Document o f The World Bank FOROFFICIAL USEONLY ReportNo. 28693-SK MEMORANDUM OFTHE PRESIDENT OF THE INTERNATIONAL BANK FORRECONSTRUCTIONAND DEVELOPMENT TO THE EXECUTIVEDIRECTORS ONA COUNTRY PARTNERSHIPSTRATEGY WITH THE SLOVAK REPUBLIC May 6,2004 This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bankauthorization. CURRENCY EQUIVALENT (Exchange Rate as of April 30,2004) Currency Unit = Slovak Koruna (SK) USSl = SK 33.83 SK1 = USO.029 GOVERNMENT'S FISCAL YEAR January 1to December 31 ABBREVIATIONS & ACRONYMS AAA Analytic and Advisory Activities CAS Country Assistance Strategy CAP Common Agricultural Policy CPS Country Partnership Strategy EAGGF Agriculture Guidance and Guarantee Fund EBRD European Bank for Reconstruction and Development EFSAL Enterprise and Financial Sector Adjustment Loan EIB European Investment Bank ER Emission Reductions SF Social Fund EU European Union FDI Foreign Direct Investment FSAP Financial Sector Assessment Program GDP Gross Domestic Product ICR Implementation Completion Report IDF Institutional Development Fund JI Joint Implementation NBS National Bank of Slovakia OECD Organization for Economic Cooperation and Development OED Operations Evaluation Department PAYG Pay-as-you-go PCF Prototype Carbon Fund PPF Project Preparation Facility QAG Quality Assurance Group RDF Regional Development Fund RON1 Regulatory Office for Network Industries S A L Structural Adjustment Loan SDF Social Development Fund SECALS Sector Adjustment Loans SME Small and MediumSize Enterprise SWAP Sector Wide Approach TA Technical Assistance The World BankTeam Vice President: Shigeo Katsu Country Director: Roger Grawe Task Manager: IngridBrockova FOROFFICIAL USEONLY THE SLOVAK REPUBLIC-WORLDBANK COUNTRY PARTNERSHIPSTRATEGY TABLE OF CONTENTS EXECUTIVE SUMMARY ............................................................................................................. i I. INTRODUCTION................................................................................................................ 1 I1. COUNTRY CONTEXT........................................................................................................ 1 A. Recent PoliticalDevelopments .................................................................................... 1 B. RecentEconomic Developments ................................................................................. 1 C. Social Development..................................................................................................... 2 I11. DEVELOPMENT CHALLENGES: COUNTRY'S DEVELOPMENT OBJECTIVES AND PROGRAM.......................................................................................................................... 3 A. Three Challenges Facing Slovakia............................................................................... 3 B. Sectoral Aspects of the Three Challenges.................................................................... 4 I V. PAST WORLD BANKASSISTANCE AND LESSONS LEARNED.................................... 6 A. PastWorld Bank Assistance: Lending......................................................................... 6 B. PastWorld Bank Assistance: AAA.............................................................................. 7 C. Lessons from the Past, Perspectivesfor the Future...................................................... 8 V. THE SLOVAKIA-WORLDBANKPARTNERSHIP FY05-07 ........................................... I O A. Context....................................................................................................................... 10 B. The Outlines ofa ProgramofAssistance................................................................... 10 C. Macro/Sector Fiscal Reforms to Support Prudent Macroeconomic Management and Fiscal Consolidation................................................................................................... . . 11 D. Structural Reforms to Enhance Competitiveness ....................................................... 11 E. 12 F. Poverty Reduction and Social Inclusion .................................................................... Current Perspectiveon Lending................................................................................. 13 G. H. Results Focus and Country Program Monitoring....................................................... 13 Partnerships................................................................................................................ 14 VI. CREDITWORTHINESS AND RISK MANAGEMENT...................................................... 16 VI1. CONCLUDING REMARKS .............................................................................................. 17 This document hasa restricted distributionandmay be used by recipients only in the performance of their official duties I t s contents may not be otherwise disclosed . BOX Box 1: EUFinancialSupport for the New Member States....................................................... 15 ANNEXES Annex A1: Slovak Republic at a Glance Annex B2: SelectedIndicators o f Bank Portfolio Performance and Management Annex B3: IBRDProgram Summary Annex B3: IFC Program Summary Annex B4: Summary o fNon-Lending Services Annex B5: Social Development Indicators Annex B6: Key Economic Indicators Annex B7: Key Exposure Indicators Annex B8: Operations Portfolio (IBRD) Annex B8: Statement o f IFC's Heldand DisbursedPortfolio Annex B9: BankEngagement Annex B10: Summary o f Development Priorities Annex Bll: Consultations onthe Country Partnership Strategy Map IBRD32523 THE SLOVAK REPUBLIC -WORLD BANK COUNTRY PARTNERSHIP STRATEGY EXECUTIVE SUMMARY i. The Slovak Republic has made great strides in implementing reforms since the FYOl Country Assistance Strategy (CAS), and on May 1, 2004, acceded to membership in the European Union (EU). A new framework to govern relations between the World Bank and Slovakia i s now needed, one that moves beyond the old lender-borrower relationship to a partnershipwhich recognizes Slovakia's new status. While financial support will have its place, the emerging partnership i s based on facilitating knowledge-sharing and policy advice. Building on this approach, the Country Partnership Strategy (CPS) proposed for FY05-07 focuses on analytical work and technical assistanceoperations designed to assist Slovakia to reach its goals, while leaving open the possibility for broader financial support should the Partnership determine it usefulto meet specific needs. 11. The reforms o f the past few years have put Slovakia on a fm footing for future progress. Slovakia achieved sustained growth in excess o f EU GDP growth rates as public expenditures declined to an average 39 percent o f GDP for 2001-2003, while the fiscal deficit was reducedto 3.6 percent o f GDP in2003. The deficit is expected to further decline to 3 percent o f GDP by 2007, and Slovakia is on target to meet this as well as other components o f the Maastricht criteria. Slovakia's reform program to support growth, reduce the deficit, and develop a vigorous market economy is impressive, and includes the introduction o f sweeping fiscal reforms and large-scaleprivatization o fpublic sector assets with substantial foreign participation. ... 