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1994-05-02
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<text>
<title>
Slovakia: Economic Policy
</title>
<article>
<hdr>
Economic Policy and Trade Practices: Czechoslovakia
</hdr>
<body>
<p>Note: Czechoslovakia divided to become The Czech Republic and
Slovakia in January 1993.
</p>
<p>1. General Policy Framework
</p>
<p> 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.
</p>
<p> 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.
</p>
<p> 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.
</p>
<p> 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.
</p>
<p> 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.
</p>
<p>2. Exchange Rate Policies
</p>
<p> 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.
</p>
<p> 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.
</p>
<p>3. Structural Policies
</p>
<p> 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.
</p>
<p> 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.
</p>
<p> 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.
</p>
<p> 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.
</p>
<p> Regulatory Policies: Controls requiring licensing are in
place for trading in arms and radioactive and nuclear materials,
as well as sensitive dual-use technology.
</p>
<p>4. Debt Management Policies
</p>
<p> 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