by 115.0 percent, so that




Table 9

Average Monthly Net Wages

Average net wages Growth (%)

nominal cost of real Year/month SIT DM US$ wages living wages

1991 10,322 620 374 82.5 115.0 -15.1 1992 30,813 591 379 198.5 207.3 -2.9 1993 46,826 684 414 52.0 32.9 14.4 Mar.94/Sept.91 - - 395.8 315.2 19.4 Dec.92/Dec.91 152.6 92.0 31.6 Dec.93/Dec.92 - 31.5 22.8 7.1 Mar.94/Dec.93 2.0 4.7 -2.6

Source: Statistical Office of the Republic of Slovenia.

Table 10

Growth of Labor Productivity and Wages (%)

1991 1992 1993 1993/1990

Gross domestic product -9.3 -6.0 1.0 -13.9 Employment -7.8 4.6 -3.0 -16.4 Labor productivity -1.6 0.6 4.1 3.1 Average nominal net wages 82.5 198.5 52.0 728.0

real wages dropped. After monetary independence, real wages decreased until February 1992 and began to rise after that month (see Table 9). From December 1991 to December 1992, real wages increased by 31.6 percent; from December 1992 to December 1993, they rose by 7.1 percent; while from December 1993 to March 1994, they finally dropped by 2.6 percent. In the whole period from September 1991 to March 1994, real wages increased by 19.4 percent, while nominal wages, recalculated in DM and US$, rose by around 76 percent because the Bank of Slovenia exchange rate of the German mark and the U.S. dollar increased by around 181 percent.

Nominal wages in Slovenia increased much more quickly than labor productivity. This is evident from Table 10. Faster growth of nominal wages in comparison with labor-productivity growth and the decline in employment are sure signs of cost-push inflation (Bole 1993). The main reason for the excessive growth of wages was unsolved problems in collective bargaining, which were the consequence of the old income system under self-management and of inappropriate wage setting in the past. Because




of the increase in real wages, the stabilization policy and the competitiveness of Slovenian exports are endangered.

Public Finance

In the past, under the self-management system, Slovenia's public-sector agencies had independent authority in administering expenditure programs and the setting of taxes and contributions at various community levels. The central (republic) government budget was responsible only for government administration and subsidies to the economy and accounted for less than one-fifth of the total public-sector expenditures. This system resulted in a proliferation of taxes, frequent and arbitrary adjustments of tax rates, and a loss of government control over fiscal policy (World Bank 1992).

Fiscal Reform

In 1991 the fiscal role of the federal govemment of Yugoslavia finally vanished completely, and a far-reaching fiscal reform program and a major realignment of the public sector were implemented. The 1991 fiscal reform consolidated all earmarked funds, except for the pension fund, into the central government budget and introduced a standard corporate profit tax and a personal income tax to replace a host of other taxes. Starting in February 1992, a new and much more simplified sales tax came into effect, replacing a multitude of turnover taxes. The new tax consists of four rates: 5 percent, 15 percent, 20 percent, and 32 percent, with the 20 percent rate being the general rate covering most sales. A draft on customs tariffs was also implemented, and preparatory work for introducing a VAT was started.

After the initial effort at fiscal consolidation, there was some backsliding. In March 1992, the government transferred health-care expenditures to a separate fund again, to be financed by earmarked contributions. Thus, a high rate of autonomy was preserved in the health and social insurance system, which prescribe their own special contributions.

Public-Sector Revenues and Expenditures

The consolidated general government account closed with a small surplus (see Table I 1). From 1991 to 1993, both revenues and expenditures increased more, by 341.8 percent and 365.5 percent, respectively, than retail prices, which increased by 298.6 percent, so that revenues and expenditures rose in real terms by 10.8 percent and 16.8 percent, respectively. The main reasons for the real increase in revenues were the rise in wages, a higher




Table 1 1

General Government Revenues and Expenditure (SIT billion at current prices)

1991 1992 1993

Revenues 152,797 466,777 675,005 Expenditure 143,554 464,158 668,205 Surplus 9,243 2,619 6,800


contribution rate for health care (1992), and lower inflation rates. The real increase in expenditures was mostly due to the rise in wages and social transfers.