111. Slovakia now faces three broad development challenges. The f i s t is to continue the prudent management o f the economy and meet obligations under the Stability and Growth Pact as Slovakia seeks to achieve full benefits from its membership inthe EU by adopting the Euro. The recent fiscal reforms have created a strong platform for fulfilling this agenda. A second challenge is to converge to European income levels and be fully competitive in European and world markets, and to build the capacity to productively use newly available EU resources. Structural reforms to improve labor and capital mobility will be important in this regard. The thirdchallenge is to reduce poverty and unemployment andto address the marginalization ofthe Roma. Unemployment is much too high at over 17 percent, and, while absolute poverty is low, there are deep pockets o f poverty, particularly among the unemployed, households living inpoor regions, and the Roma minority, who comprise nearly 11percent o fthe population. Labor market reforms are needed, small and medium size enterprise (SME) development (which should normally generate a highproportion o f new jobs) is lagging, and education reforms are only just beginning while lack o f education remains a key determinant o funemployment andpoverty. iv. While these are significant challenges, Slovakia has already demonstrated how much can be accomplished ina short period o ftime. With the continued commitment o fthe authorities, Slovakia should proceed in the future as it has in the past, addressing these challenges by formulating and implementingpractical and effective solutions. As a partner indevelopment, the Bankstandsreadyto assist, where needed, intheseefforts. V. World Bank assistancehas played animportant role inhelping Slovakia to achieve its goals. The objectives set out inthe last CAS have been met and insome instances, exceeded, and ongoing projects have satisfactory ratings or better. Analytic and Advisory Activities (AAA) -11- have played an important role, is considered a best practice example by the Bank, and is much appreciated by the Government. The Bank needsto continue to provide excellent policy advice to continue to berelevant. vi. For the future, assistancewill be formulated inthe context o f the Partnership Strategy guided by agreedcriteria. Such assistanceshould: (a) have a highpayoff interms o f either equity or growth, (b) complement other sources o ffunds or expertise, (c) reflect the Bank's comparative advantage, and (d) have an impact inthe near or medium term, other factors being equal. AAA will continue to be an important part o f the partnership because o f its impact on Slovakia and because lessons learnedinSlovakia are applicable inless advanced countries. vii. There are a variety o f ways in which the World Bank could assist Slovakia to meet the challenges outlined above. The World Bank could assist with reforms to enhance competitiveness in selected aspects o f private sector development (financial deepening, SMEs), rural development, labor markets, legalljudicial, and education. It could also assist in poverty reduction and social inclusion through proposed work on a poverty assessment and poverty alleviation, education, as well as work to reducethe marginalization o fthe Roma. viii. For the present, two projects are under preparation: a Social Development Fund Project and a Legal and Judicial Reform Project. While demand for AAA and technical assistance is high, demand for additional World Bank finance is now low, as Slovakia has excellent access to capital markets. As the World Bank reduces the non-financial costs o f borrowing by simplifying and aligning its procedures with EU and country practice and more effectively introduces its products in line with the "Management Action Plan for Enhancing World Bank Support to Middle Income Countries" (Sec M2004-0071/1, April 20, 2004), effective demand for financing could grow inthe future. An important initiative is the Bank's proposed approachto lending to the EU8. The EU8 Technical Assistance Loan Facility' could be accessed by Slovakia to provide technical assistance beyond the limited capacity o f the World Bank's administrative budget inrelationto any ofthe development challengesthat Slovakia faces for which it wishes to draw on World Bank support. Inaddition, sector-wide approaches, pooling World Bank, Government, and possibly the h d s o f European institutions could be useful to promote or maintain policy or institutional reforms and thereby leverage EU funding, and/or to provide financial support to activities not eligible for EUfunds. ix. Slovakia has made notable progress in recent years. Its accession to the EU both certifies this progress and presages continued achievements in the future. As Slovakia assumes a new status, it is now appropriate for Slovakia and the Bank to enter into a new phase o f their partnership. To meet this challenge, the World Bank will endeavor to respond quickly and flexibly to Slovakia's development needs. Through this engagement, the World Bank can also help Slovakia share its development experience with other countries and lay the groundwork for its eventual transition to donor status. 'See "Framework for World Bank Support to EU8 Countries," draft Board Paper, May 2004. ProposedAgenda for BoardDiscussion Is theproposedpost-Accession strategyfor Slovakia congruent with the country's requirements and the WorldBank's capacities? MEMORANDUMOF THE PRESIDENTOF THE INTERNATIONALBANK FORRECONSTRUCTIONAND DEVELOPMENT TO THE EXECUTIVEDIRECTORSONA COUNTRY PARTNERSHIPSTRATEGY WITH THE SLOVAK REPUBLIC I. INTRODUCTION 1. The Slovak Republic has made great strides in implementing reforms since the FYOl Country Assistance Strategy (CAS), and on May 1, 2004, acceded to membership in the European Union (EU). A new framework to govern relations between the World Bank and Slovakia is needed, one that moves beyond the traditional provider-client relationship to a partnership which builds on the progressthat Slovakia has achieved. While financial support will have its place, the emerging partnership is based on facilitating knowledge-sharing and policy dialogue. The Country Partnership Strategy (CPS) proposed for FY05-07 focuses on analytical work and technical assistance operations designed to assist Slovakia to reach its goals, while leaving open the possibility for broader financial support should Slovakia determine it useful to meet specific needs. 11. COUNTRY CONTEXT A. RECENT POLITICAL DEVELOPMENTS 2. Since winning its second term in September 2002, the Government has b&n implementing an ambitious reform program with considerable success. However, the four-party coalition lost its parliamentary majority in December 2003, although defecting members o f Parliament have stated that they are likely to continue to vote with the Government during the remainder o f its four year mandate. While Slovakia has achieved an impressive reform record, political views inthe country have been divided; for example, the EUaccessionvote was decided by a relatively small margin. Popular support for the reform has been variable, especially when reforms to improve the functioning o f markets have reduced directed benefits, such as the adjustment inwelfare payments to reduce them below minimumwage levels, or the initiative to introduce limited tuition payments for tertiary education which has been shelved for the time being. The recent election o f Ivan Gasporavic, who was supported by the Parliamentary opposition, as President combined with the minority position o f the Government, could slow down the pace of reform. Onthe other hand, a referendum inApril 2004, to limit the term o fthe Government, was defeated, which increases the probability that the Government will remain in office for its elected term to mid-2006. The Government is committed to press ahead with its reform agenda and there is little risk o f reversal or abandonment o f that agenda given the irreversible nature o fthe key reforms and core o f support for reform inthe coalition. B. RECENTECONOMICDEVELOPMENTS 3. Progress has been exemplary since the last CAS (January 2001). At that time, gross domestic product (GDP) growth was modest and appeared unsustainable given policies and structural imbalances then inplace. Few structural reforms had been implemented, fiscal policy risked high deficits while monetary policy needed for stability resulted in high interest rates, foreign direct investment (FDI) was low, and unemployment was high. - 2 - 4. Since then, GDP growth has exceeded 