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Text File | 1994-05-02 | 19KB | 367 lines

<text> <title> Slovakia: Economic Policy </title> <article> <hdr> Economic Policy and Trade Practices: Czechoslovakia </hdr> <body> Note: Czechoslovakia divided to become The Czech Republic and Slovakia in January 1993. 1. General Policy Framework Czechoslovakia is currently undergoing two fundamental economic transitions: movement toward a market economy and shifting its trade to the west. In 1990, Czechoslovakia liberalized foreign trade and investment, legalized private enterprise, and passed the legal framework for the important reforms which came into effect in 1991: decontrol of prices, partial convertibility and small business privatization. In January 1991, the government established internal currency convertability and devalued the crown sharply. At the same time, about 85 percent of prices were freed, while a further 10 percent were freed during the course of the year. January also marked the beginning weekly auctions of "small-scale" enterprises to private sector bidders. As of November 1991, nearly 19,000 small businesses had been privatized this way. A more complicated procedure will be used to privatize large-scale enterprises. By 1994, the government plans to privatize about 95 percent of the 4,000 "large-scale" enterprises, many of which functioned as monopolies in virtually all economic sectors. The government plans to do this in two waves; companies included in the first wave had to submit privatization plans to the government by October 1991 and their privatization should begin in early 1992. The second privatization wave is planned to begin in May 1992. With the demise of the Council on Mutual Economic Assistance (CEMA) and traditional Soviet Bloc trading patterns, Czechoslovakia is moving rapidly toward bolstering trading relationships with the West. The government signed an association agreement with the European Community (EC) in December 1991. The government is also completely rebuilding Czechoslovakia's legal framework to make it compatible with western (particularly EC) business practices. A new commercial code will take effect in January 1992. In January 1993, a new EC-compatible tax code will be implemented. Czechoslovakia is also working on EC standardization in such areas as telecommunications, transportation, customs procedures, and environmental regulation. To balance the economic influence of its west European neighbors, the Czechoslovak government and business sectors want to develop strong trade and investment ties with the United States. The U.S. and Czechoslovakia have now concluded a bilateral trade agreement, a bilateral investment treaty, an overseas private investment corporation agreement and have initialed a bilateral tax treaty. Czechoslovakia's tough, IMF-endorsed economic stabilization program has been highly successful. Inflation, which was 60 percent for the first half year, was near zero for the third quarter of 1991. The current account is projected to record a $200 billion surplus, compared with a deficit of $2.5 billion projected in January 1991. The overall budget ended the year in deficit. Economic reform and the shift in trading partners has been painful. Trade with the Soviet Union, traditionally Czechoslovakia's largest trading partner, fell about 40 percent in the first half of 1991. The national unemployment rate, nominally almost zero under Communism, is now 6.0 percent and rising, with levels of almost 4.0 percent in the Czech Republic and 10.3 percent in Slovakia. GDP fell about 9 percent in the first half of 1991 compared with the first half of 1990, and the decline is expected to total 12-15 percent by year end. In the first half of 1991, industrial production declined about 19 percent and retail sales about 30 percent. The Central Bank estimates that the economic decline will not bottom out until the second half of 1992, at the earliest. 2. Exchange Rate Policies In January 1991, Czechoslovakia introduced partial convertibility of the crown under the Foreign Exchange Act of 1990. The Foreign Exchange Act permits domestic or foreign companies enrolled in the company register to freely exchange crowns for hard currency in business-related, current-account transactions. Current-account transactions include the import of goods and services, royalties, interest payments and dividend remittances. The U.S.-Czechoslovak Bilateral Investment Treaty which was signed in October 1991 provides for free transfers of all payments related to an investment (e.g. capital and earnings.) Capital-account transactions still require a foreign exchange license. Companies are obligated to exchange any foreign convertible currency they earn for crowns, but in exceptional cases, the state bank may grant permission to maintain a foreign-exchange account. Private persons do not need permission to have a foreign-exchange account. Through a series of devaluations since 1989, the crown has decreased in value by half, making all foreign goods much more costly in terms of domestic currency. The crown is tied to a basket of trade-weighted currencies from Austria, Great Britain, Germany, Switzerland and the United States. Since January when the most recent devaluation occurred (80 percent), the crown/dollar rate has remained relatively stable at approximately 28-30 crowns per dollar. Parallel market exchange rates gradually converged during 1991. 3. Structural Policies The transition from a centrally-controlled to a free market economy has required drastic changes in a wide range of legal and institutional structures. The major changes in 1991 are summarized below. Prices: About 85 percent of prices were deregulated in January 1991. During the course of 1991, another 10 percent of prices were deregulated. Remaining price controls apply only to basic utility services, rents and sugar. Taxes: The Czechoslovak tax system has been partially revised and a completely new tax code which will rely mainly on a European-style VAT and an income tax is expected to be in place by the beginning of 1993. Currently, enterprises pay a corporate income tax of 55 percent on income over 200,000 crowns (about $66,000). Enterprises with at least 30 percent foreign ownership pay 40 percent. Enterprises must also pay a 50 percent tax on the volume of employee wages and turnover tax on sales of goods. A bilateral tax treaty with the United States has been initialed. It will be signed in 1993 after the new Czech and Slovak Federal Republic (CSFR) tax code has been revised. Privatization: Most of the legislation for privatizing state enterprises and cooperatives is in place and implementation is underway. Many enterprises have been or will soon be restored to their pre-Communist owners. About 19,000 out of 120,000 shops, restaurants and other small enterprises have been auctioned off. Privatization of large enterprises will take place in two waves beginning in the spring of 1992. Companies included in the first wave have already submitted privatization projects to the Ministries of Privatization for approval. These projects contain information about the way in which the company is to be privatized, its assets, etc. Enterprises may be privatized through auctions or direct sale to domestic or foreign investors or through a "voucher" scheme. Under the voucher scheme, each Czechoslovak citizen will be eligible to purchase vouchers, issued by the Minister of Finance and sold for 1,000 crowns (about one week's average wage), which can be exchanged for shares in state enterprises. Regulatory Policies: Controls requiring licensing are in place for trading in arms and radioactive and nuclear materials, as well as sensitive dual-use technology. 4. Debt Management Policies Czechoslovakia has one of the lowest foreign debts in central and eastern Europe. As of September 1991, the gross foreign debt was US$9.27 bi