The structure of public-sector revenues and expenditures and their shares in GDP are shown in Table 12. The biggest shares of revenues represented domestic taxes on goods and services, contributions for the pension fund, contributions for health care, and the individual income tax. The biggest shares of expenditures represented central government expenditures and the pension fund. The surplus in the public sector was mostly due to the surplus in health care.

The shares of public-sector revenues and expenditures in GDP rose and in 1993 reached almost 50 percent.

Public Debt

The precise amount of the public debt in Slovenia is not known yet (Kranjec 1993). The Ministry of Finance estimated it in the Budgetary Memorandum for 1994. The total debt amounted to SIT 379 billion, which is US$ 2874.4 million or 24 percent of GDP. Official data are given in Table 13.

The domestic debt represents 76.8 percent of the total debt. Less precise are data on Slovenia's obligations resulting from succession, the undivided foreign debt of the former Yugoslavia and repayment of other foreign loans.

Monetary and Banking Sector

In June 1991, Slovenia adopted its own banking law and the Law on the Bank of Slovenia (BS), which created and endowed the BS with the usual authority and functions of a central bank.




Table 12

Structure of General Government Revenues and Expenditure and Their Shares In GDP

Structure (%) Shares in GDP

1991 1992 1993 1991 1992 1993

Revenues 100.0 100.0 100.0 43.7 46.5 49.8 1. Tax revenues 48.3 46.2 46.7 21.1 21.5 23.3

Corporate income tax 1.4 1.3 1.0 0.6 0.6 0.5 Individual income tax 15.2 14.8 14.5 6.7 6.9 7.2 Domestic taxes on goods and services 23.3 23.2 23.5 10.2 10.8 11.7

Customs duties and other import duties 8.2 6.9 7.6 3.6 3.2 3.8

2. Social security contributions 44.8 44.7 44.7 19.6 20.8 22.2 for unemployment 2.8 3.0 3.1 1.2 1.4 1.6 for health care 12.5 18.3 15.3 5.5 8.5 7.6 for the pension fund 29.4 23.5 26.3 12.9 10.9 13.1

3. Nontax revenues 6.9 9.1 8.6 3.0 4.2 4.3 Expenditure 100.0 100.0 100.0 41.1 46.2 49.3

Central government expenditure (without health care and pensions) 40.3 45.4 44.8 16.6 21.0 22.1

Local govemment expenditure 16.5 10.8 11.1 6.8 5.0 5.5 Pension fund 26.9 27.4 27.8 11.0 12.7 13.7 Health care 12.2 15.6 16.0 5.0 7.2 7.9

Surplus (% of revenues) 6.0 0.6 1.0 2.6 0.3 0.5


Table 13

Structure of Public Debt by Creditors (31 December 1993) Structure (%) Shares in GDP (%)

debt guarantees total debt guarantees total

1. Domestic debt 65.4 11.3 76.8 15.7 2.7 18.4 Public funds 8.5 0.0 8.5 2.0 0.0 2.0 Bank of Slovenia 0.4 0.0 0.4 0.1 0.0 0.1 Commercial banks 47.5 11.3 58.9 11.4 2.7 14.1 Others 9.0 0.0 9.0 2.2 0.0 2.2

2. Foreign debt 15.6 7.6 23.2 3.7 1.8 5.6 Intemational organizations 7.8 3.5 11.3 1.9 0.8 2.7 Foreign governments 0.2 0.6 0.8 0.0 0.1 0.2

Commercial banks 7.6 3.5 11.1 1.8 0.8 2.7 3. Total debt 81.0 19.0 100.0 19.5 4.5 24.0

Source: Javni dolg RS, Ministry of Finance, zakladnica OPB.




Monetary Policy

The most important event in the monetary sphere for Slovenia in 1991 was the replacement of the Yugoslav dinar by the Slovenian tolar (SIT) in October 1991. After converting dinars to tolars at a 1: I ratio, the BS pursued an active monetary policy. The Bank of Slovenia set itself the goal of bringing down inflation, which in October 1991 exceeded 20 percent. The choice of the target of monetary policy, exchange rate or money supply, was determined by the given macroeconomic circumstances. Because the demand for money in the period since 1990 has shown much more stability than the supply and demand for goods, and particularly for foreign currency, monetary policy throughout 1992 was aimed at regulating the quantity of money in circulation, with instruments aimed at the maintenance of the general liquidity of banks and savings banks and with measures for maintaining the general liquidity of banks in foreign payments (Ribnikar 1993a). In 1992, three periods can be determined, in which these needs differed in terms of both quality and quantity (Bank of Slovenia 1993).