4 percent per year, higher than its neighbors and well above the EU GDP growth rate o f 0.7 percent for 2003. Public expenditures have declined from over 55 percent o f GDP inthe early 1990s to an average o f 39 percent o f GDP for 2001- 2003, and are now much lower than the average for EU8 countries. The fiscal deficit was reduced from 5.7 percent o f GDP in 2002 to only 3.6 percent o f GDP2 in 2003. Further improvement is needed because part o f the reduction was due to one-off effects, and Slovakia will incur some expenditures to meet EU accession requirements and the introduction o f the second pillar to the pension system. Taking these into account, the deficit is expected to grow to 4 percent o f GDP but then decline to 3 percent o f GDP by 2007, to meet one o f the key Maastricht criteria andhelp pave the way for the planned introductiono fthe Euro.' 5. A sweeping tax reform was introduced in January 2004, comprising a tax rate of 19 percent on all personal and corporate incomes, but with an increased deductible allowance for low income earners. Virtually all tax exemptions were eliminated - gift and inheritance taxes were abolished while real estate transfer tax will be abolished in the beginning o f 2005. A uniform value-added tax rate o f 19 percent is applied to all products, resulting in a major shift from direct to indirect taxes. This simplification o f the tax regime should improve govemance aspects related to taxation, and further improve Slovakia's competitiveness for foreign investment. The reform is designedto be fiscally neutral, but the impact o f such large changes is difficult to predict. While the early results are encouraging, the Government will need to be ready to react incase revenues do not meet projected levels. 6. Core inflationhas been kept at about 3 percent in2003 and overall inflation was limited to 8.6 percent as a result o f fm monetary policy which contained second-round effects o f increases inadministered prices. The trend appreciation o f the currency has beenkept broadly in line with productivity gains despite large inflows o f FDI. As a result, the current account deficit has beenreduced from 8 percent o f GDP in2001 and2002 to less than 1percent o f GDP in2003. Foreign exchange reserves are robust: the equivalent o f 6 months of imports. C. SOCIAL DEVELOPMENT 7. Slovakia needs to reduce unemployment and poverty, while addressing the particular issue o f the marginalization o fthe Roma community. Slovakia's poverty profile is similar to that o f other EUaccessionc~untries.~Absolute poverty i s low, but there are deep pockets o fpoverty, particularly among the unemployed, households living in poor regions-especially in Eastern Slovakia-and the Roma minority, who comprise nearly 11 percent o f the population. Poverty is most severe in geographically isolated and marginalized Roma settlements in Eastem Slovakia which commonly lack basic infrastructure and utilities. Unemployment reaches nearly 100 percent in many o f these settlements and education levels and health status indicators are low. For example, only 3 percent o f Roma children complete secondary education. At least one-third of the long-term unemployed are Roma. The Government has established an office for Roma According to ESA 95 methodology. Inaddition to the Maastricht criteria (fiscal deficit <3% o fGDP, public debt lessthan60 percent ofGDP, low inflation and long- term interest rates, and exchange rate stability), further reforms will be needed to enable a successfbl introduction o fthe Euro including increased labor market flexibility and financial sector reforms. SlovakRepublic: Living Standards,Employment andLabor Market Study (Report No. 22351-SK, February 2002). A full Living Standards Measurement Study is planned for FY05. - 3 - affairs headed by a senior official (and supported by an Institutional Development Fund (IDF) grant in FY02) which is responsible for coordinating policy on Roma across the Govemment (and for coordinating the activities of the Government related to the Decade o f Roma Inclusion which grew out o f the Budapest Roma conference cosponsored by the World Bank and Soros Foundation in2003). However the political influence o f the Roma is dissipated and none o f the coalition partners (and even less the opposition parties) consider the Roma as part o f their politicalbaseor responsibility. 8. Unemployment is still high at over 17 percent for 2003, although it declined by about 1 percentage point from 2002. Conversely, employment i s low, at 57 percent, one o f the lowest observed in OECD countries. Low-skilled workers are falling out o f the job market as about a quarter million low-skilled jobs disappeared during 1994-2002. There are large gaps between workers in the high productivity FDI sector and, in general, domestic (including state-owned) enterprises. Despite recent reforms, employment is still skewed towards the public sector, with general govemment accounting for over 20 percent o f alljobs. 9. Slovakia has taken several legislative steps to promote gender equality, and follows the recommendations o f the 4th UN World Conference in Beijing as well as EU regulations. A National Action Plan for Women was introduced in 1997 and Parliament adopted the Concept o f Equal Opportunities for Menand Women. Although, implementation o f the new laws has been slow indealing with gender disparities, available data indicate that gender disparities are not a major problem. 10. The recent tax reform creates strong incentives for business creation and self- employment; but further measures are needed. High welfare benefits approximating the minimum wage and high levels o f social security contributions and health care benefits have diminished labor force participation. Recogruing this, welfare benefits have recently been reduced from the equivalent o f about 100 percent o f the minimum wage to about 50 percent o f the minimumwage. Recently enactedpensionreform laws increasethe retirement ageto 62 (and modemize the pay-as-you-go (PAYG) pillar including through the creation o f a mandatory second pillar). Sick pay benefits are being reduced to levels consistent with other market economies while co-payments have been introduced, all o f which will reduce labor costs, thereby increasing labor demand. This package o freforms should have a positive impact on employment; butthe rationale for these reforms is not well understoodby the populationsuggestingthe needto increase communication to help ensure their success. For the future, an enhanced focus on education and training is a high priority, as are other measures to induce growth in SMEs and other sectors not directly linkedto FDI. 111. DEVELOPMENTCHALLENGES: COUNTRY'S DEVELOPMENT OBJECTIVESAND PROGRAM A. THREE CHALLENGESFACINGSLOVAKIA 11. Slovakia now faces three broad development challenges. The fust is to manage the economy prudently and meet obligations under the Stability and Growth Pact as Slovakia seeks to achieve full benefits from its membership in the EU by adopting the Euro. These require further reductions inthe fiscal deficit to meet the ceiling o f less than 3 percent o f GDP, managing public debt to remainunder 60 percent o f GDP, keepinginflation under control so that it does not exceedby more than 1.5 percent the average o fthe three best performers inthe EU, maintaining - 4 - long-term interest rates at no more than 2 percent above the interest rates o f the three lowest inflation countries, and, finally, maintaining exchangerates within the ERM2 for at least 2 years. 12. A secondchallenge is to converge to European income levels and be fully competitive in European and world markets, and to build the capacity to be able to productively use newly available EU resources productively. As it does so, Slovakia will need to implement structural reforms to improve labor and capital mobility thereby enabling the economy to function efficiently after adoption o f the Euro when active monetary policy will no longer be an option. Another aspect o f this challenge is to enhance communications to build a broader consensus in support o freform. 13. The third challenge is to reduce poverty and unemployment and to address the marginalization o f the Roma. Unemployment is much too high - and reciprocally, employment is too low. Labor market reforms are needed. SME development, which should be a major source o f new employment and innovation, is lagging and Slovakia's overall long term competitiveness, both for foreign and domestic investment beyond the currently highly successful automotive sector, needs to be reviewed and appropriate reforms introduced. Lack o f education i s a key determinant o f unemployment and poverty, and education reforms are only just beginning. Many Roma childrenstill do not attend school regularly or those that do are often misplaced into low quality special schools or classes intended for the mentally and physically disadvantaged. B. SECTORALASPECTSOF THE THREE CHALLENGES 14. Slovakia needs to build on recent public sector expenditure reforms inorder to meet the Maastricht Criteria. A new pension system was approved in2003, but implementation will need to proceed quickly as the new system is to be operating from January 2005. Systemic reform o f social assistance is being implemented to improve work incentives and reduce the poverty trap (see para. 7). Information technology reforms are needed as the country moves to a unified contribution system. Fiscaldecentralization to improve effectiveness and accountability is needed with devolution o f responsibilities to regional and local political units. These and other reforms need to be carefully explained to the public to broaden understanding and support. This is an example o f an area where enhanced Government communications are key to carrying reforms forward. 15. Health sector reforms have been introduced (including co-payments, improved patient management, better control on expenditures for pharmaceuticals) but recently, the pace o f reform has slowed. As in the case o f pension reforms, Govemment communication o f the benefits o f health sector reforms needs to be improvedto garner support for the key elements o f the reform program, such as hospitalrestructuring and improvedprovider payments methods, among others. 16. Education sector reforms have begun but further progress is needed to achieve competitiveness and improve social inclusion. The Ministry o f Education's analytical and decision-making capacity needs to be strengthened. Excess capacity in primary and secondary schools is being addressed by local decisions to determine which facilities would be closed, based on national criteria. Tertiary education has been a free good which has limited the availability o fresources. The introduction o f tuition reform at the tertiary level remains a priority for the Government despite some political opposition. An implementation strategy for life long learning, including the modernization o fthe vocational education system, needsto be developed. - 5 - 17. Public administration reform has been pursued by the Govemment, but further reforms are needed. The merit basis for staffing needs to be enhanced as there are too inany seniority- based pay steps. Limitedflexibility prevents needed staffing changes. Training for civil servants needsto be enhanced. 18. The judicial system needs to improve its efficiency and effectiveness to become more responsive to the needs o f society and the market. This requires enhancedcapacity inthe areas o f human resources, and information and document management. The market for legal services is too exclusive and the poor especially need to be given greater access to this system through better targeting o f legal aid. A regulatory impact assessment is needed to better evaluate the impact o f laws. 19. Energy sector reforms have proceeded quickly with substantial privatizations o f distribution companies, the implementation o f a regulatory framework, and the development o f an energy efficiency strategy. There is a need to continue ongoing work to improve the regulatory framework for electricity distribution and gas, develop an implementation framework for renewable energy, andprepare an energy efficiency action plan. 20. Wide-ranging financial sector reforms have been introduced with the private banking system now operating in a reasonably competitive framework. However, further reforms are needed to create a more conducive environment for financial sector growth. Creditor rightsneed to be strengthened, the quality o f financial statements needs to be improved, and credit information needs to be made more accessible. Non-bank sources o f finance need to be developed, including leasing, factoring, ventuse capital, commercial paper and bond markets. A strategy should be formulated to promote the development o f a capital market. Financial sector oversight should be further strengthened, including through effective implementation o f an integrated supervision structure under the auspices o f the National Bank o f Slovakia (NBS), adequate enforcement o f newly applicable international accounting and auditing standards, and enhanced supervision o f the insurance sector and o f both the new mandatory and existing voluntary private pension funds. 21. There is a need to continue to improve the investment climate, especially to support the development o f SMEs as an engine o f growth. The regulatory framework should be fiather streamlined and simplified to reduce the adnlinistrative burden that affects the SME sector disproportionately. This reform would include further simplification o f licensing, permit and inspectionprocedures. 22. In agriculture, Slovakia will need to build on an important array o f reforms (such as removing the large farm bias andthe emphasis on self-sufficiency while observing a hardbudget constraint) by implementing the single area payment scheme under the Common Agricultural Policy (CAP), improving market linkages, enhancing the competitiveness o f agriculture, and promotingruraldevelopment through efficient structural policies. 23. While Slovakia is developing programs to W h e r improve its transportation, communications, and other linkages to its western neighbors as part o f its EU accessionprogram, it should also evaluatethe needfor regionallinkages to make surethat development opportunities are not unduly constrained. 24. Slovakia is subject to periodic and devastating floods along the Danube and its tributaries. In response, it has begun implementation o f a well formulated flood protection - 6 - program. But the pace o f investment needs to be accelerated given the apparent increased frequency o f severeand costly floods throughout the region. 25. Finally, the Govemment faces the challenge o f improving communications to promote public understanding o f and support for structural reforms. The pace o f change in Slovakia and the perception o f declining welfare for many regions and segments o f the population has dominated public perception o f reform and its large net benefits. A clear presentation o f the benefits o freformis needed, with best-practice comparisons to Slovakia's Europeanneighbors. 