In the first period, from monetary takeover in October 1991 until the end of February 1992, the Bank of Slovenia first drained the surplus liquidity of banks with a thorough reduction of the money supply. After this urgent introductory measure, in conjunction with which the Bank of Slovenia took the opportunity to incorporate various types of previously obligatory bank deposits with the central bank into the commercial banks' obligatory reserves, there followed a lowering of the reserve rate, accompanied by a normalization ofthe structure of primary money with a parallel decrease in rediscount quotas, which were abolished in April. The occasional liquidity deficits were covered by temporary purchases of government securities.

In the second period, from March to around midyear, the Bank of Slovenia gradually adjusted the quantity of money to the decrease in inflation rates and the falling velocity of circulation. Bank liquidity was main- tained through purchases of foreign exchange and foreign-exchange bills as well as through the temporary purchase of government securities.

In the third period, the second half of the year, monetary policy was stabilized as the necessary changes in the quantity of central bank money were considerably smaller than in the first half of the year because of relatively much lower inflation. In the last quarter, the quantity of money increased more markedly, particularly as a result of the growth in real transactions. Throughout this period, the Bank of Slovenia was issuing money through Lombard loans, intervention in the interbank market, overnight loans, liquidity loans to banks in the prerestructuring process, and through the purchase of foreign currency.




Table 14

Monetary Indicators (end period figures in SIT billion)

Primary money Ml Inter- national reserves

bank real (US$ Year/month total cash reserves nominal (index) million)

1 2 3 4 5 6 7

1991 8 October 14,699 8,079 6,598 30,302 100.0 170.1 December 15,918 9,176 6,682 39,330 78.0 365.3

1992 January 12,844 8,261 4,514 39,147 67.4 364.7 December 32,730 24,183 7,685 78,915 81.1 1,163.2

1993 January 32,088 21,335 9,913 76,181 75.5 1,204.4 December 46,178 32,688 12,581 113,371 94.8 1,566.0

1994 January 44,083 26,892 16,338 106,781 89.2 1,654.9 March 44,575 30,229 13,429 112,273 88.0 1,783.9

Growth (%) Mar.94/Oct.91 203.3 274.2 103.5 270.5 88.0 948.7 Dec.92/Dec.91 105.6 163.5 15.0 100.6 104.0 218.4 Dec.93/Dec.92 41.1 35.2 63.7 43.7 16.9 34.6 Mar.94/Dec.93 -3.5 -7.5 6.7 -1.0 -7.2 13.9


There was a large supply of foreign exchange on the market throughout 1992 because of the surplus on current account. The Bank of Slovenia did not automatically purchase the amounts offered, as this would have increased the quantity of reserve money. The balancing of supply and demand for foreign exchange was left to the exchange rate, while an excessive appreciation of the tolar was avoided by selling foreign-exchange bills and by intervening on the open market with Lombard loans and the purchase of foreign exchange, meanwhile conditioning this intervention on the amount of foreign exchange that the banks had to purchase from exporters and with the exchange rate at which the transactions were made. The Bank of Slovenia created additional scope for such intervention through the sale of its bills, which withdrew money from circulation.

As a result of the gradual decrease in inflation rates, the real demand for money was rising, which the central bank was able to adapt to without threatening the stabilization objective. Since June 1992, all monetary aggregates began to rise in real terms (see column 6 in Table 14). At the end of




the year, there was a further increase in the demand for money stemming from a rise in real transactions.

In 1992, the effects of the policies outlined above were reflected in the increase in total foreign-exchange reserves by US$ 799 million, while the international reserves of the Bank of Slovenia increased by US$ 633 million.

Monetary policy was made additionally difficult by the state of the Slovenian banking system in conditions of greatly reduced inflation and delays in the implementation of the bank restructuring program. The Bank of Slovenia was frequently called upon to supply liquidity to banks in cases where difficulties were arising from an inherited bad asset structure and from unsettled relations connected with the inheritance of the former federation. In the second half of 1992, this pressure was reflected in the increased share of liquidity loans.