26. While these are manifold and significant challenges, Slovakia has already demonstrated how much can be accomplished ina short period o ftime. With the continued commitment o f the authorities, Slovakia should proceed inthe future as it has inthe past, addressingthese challenges by formulating and implementing practical and effective solutions. As a partner indevelopment, the World Bank stands ready to assist where neededinthese efforts. IV. PAST WORLD BANK ASSISTANCEAND LESSONSLEARNED A. PAST WORLD BANK ASSISTANCE: LENDING 27. The Bank's first CAS for Slovakia covered FYO1-03. The CAS proposed assistance to help Slovakia complete transformation reforms, strengthen govemance and build institutions, improve social security, enhance human development, and meet environmental standards. At that time, the new Government was planninga rapid acceleration o f reforms to move Slovakia to the first rank o f EU accession candidates. The authorities also aimed to improve fiscal consolidation to reduce a large deficit, among other objectives. Although there hadbeen an active advisory and technical support program from the late 1990s, there were no projects under implementati~n.~The CAS proposed a lending program o f US$415 million, including an Enterprise and Financial Sector Adjustment Loan (EFSAL) in support o f sweeping banking and corporate sector reforms, and a number o f investment projects: Social Benefits Reform Administration, Public Finance Management, Judicial Reform, and Social Sector Investment. 28. The EFSALwas approved inFY02 for Euro 200 million (US$177.3 million equivalent), andhasplayed animportant and wide-ranging role inthe reform andrestructuring ofthe banking system, strengtheningbank regulation and supervision, implementing a strategy to work out the large stock o f non-performing claims taken off the books o f the state banks, introducing a new banking law, measures to improve bank accounting and auditing, bank closure and deposit insurance, and improving the legal framework for bankruptcy, collateral claims, and the laws dealing with corporate govemance, among others. The third tranche o f the loan was released (withfullcompliance) onApril21,2004, aheadof Slovakia's accessionto the EU. 29. The FY02 Social Benefits Reform Administration project was approved for Euro 23.2 million (US$23.5 million equivalent), with the objective o f strengthening institutions (to support pension reform design, human resource training, and public information), establishing a unified contribution collection system, and developing a client database and other information systems. The FY03 Public Finance Management Project was approved for Euro 5.0 million (US$5.5 million equivalent) and is now playing an important role in improving budget processes, strengthening the macro-economic analysis and forecasting capacity o f the Ministry o f Finance, Earlier projects included the successfully implemented S A L , telecommunications and rehabilitation loans. - 7 - strengthening debt management and treasury capability, and supporting effective coordination o f the overall reform effort. The Social Sector Investment Project proposed inthe F Y O 1 CAS was modified in concept and focused to address Slovakia's priorities and constraints as the FY04 Health Sector SECAL for Euro 55 million (US$62.9 million), accompanied by a Health Sector Technical Assistance (TA) Loan for Euro 10.58 million (US$12.58 million). These projects support the Govemment's comprehensive health reform with measures on both the demand and supply side to lower costs, reduce expenditures leading to fiscal sustainability while restructuring the delivery o f health services to improve quality including measures to improve access for vulnerable groups. The accompanying T A loan is an important indication o f the importance that the Slovak Govemment attachesto getting the best technical advice to support its reform agenda. 30. The five ongoing projects are rated satisfactory in terms o f meeting development objectives and implementation progress, andthe one (of three) closed project evaluated by OED was ratedhighly satisfactory (see annex B2). B. PAST WORLD BANK ASSISTANCE: AAA 31. Non-lending assistance has played an important role in Bank support for Slovaha, and has had an important impact on policy reforms in priority sectors, as indicated by the Quality Assurance Group's (QAG) rating o f the overall quality o f AAA as "highly satisfactory." The Development Policy Review (Report No. 26607, June 2003) proposed a range o f reforms to promote structural transformation, new expenditure strategies, and improved governance, many o f which served as a basis for government programs. In agriculture, the report "Food and Agriculture inthe Slovak Republic: The Challenges o f EUAccession" (White Cover, September 2002) proposed a series o f reforms (remove current policy emphasis on self-sufficiency, prepare for the adoption o f EU agricultural policies on accession, eliminate agricultural policy bias in favor o f large farms, impose hard-budget constraints, and facilitate the adoption o f EU compliance in food safety standards by Slovakia's food processing industry). The report was translated into Slovak and its recommendations were adopted almost in their entirety. In April 2004, an international workshop was organized to share the experience and challenges o f preparing for EU accession with Slovakia's neighbors, and to discuss programs and policies, including Bank assistance, for the future. The two FlAS studies in2000 and 2001 analyzed the regulatory and administrative burdens for foreign and domestic investment and recommended reforms, many of which have been introduced. The "Living Standards, Employment, and Labor Market Study" (Report No. 22351, February 2002) provided new information on poverty and led to systemic reforms o f social assistanceand labor marketpolicies which improve work incentives while strengthening support to the poor. The study on "Poverty and Welfare o f Roma in the Slovak Republic" (Report No. 28768, April 2002) was the f i s t study to address Roma issues as a poverty and economic development issue, and ledthe Govemment to request support for a Social Development Fund which will support demand-driven development initiatives from the marginalized communities. 32. The Financial Sector Assessment Program (FSAP) provided a comprehensive review o f financial sector strengths and weaknesses, supported the implementation o f the reform agenda under the EFSAL, and highlighted key additional policy challenges for further development o f the financial system going forward. In energy, the Bank has assisted in providing options on institutional structures to support a new regulatory framework, assisted in the privatization o f distribution companies, and provided support for the formulation o f a national energy strategy, while working with a bilateraldonor (Austria) indeveloping arenewable energyplan. - 8 - 33. IDF grants have also been an important component of the Bank's assistance strategy. The IDF grant for Bankruptcy Reform assisted with the preparation o f a new modem draft bankruptcy law, and the design o f a regulatory framework for bankruptcy trustees. IDF grants have also played important roles in assisting judicial and legal reform, accounting and auditing reform, and capacity building for the Roma office. An IDF grant for Infrastructure Regulatory Reform is assisting the newly established independent regulator, the Regulatory Office for Network Industries (RONI). An FY04 grant will support the Government's efforts to strengthen institutional capacity to formulate and implement a communications strategy for the reform agenda. C. LESSONSFROM THE PAST, PERSPECTIVESFOR THE FUTURE 34. The World Bank has fulfilled and inmany respects exceededthe programoutlined inthe FYOl CAS. Virtually all products envisioned in the last CAS have been delivered, with appropriate modifications as needed, and these have played an important role in assisting Slovakia to perform as well as it has, which is very well indeed. Onthe basis o fthis performance, Slovakia deserves to be robustly supported by the Bank in the critical period o f its initial membership years in the EU. Although Slovakia enjoys good access to capital markets at this point in time, it wishes to remain fully engaged with the Bank in recognition o f the complex development challenges ahead. Should Slovakia's per capita income continue to grow at recent rates so that it appears to be firmly on a convergence path within the EUand it makes continued progress on structural reforms, it is likely that our future partnership would strongly emphasize Slovakia's emergingrole as a donor. 35. During the period of this partnership framework (FY05-07), Slovakia welcomes World Bank technical assistanceandmodest amounts o f lending. Both are seenas usefulto bringOECD and other comparator country experience to bear on the problems Slovakia wishes to address, provided the Bank's technical assistance continues to meet high performance standards. The Govemment's desire for rapid reform design and implementation is constrained by capacity, since there are real constraints on the speed with which public administration can be reformed and rectified. The Bank plays, and would continue to play, an important role in supplying technical assistance to address this constraint. In a similar vein, the Bank is able to assist Slovakia to improve multi-sectoral coordination which constrains effective reform. 36. In addition, Government communication of the reform agenda is not strong, with consequent lack o f understanding o f goals, nature, and benefits o f economic reforms among stakeholders and beneficiaries. Bank participation inand endorsement o f the reform program i s important inbuttressing Government's communications with the public and securing support for the reforms. 37. To continue to provide excellent policy advice and remain relevant, the Bank will align its support with Slovak/EU priorities consistent with Bank corporate priorities. Such advice should continue to be solid technically and draw on the best experience o f OECD countries which Slovakia is trying to emulate. For advice to be useful, the Bank has to move exceptionally quickly given Slovakia's rapid formulation and implementation o f reforms. The "EU 8 Framework6" paper proposes a new framework to facilitate the rapid flow o f Bank technical assistance, including pre-approval by the Board o f an envelope within which individual country ~ See "Framework for World Bank Support to EU8 Countries," draft Board Paper, May 2004. - 9 - loans would be made through streamlined approval procedures covered by standard loan documentation inline with horizontal APLs. 38. Beyond small amounts o f lending for technical assistance, however, Slovakia's demand for Bank funding will be shapedby the competitiveness inunderlying financial terms relative to other funding sources, balanced by its flexibility as a risk management tool. The financial terms available in the future on international capital markets will evolve based on general market conditions and the perception o f specific country risk. Slovakia has, in recent years, improved substantially the terms o f its market access and has been able to borrow on the bond market recently at rates 30 or more basis points below the all-in costs o f IBRD lending. On the other hand, IBRD'sFixed-Spread Loanhas severalembeddedflexible featuresthat canmake it auseful tool for public debt risk management. Indeed, not only does the Fixed-Spread Loan offer a large number o f possibilities interms o f customizing the repayment profile at loan negotiation, it also permits changes to the financial characteristics o f all or part o f the loan throughout its life (currency, interest rate fixing/unfixing, interest rate caps and collars). 39. There is currently ongoing work with Slovak public debt management authorities to gain better mutual understanding o f the possibilities stemming from the above, which would allow a clearer formulation o f the Bank's financial role in o f the Country Partnership Strategy, including options presented below. \ 40. Separately from the purely financial terms, there are the additional indirect costs o f borrowing from the Bank, such as the number o f steps needed to satisfy Bankrequirements for each operation, and the time needed to complete them. In the context o f the "Framework for World Bank Support to EU8 Countries," the Bank will endeavor to reduce these indirect costs as fully and quickly as possible. Under this approach, the Bank would accredit counterpart institutions in Slovakia for investment or policy support lending (as in the case o f technical assistance discussedabove) for financial management, procurement, and safeguards. Inso doing, the Bank's Institutional Fiduciary Assessments will bear in mindharmonizatiodalignment with the EU, and reliance on prior assessment/certification work done by EU institutions, as well as the EU's mandatory requirements for Slovakia to comply with EU directives. Based on demand, the Bank could then respond rapidly with streamlined approval procedures for such operations which reliedon such accredited institutions. 41. With this new framework, access to policy lending in support o f either new reforms or existing good policies would be conditioned on the country's performance at the sector level for SWAPSor SECALS while maintaining satisfactory macroeconomic progress in line with the country's own convergence program. There are two ways inwhich the Bank-Slovak partnership might proceed inthis case. First, the Bank can bring value added by assisting Slovakia to access EU funds which will become available to Slovakia as a new member state; inparticular, the Structural andCohesion Funds. Inorder to be able to utilize this EU funding, Slovakia will need to generate projects and programs which qualify for funding, and the Bank may be o f assistance insome ofthese, for example, by usingthe Bank's project modalities where appropriate. Inthis context, the Bank could provide TA to build capacity at the local level for developing and managing the project necessary to access structural funds and use them well.7 Further, the Funds require co-financing ranging from 50 to 85 percent, which the Bank could assist in providing. 'For example, the proposedSocial Development Fundwould support buildingregional and local institutions which will develop, propose, and implement projectsunder EUfunds. - 10- Such potential Bank financial support for Slovakia would take the form o f co-financing in support o f maintaining or implementing policy and programs. The Bank could o f course also provide financial assistanceoutside o f co-financing, should that be desired. 42. Operations which are selected for inclusion inthe program should meet certain criteria. The reforms that they support should have a high payoff in terms o f either equity or growth. Bank assistance should not duplicate other sources of funds or expertise and Bank assistance should reflect the Bank's comparative advantage. Reforms to be supported by the Bank should have a near or mediumterm impact, other factors being equal. 43. Inadditionto lending, AAA has been andwill continue to be an important aspect ofthe Partnership. Slovakia is a best practice example inthe use o f AAA. In addition to the benefits which AAA brings to Slovakia, there is a payoff to the Bank in pursuing AAA in Slovakia because o f the lessons learned which are applicable in less advanced countries. Nevertheless in the context o f our evolving partnership the Bank would look to Slovakia to take on an increasing share o f the costs o f AAA boththrough cost sharingand borrowing for T A if particular activities grew beyondthe Bank's budget constraints. Inaddition, costs will also be reduced by grouping AAA as appropriate into regional studies (as is currently planned in FY05-07 for studies on public expenditure/fiscal reforms and labor markets). V. THE SLOVAKIA-WORLD BANK PARTNERSHIP FY05-07 A. CONTEXT 44. The macroeconomic scenario on which the Slovakia-World Bank partnership is predicated assumes continued economic growth exceeding the average for EU countries, low inflation, continuing substantial FDI flows, current account deficit averaging about 3 percent o f GDP through 2007, and the Government's fiscal deficit declining to 3 percent o f GDP inthat year. All o f this would be satisfactory progress towards meeting the Maastricht criteria and subsequentlyjoining the EuropeanMonetary Union. 