The Bank of Slovenia in 1993 had less work because of a reduced surplus in the current account, only US$ 196.0 million compared with US$ 929.1 million in 1992, and thus less intervention in the money and foreign- exchange market. The Bank of Slovenia has issued money through liquidity loans to banks in the prerestructuring process and intervened in the interbank market with overnight loans. In this way the BS also influenced the level of the interbank interest rate. The supply and demand for money also was regulated through foreign-exchange bills. At the end of the year there was a further increase in the demand for money stemming from a rise in real transactions.

From October 1991 to March 1994 monetary policy was quite restrictive. Real money (Ml) decreased by 12 percent in this period and had the greatest influence on lowering the inflation rate.

Banking-Sector Problems

The financial position in many Slovenian banks is very precarious. The problem is inherited and stems from two sources: the liability of the population's foreign-exchange deposit accounts in banks, and a large share of nonperforming loans. The previous federal guarantee of repayment of foreign-exchange deposits by the National Bank of Yugoslavia is no longer applicable, and the new Slovenian government and the Bank of Slovenia do not have resources to pay off depositors. Moreover, the banking sector had over 40 percent of its total assets classified as nonperforming. In mid-1992, many banks were thus charging an exorbitant level of real interest rates of 30 percent for corporate loans.

Govemmental bonds were needed as a way to rehabilitate the financial sector and to fulfill the government's obligations to depositors (almost US$




1.5 billion were included in the public debt). With this the bank rehabilitation program started in April 1993, first with Ljubljanska Banka and Kreditna Banka Maribor, which are the biggest among the thirty banks in Slovenia, controlling over 50 percent of banks' balance, and real interest rates for corporate loans fell to 11 percent from mid-1992, when they were 30 percent.

External Sector

In March 1991, Slovenia introduced its own foreign-exchange market, in which Slovenian enterprises were allowed to trade the bank papers that authenticated the availability of foreign exchange for purchase at the official exchange rate. In this way, Slovenia circumvented the Yugoslav federal authority in determining foreign-exchange-rates policy without changing the official Yugoslav dinar exchange rate and created a new exchange system (IMAD 1992). However, by the end of the summer of 1991, this system ran into serious difficulties because of the banks' increasing inability to provide foreign exchange when presented with the papers they had issued.

Foreign-Exchange System

At the beginning of October 1991, Slovenia immediately devalued the new currency by about 60 percent, to 32 SIT for one German mark. The new rate overshot the estimated equilibrium rate by about 20 percent. Three foreign-exchange markets were permitted to operate simultaneously: the interenterprise market, which dealt with the need for current-account transactions; the official market, which dealt with the need for servicing the foreign debt and payments of essential imports, such as oil and medical supplies; and the household market, in which individuals could buy and sell foreign currencies among themselves.

Only in the official market was the official exchange rate used. To main- tain the supply of foreign exchange to the official market, exporters were initially required to surrender 30 percent of export proceeds for official purchases. Until early March 1992, the official exchange rate was 10-20 percent below those prevailing in the other two markets. From then on, the Bank of Slovenia permitted the official rate to be adjusted gradually on a daily basis toward the market rate.

From October 1991 to June 1992, the external value of the tolar increased in real tenns, which highlights the intense pressure coming from the balance of payments. In addition to the current-account surplus, the supply of foreign exchange was supplemented in the first quarter with sales by households arising from the privatization of apartments (Bank of Slovenia 1993).




Table 15

Nominal and Real Exchange Rates (SIT/DM, average monthly rates)

Nominal rates Indices of real rate of BS

Relative Inter- Exchange production Relative

Year/month BS enterprise offices prices wages

1 2 3 4 5 6

1991 October 8 32.0000 38.5000 100.0 100.0 December 36.7697 42.8909 42.1763 79.6 94.1

1992 January 37.3298 45.2244 45.9077 73.2 85.3 July 50.9109 53.1314 53.3515 67.4 67.0 December 60.8339 61.1992 61.6731 77.5 66.8

1993 January 61.2873 61.8004 62.0171 74.9 68.2 December 75.6828 76.8625 76.4645 84.3 65.0

1994 January 77.1734 77.6163 77.1905 85.4 68.1 March 78.5194 78.8121 78.3705 85.0 65.6

Growth (%) Mar.94/Oct.91 145.4 103.6 -15.0 -34.4 Dec.92/Dec.91 65.4 42.7 46.2 -2.6 -39.0 Dec.93/Dec.92 24.4 25.6 24.0 8.7 -2.7

Source of data: Monthly Bulletin, Bank of Slovenia.