45. Within this scenario, Slovakia could finance a majority of its fiscal deficit by borrowing extemally, with the implication that it would borrow at least US$1 billion per year on external markets. The strategy is to borrow in Euros, so that as the country moves towards the adoption o f the Euro, risks are minimized. This i s consistent with exploring borrowing opportunities with the Bank which can, o f course, lend in Euros. Should Slovakia determine that it would like to draw more substantially on this partnership, the framework could accommodate lending in the range o f US$lOO-150 million per year. The following sections outline how such a scenario might play out, depending on Slovakia's more precise determination o f its needs inthe context o f its partnership with the World Bank. B. THE OUTLINES OF A PROGRAM OF ASSISTANCE 46. The Bank and the Government have identified a number of areas which in effect constitute a menu from which the authorities would determine priorities in the light of pressing needs and perceived advantages o f Bank involvement considering the range of instruments available. These can be grouped into three broad headings: a) continued macro and fiscal measures to support prudent and sustainable fiscal management; b) further - 11- structural reforms to enhance competitiveness; and c) poverty reduction and social inclusion. Priorities for Bank engagement are anticipated in each broad category. C. MACRO/SECTOR FISCAL REFORMSTO SUPPORT PRUDENT MACROECONOMIC MANAGEMENT AND FISCAL CONSOLIDATION 47. The ongoing Public Finance Management loan is supporting the implementation o f important fiscal reforms. For the future, the proposed cross-country Public Finance Management Review should offer a further set o f reforms to restructure expenditures and reduce the fiscal deficit to meet the Maastricht criterion. There are three aspects which need to be addressed. First, assistance to continue reforms in key sectors, including health, education, and social benefits. Second, to help strengthen the structures needed for effective fiscal decentralization. Third, to review public administration and identify further reforms to promote an improved cost- effective structure. Looking beyond the proposed Public Finance Management Review, there may be scope for policy-based lendingto support the implementation o f fiscal reforms, especially should these be consistent with Slovakia meeting the priorities identified in the EU's Annual Report. D. STRUCTURAL REFORMSTO ENHANCE COMPETITIVENESS 48. There will be need for sector reforms to increase productivity and efficiency, beyondthe fiscal aspects that may be addressed by the macro/fiscal work noted above. These include addressingissues in: (4 Financial and enterprise sector reforms, building on the reforms supported by the EFSAL and the implementation o f reforms identified in the earlier FIAS reports. Creditor rights, credit and financial statement information and corporate govemance all need to be strengthenedfurther to facilitate more rapid growth o f financial intermediation in support of private sector growth. A corporate govemance assessment for banks is planned for FY05 which would assist in defining the need for further improvements. SME sector administrative and structural constraints need to be addressed. The FIAS reports need to be updated and the Bank could help develop a methodology for self- assessment by the Govemment o f the administrative and regulatory barriers to investment. Support for reforms inthese sectors could be inthe form o f analytical work or technical assistance, or inthe form o f co-financing EU structural funds combined with support for specific policy reforms. (b) Labor market mobility constraints and policies which aflect employment. A proposed regional Labor Market Review would look at ways to support the development o f a more fully competitive labor force with low unemployment inthe new EUmembers. (4 Legaldudicial reforms. A project (FY05) is under preparation which could include capacity building, improvedjudicial infi-astructure, and reforms to improve the market for legal services. A project preparation facility (PPF) advance if requested would help accelerate project preparation and jump start first phase investment support for restructuring andupgradingthejudicial system. (4 Education sector reform. Ongoing T A addresses: (i)measures to improve the responsivenesso f higher education to the needs o f the global information society; (ii)the - 12 - design and implementation o f student admission and financing policies; and (iii)the development o f a life long leaming system in line with other OECD countries and with the Lisbonagenda. Agriculture and rural development which might focus on assistance inimplementing the single area payment scheme under the CAP, improving market linkages, and/or promoting rural development in the poorest rural areas o f the country, specifically in southeastem Slovakia. Flood protection which would involve support for the implementation o f a flood protection program, including advance waming systems and specific containments to protect flood-prone urban areas where damagecosts are highest. Improvements in the knowledge economy. This would build on the results o f the recent Slovakia Knowledge Economy (KE) workshop and ongoing work in education reform. The aim would be to improve national institutions and programs to enhance the transmission and local adaptation o f knowledge and technology to the productive sectors. Thus, the Bank will seek to assist inbuilding on the ongoing reform to increase capacity and efficiency to enable Slovakia to better tap into the globalknowledge economy. Energy sector pricing and regulation. Building on the successfully completed and ongoing IDF grants, there is scope for hrther work on gadelectricity pricing, regulation in the context of continuing support for the RONI, and to support Slovakia's further integration into EUnetworks. There could also be scope to assist Slovakia to further promote the use of renewable energy and improve energy efficiency. Through the Prototype Carbon Fund (PCF) and related carbon finance vehicles, the Bank could be an important partner in efforts to develop the Slovak Republic's carbon trading market through project development, capacity building and replication o f best practices. Potential has been identified for a PCF-financed Renewable Energy project to support a package o f small scale renewable energy sub-projects including geothermal, wind and mini-hydro. Further potential opportunities exist to provide PCF support to sustainable waste management and renewable energy projects and projects in the forestry/ land management and transport sectors. E. POVERTY REDUCTIONAND SOCIAL INCLUSION 49. The Bank-Slovak partnershiphas been working to prepare assistance in developing and implementing policies and programs to address the inclusion o f vulnerable and marginalized groups and communities in local govemance processes and development. This would improve access to economic and employment opportunities and social services, and further buildcapacity for excluded communities to propose and implement projects, and work with local governments. Specific issues couldbe covered as follows: i)PovertyAssessment.Thereisaneedtoupdateinformationonpovertyandidentify areas where interventions may be warranted, which would be addressedby the Living Standards Measurement Study (FY05). This would also build urgently needed capacity within the Govemment for monitoring living standards and the impact o f - 13 - policy changes through T A to the statistical office and line ministries (especially