In the second half of 1992, conditions on the foreign-exchange market stabilized, while on the other hand the central bank's room for maneuver became much narrower. During this period, the Bank of Slovenia increased its latitude through sterilization, effected with the sale of the new twin bill, and through the use of some other instruments. In the third and fourth quarters of 1992, an additional demand for foreign exchange was again financed by households. However, the problem was in this period showing up essentially in the field of domestic cost pressures. The real effective exchange rate, adjusted for inflation with relative wages, demonstrated continuing appreciation, as in the second half of 1992 the growth in average wages exceeded the growth in prices. The same goes for the whole year of 1993. Quite the opposite is true for the real effective exchange rate, adjusted for relative inflation, which shows depreciation after July 1992. This is illustrated in Table 15 with the growth of the nominal and real exchange rate of the German mark.

According to the first calculation (real exchange rate, adjusted for relative




growth of industrial prices, column 5), the real exchange rate of the German mark was falling, and the external value of the tolar was rising, until July 1992 and began to rise, and the external value of the tolar began to fall, after that month. The profitability of exports was thus slightly improving. According to the second calculation (real exchange rate, adjusted for relative growth of wages in industry, column 6), the real exchange rate of the German mark was falling until December 1993 and showed a slight rise after that month. From October 1991 to March 1994, nominal relative wages in Slovenia increased by 273.9 percent, while the nominal exchange rate of the DM increased by only 145.4 percent. The key problem in Slovenia is thus the growth of nominal wages.

Trade Regime

Slovenia inherited the Yugoslav system of foreign trade, which had become much simpler by the end of 1990 as a result of the trade liberalization program undertaken in 1988-90. In addition, Slovenia made a number of adjustments to the system in 1991 and 1992, mainly concerning agricultural imports. While 12.9 percent of imports were still under the regime of quotas and licenses in 1991, in 1992 this share dropped to 2.1 percent. In 1993, the quotas were replaced by special import duties (IMAD 1 993b).

At present, foreign trade in Slovenia is regulated by tariffs. In 1991, the average tariff rate was 20.5 percent, while in 1992 it was only 13.3 percent, but owing to numerous exemptions, actual rates in 1992 were much lower. In manufacturing the rates were capital goods, 3.7 percent; intermediate goods, 2.3 percent; consumer goods, 7.5 percent; agricultural goods, 3.5 percent. In 1993, tariff rates were lowered again slightly.

Balance of Payments

As we saw in Table 4, Slovenian exports and imports of goods and services dropped from 155 percent of GDP in 1990 to 124 percent of GDP in 1993. Slovenia has traditionally produced a surplus on the current account, which, however, dropped from 15.8 percent of GDP in 1990 to 1.1 percent of GDP in 1993. The balance of payments of Slovenia in 1992 and 1993 is given in Table 16.

Despite a decline in economic activity and a drop in industrial production and in spite of the increase in the external value of the tolar, relatively good results were achieved in goods trade. Over the past few years, Slovenia has lost some very important markets. By 1992, Slovenia had more than compensated for these losses by redirecting to the markets of the West,



NOVEMBER-DECEMBER /994 93

Table 16

Balance of Payments of Slovenia (in US$ million)

1992 1993

1. Current account 929.1 196.0 1. Trade balance 791.1 -136.8 2. Services 180.3 348.2 3. Income -91.3 -56.1 4. Current transfers 49.0 40.8

11. Capital and financial account -640.6 -180.7 A. Capital account 4.1 B. Financial account -640.6 -184.8

1. Direct investment 112.9 110.2 2. Portfolio investment -8.9 3.1 3. Other investment -112.0 -187.0 4. International reserves -632.6 -111.1

111. Statistical error -288.6 -15.3


above all to the countries of the European Union and the EFTA countries. The redirecting of exports to Westem markets did not in most cases concem the same range of goods; rather, it was accomplished by structural adjustments in supply and production.

In 1992 the value of exports of goods (f.o.b.) was US$ 6,683 million and imports (f.o.b.), US$ 5,892 million. In 1993 exports of goods dropped to US$ 6,088 million, while imports increased to US$ 6,225 million. The trade deficit was covered by the surplus in the balance of services. Receipts from services increased from US$ 1,219 million in 1992 to US$ 1,390 million in 1993, or 18 percent of all current receipts. Slovenia has a surplus in the majority of service sectors, which increased from a total of US$ 180 million in 1992 to US$ 348 million in 1993.

Foreign direct investment in Slovenia was US$ 111.0 million in 1992 and US$ 112.5 million in 1993. Greater activity on the part of foreign investors is expected in 1994, when privatization gets under way. Surpluses in the current account were financed through outflows of short-term capital and partly under the influence of central bank policies.

International reserves increased in 1992 by US$ 632.6 million and in 1993 by US$ 111.1 million. Slovenia's total foreign-exchange reserves, including commercial banks' operating reserves, increased in 1992 by US$ 799 million and in 1993 by US$ 403 million, reaching US$ 1,556 million by the end of 1993, the equivalent of 3.3 months of goods imports and 179 percent of money (M 1).




Table 17

Regional Structure of Slovenian Trade In 1993 (million US$)

Exports (f.o.b.) Imports (c.i.f.)

amount % amount %

EU 3,495 57.4 3,616 55.7 States of former Yugoslavia 963 15.8 692 10.7 EFTA 425 7.0 777 12.0 States of former Soviet Union 296 4.9 217 3.3 United States 216 3.5 188 2.9 Other countries 693 11.4 998 15.4 Total 6,088 100.0 6,488 100.0 France 528 8.7 521 8.0 Italy 755 12.4 1,048 16.2 Germany 1,798 29.5 1,625 25.0 Austra 303 5.0 552 8.5 Croatia 737 12.1 591 9.1


The Structure of Exports and Imports of Goods

The structure of Slovenian exports and imports of goods was very similar to that of the former Yugoslavia. Slovenia exported and imported mainly raw materials and semifinished products, in 1989, 47 percent of exports and 68 percent of imports. This structure did not change much after independence. The major finished products exported by Slovenia are electrical machines and appliances, vehicles, chemical products, transport equipment such as cranes, trucks, water turbines, camping trailers, and telecommunications equipment, and miscellaneous consumer products including textiles, foot- wear, furmiture, household appliances, sports equipment, etc.

As for the regional structure of Slovenian trade in 1993, Table 17 lists those countries with which Slovenia recorded more than US$ 180 million in exports and imports of goods. The most important partners for Slovenia are the EU and EFTA countries and the states of the former Yugoslavia. The most important single partner is Germany, which accounts for around 27 percent of Slovenian trade, followed by Italy, Croatia, and France.

External Debt

Upon attaining sovereignty in 1991, Slovenia declared its willingness to assume a share of the extemal debt of the former Yugoslavia pertaining to the




Table 18

Debt Indicators for Slovenla (million US$)

1991 1992 1993

1. Total debt stock (EDT) 1,866 1,741 1,873 of which long-term debt 1,765 1,659 1,744

2. Total debt service (TDS) 394 418 414 3. EDT/exports of goods and services(%) 37.8 21.7 24.5 4. TDS/exports of goods and services (%) 8.0 5.2 5.4 5. International reserves/EDT (%) 19.6 66.8 83.6


Republic of Slovenia as well as its share of obligations arising from guarantees given to legal entities registered in Slovenia. It has also expressed that it is prepared to take over a corresponding share of the debts of the former federation that it is not possible to allocate.

At the end of 1993, Slovenia's external debt amounted to US$ 1,873 million. Most of these debts, US$ 1,245 million, were public and publicly guaranteed. In 1993, debt indicators for Slovenia improved (see Table 18). Besides this debt, there also exists the common debt of the former Yugosla- via, US$ 3.1 billion, of which Slovenia's share has been estimated at US$ 880 million. The future servicing of foreign debts should not essentially threaten the foreign liquidity of Slovenia, even if it is increased to include an appropriate share of the undivided extemal debt of the forner Yugoslavia

Development Prospects

It seems that the depression in the Slovenian economy is ending. First estimations show that GDP is going to rise by 2 percent in 1994, but the Slovenian economy can be expected to make a full recovery only over an extended period. Three fundamental factors underline this outlook of the economy.

(1) The loss of market share in the former Yugoslav republics and the former CMEA countries cannot be expected to be fully regained because of largely unsuitable technology and obsolete production programs (Mencinger 1993). The contraction experienced in this trade is likely to be permanent, and large-scale industrial restructuring and realignment is inevitable as a result of this loss of market. Because of unsolved problems in the distribu- tion of product (unsettled collective bargaining), the danger of an increase in wages still exists, which would cause a deterioration in the current account and hinder economic activity and employment.




(2) A definitive eradication of inflation is far from being assured. Currently, inflation is still running at 1-2 percent per month, and the danger of sudden surges in inflation and financial instability is still present. To tackle inflation, monetary and fiscal policies will have to stay tight over a sustained period, and this will cause a low growth of economic activity.

(3) Both the enterprise sector and the banking sector are burdened with a number of structural and financial problems that impede a quick economic recovery. A full recovery of the enterprise sector will depend on faster and more substantial progress in the field of restructuring and privatization, which began in 1993. However, this process is slow, and its effects cannot be expected in the short run. The same goes for the restructuring of banks. The banking sector, troubled by both stock and flow problems, is still incapable of providing the effective and efficient intermediation that a sound recovery in the real sector would need. This is why investment activity is still very weak.

It is obvious that recovery is subject to transition toward a full market economy, which requires further reforms of both the economic system and economic policy. Crucial goals have to be the increased share of domestic savings in GDP. This requires a drop in shares of government and private consumption. Investment and the efficiency of investment must also increase.

Reform of the Economic System

The transition toward a market economy started in 1991. Fiscal reform was carried out; the banking and foreign-exchange system was settled; privatization of apartments was almost completed; and laws on denationalization and on privatization of cooperatives as well as laws that regulate social services and introduce plurality of ownership, management, and fimancing were adopted. Obstacles that hindered the functioning of the market mechanism in numerous fields were removed, and a process of liberalization of the trade system took place, especially the revision of import quotas and the lowering of customs duties.

By the end 1992, some crucial elements necessary to form a full market economy, which is the condition for an upturn in economic trends and further development, had also been implemented. Here we have in mind the privatization of enterprises (Ovin 1992) and the restructuring of banks (Ribnikar 1993b).

Some elements necessary to form a full market economy are still missing: a reconstruction of the legal organization of numerous institutions, mechanisms, and rules necessary for the efficient functioning of a market system. Indeed, these laws are already in the parliamentary procedure.




Table 19

Growth of Basic Aggregates from September 1991 to December 1993 (%)

Nominal Real

1. Monetary policy (Ml) 274.1 -5.2 2. Fiscal policy (public-sector revenues) 474.2 45.6 3. Incomes policy (net wages) 398.3 26.3

Nevertheless, the effects of reforms completed up to now are already evident in changes of the economic structure, which is becoming more and more distant from the typical socialist economy. Here we have in mind mainly the increasing number and the economic importance of small and medium-sized enterprises as well as of private enterprises and the enlarged service sector.

Economic Policies

Crucial policies for attaining price stabilization include monetary, fiscal, and incomes policies (using the system of a floating exchange rate, the exchange rate in Slovenia became an endogenous variable of monetary policy; Ribnikar 1993a). Table 19 shows the effects of these policies after monetary independence in Slovenia (real data are adjusted for the growth of retail prices).

Macroeconomic stabilization was implemented through restrictive monetary policy and a floating exchange rate. The fiscal policy supported stabilization only in achieving a surplus of the public sector, while public-sector revenues and expenditures rose in real terms (although their increase was mostly determined by the growth of wages; Mencinger 1994). The incomes (wage) policy was thus less efficient.

The principal objectives for macroeconomic management in 1994 remain controlling inflation and at the same time carrying out structural reforrn in such a manner that the broad objective of macroeconomic stability will be obtainable.

Several areas of fiscal management require improvement: (1) The shares of revenues and expenditures of the public sector, which

in 1993 reached 48.2 percent and 49.1 percent, respectively, should be treated as upper limits of economic acceptability. They should be lowered in the coming years. The reserves are especially in social security rights, which should be financed to a greater extent through private sources and in a changed structure of revenues. Greater importance should be given to




indirect taxes and taxes on profits and property, while the taxation of wages should be lowered (Borak 1993).

(2) The budget deficit should be limited to the availability of noninfla- tionary financing sources and should not exceed 1 percent of GDP. Given the fact that enterprises are already heavily taxed and the fact that the increase in government expenditures in the 1993 budget was rather generous, the emphasis should be placed on expenditure reduction.

(3) Budgetary resources should be allocated for enterprise and banking- sector reforms as well as for the increased provision of a social safety net to ease economic reforms.

(4) The fiscal reform should be deepened and accelerated. Specifically, there should be a continuation of fiscal consolidation, incorporating all extrabudgetary funds into a unified govenmment budget, and the government budget itself should be constructed according to modern practices. Tax reform should be continued by accelerating preparation for the introduction of a VAT and of a new customs tariff law with a simplified and more uniform rate structure to complement the reform of the domestic sales tax.

In the monetary area, the principal task for the authorities is to develop the capacity for formulating and implementing financial programming and to develop appropriate monetary instruments to control liquidity in the banking and enterprise sectors. The strategy for accumulating foreign-exchange reserves should be better integrated into an overall monetary program.

In addition to adopting a new and better customs tariff law, Slovenia also needs to revise other features of its trade regime. Given the small size of its economy, Slovenia ought to aim at maintaining a very open trading system.

An important issue relates to the pricing policy of public and semipublic monopoly entities. The current practices of self-regulation by industries and periodic government intervention have resulted in constant pressure for price increases. The selection of pricing methods should be based on sound economic analysis and be integrated into restructuring programs for the public sector.

In 1992 and 1993, wages increased sharply. While wage policy has never been considered effective by itself in restraining demand, a well-designed stabilization program should include some anchor for wage increases. It must be done more in the fonn of a social pact involving labor unions, the business sector, as well as the government.

References

Bank of Slovenia. 1993. Annual Report 1992. Bole, V. 1993. '"C usmeritvah ekonomske politike." Baneni vestnik (Ljubljana), no. 1-2.




Borak, N. 1993. "Oris temeljnih izhodi?6 gospodarske politike." Baneni vesinik (Ljubljana), no. 1-2.

Institute of Macroeconomic Analysis and Development (IMAD). 1992. "Ocena gospodarskega in socialnega razvoja Slovenije v letih 1991 in 1992 (majska analiza)." Zavod Republike Slovenije za makroekonomske analize in razvoj (Ljubljana), June.

. 1993a. "Gospodarska gibanja v Sloveniji leta 1993 in perspektive do leta 1997 (pomladansko poroUilo)." Zavod Republike Slovenije za makroekonomske analize in razvoj (Ljubljana), July.

. 1993b. "Jesenska analiza." Zavod Republike Slovenije za makroekonomske analize in razvoj (Ljubljana), November.

Kradun, D. 1991. "Inflation Model of a Semicommand Economy." In Economic Modelling (London), vol. 8, no. 4.

Kranjec, M. 1993. "Javni dolg Slovenije." Baneni vestnik (Ljubljana), no. 6. Mencinger, J. 1993. "Transformacijska kriza, 1989-1992." Gospodarska gibanja

(Ljubljana: EIPF), no. 238 (April). . 1994. "Irelevantnost gospodarske politike?" Gospodarska gibanja (EIPF

Ljubljana), no. 247 (February). Ovin, R. 1992. "Konkumerende Privatisierungskonzepte in Slowenien." In Privatisierungs-

konzepte im Systemwandel-Arbeitsberichte zum Systemvergleich, ed. H. Leipold. Marburg: FVWL.

Ribnikar, 1. 1 993a. "Denarna politika Banke Slovenije." Baneni vesmik (Ljubljana), no. 5. . 1993b. "Sanacija bank." Baneni vestnik (Ljubljana), no. 1-2.

World Bank. 1992. "Slovenia-The Current State of the Economy, April 30, 1992." World Bank Report, unpublished manuscript.

tirnond, E. 1991. "Inflation and Price Stabilisation Policy in Yugoslavia." In Communist Economies and Economic Transformation (Abingdon), vol. 3, no. 2.

. 1992. "The Collapse of the Yugoslav Economy." In Soviet Studies (Glasgow), vol. 44, no. 1.



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Economic Developments in Slovenia