the Ministry o f Labor, Social Affairs and Family). Slovakia will also need regular high quality household surveys for monitoring progress on the EU social inclusionprocess (e.g. the "Laaken" indicators o f poverty and welfare). Finally, the Poverty Assessment will more clearly identify disparities which may be emerging as a result, for example, o freforms affecting public sector employment. ii)Poverty alleviation. There is a needto improve the prospects of disadvantaged portions o f the population: (i) through economic development and employment; (ii) improving basic communal services and community drastructure; (iii)alternative community-based social care services; and (iv) monitoring, and evaluation. The proposed Social Development Fund (SDF) project (FY05) would address these objectives. The specific components o f the SDF would be: (i) economic development and employment; (ii) communal services and community infrastructure; (iii) basic alternative community-based social care services; and (iv) project management, monitoring, andevaluation. Finally, the project would include technical assistancefor capacity building as well as targetedsupport for developing Roma communities. iii)Education.Beyondimprovingcompetitivenessandenhancinglinkstotheknowledge economy noted above, the World Bank could provide financing for the development o f higher and vocational education institutions and teacher training as part o f an education modernization program. For the present, the focus is on AAA to address higher andvocational education reform issues, includingthe needto develop linkages between education, research and innovation, and subsequently to pursue project formulationas and when requests develop. iv) Decade of Roma Inclusion. The World Bank will support Slovakia's participation in the regional initiative, the "Decade o f Roma Inclusion 2005-2015." The objective o f this activity i s to accelerateprogress inimproving the welfare o f Roma in the region through setting quantitative nationaltargets for improving economic status and social inclusiono f Roma, and developing and implementing national action plans to achieve those targets. F. CURRENTPERSPECTIVEONLENDING 50. As noted above, two potential projects are at an advanced stage o f preparation: Judicial Reform and the SDF. Both are primarily oriented toward T A and capacity building. Beyond these, the Bank would be prepared to assist financially in other areas o f the partnership framework. Future financial assistance could be provided under the proposed EU8 Technical Assistance Loan Facility to assist with institutionand capacity building and the EU8 sector wide approach (SWAP) to pool World Bank financial support with Government funds related to priority programs or sectors. This approach could support policy reforms as well as continuation o f existing good policies and investment programs, and could be used to co-finance and/or pre- finance EU Structural andCohesion Funds. G. RESULTSFOCUSAND COUNTRY PROGRAMMONITORING 51. Given the approach outlined above, the Bank's role inthe Partnership will evolve and in any case be supportive o f the Govemment's efforts. Country performance will be the result o f - 14- many factors on which the Bank will have only a selective impact. Since the nature o f the Bank's relationship with Slovakia precludes precise programming o f tasks, it is not possible to project specific outcomes. However, there are two broadpossibilities. First, the Bank assistance program could be limited to T.A. lending and AAA, should Slovakia determine that Bank lending is not sufficiently competitive with other sources o f finance available inthe market or from other institutions. Program monitoring will then need to be tailored to the impact o f increased knowledge and policy advice. Second, should the Government conclude that the features now available in Bank lending products make the Bank more financially competitive (para. 38 above), Bank lending for investment programs and implementation o f policy reform would be a more likely possibility. 52. In either case, the Bank should be evaluated on the extent to which it has reduced the non-fmancial costs now associated with its lending (see para. 40). This would entail pre- qualifying counterpart institutions inSlovakia, and aligning Bank procedures (including financial management, procurement, environment, and social safeguards) to the extent possible with EU policies and procedures. The Bank should also be evaluated on its effectiveness in responding quickly to requests for technical assistancelending which may occur. 53. Project-specific evaluation criteria will also be developed for projects which are implemented. For example, inthe case o f the proposed SDF Project, outcome indicators would be the number o f sub-projects implemented jointly by local governments and communities and the number o fbeneficiaries participating inprojects supportedby the SDF. 54. The second case is one in which Slovakia determines that Bank lending is competitive with its other sources, either in strict financial terms or if the Bank's presence enhances, by a sufficient margin, Slovakia's access to EU funding or provides other benefits to offset any fmancial disadvantage. Inthis case, it would be appropriate to have overall macro outcomes as a monitoring indicator, with a special focus on the fiscal deficit which would be gradually reduced and maintained to achieve the Maastricht criterion o f 3 percent o f GDP. Inaddition, key sectoral indicators should be developed which would complement the overall fiscal indicator. This would be determined according to the specific sector or sectors in which policy support was being extended. 55. The case o f Bank lending to co fmance EU support is slightly different. Here, the Bank's contribution would be to the formulation o f programs suitable for EU financing (and Bank co- financing). However, sector specific outcome indicators would be developed concerning the sectors being supported. The Bank would need to be competitive fmancially for this to materialize, or almost competitive with incremental costs offset by the value o f project formulation under the Bank's program. Aligning and making maximum use o f Slovakia's implementation o f EU policies and procedures with the Bank's as discussed above in para. 40 would be very helpfulinthis regard. H. PARTNERSHIPS 56. Support to Slovakia as it progressed toward EUmembership has been closely coordinated with the European Commission (EC) under a Memorandum of Understanding (MoU) signed in response to the EC's Agenda 2000 which called upon IFIs to assist inthe enlargement process. The signatories to the M o U include the EC inliaisonwith EIB, the World Bank, the EBRD, IFC, the Nordic Investment Bank, the Nordic Environment Finance Corporation, the Council for - 15 - Europe Development Bank, and the Black Sea Trade andDevelopment Bank. Regular meetings o f the parties to the M o U help ensure the complementarity o fthe respective assistanceprograms, smooth implementation and enhancedeffectiveness o ftheir cooperation. 57. The EU program o f assistance i s wide-ranging and will play a major role in Slovakia's development, and so is presented in some detail below. The Bank will continue to work closely withthe EUto ensurethat its operations are as closely aligned as possible to EUsupport. 58. Pre-accession EU assistance to Slovakia under the PHARE program (to help implement the acquis communautaive, strengthen administrative capacity and help countries to develop well-prepared investment and institutionbuilding projects) totaled Euro 631.5 million during the 1992-2003 period. Under SAPARD (Special Accession Program for Agriculture and Rural Development), with Euro 38.2 million allocated since 2000, the main priorities have been improving agricultural production, upgrading agri-food enterprises to EC standards, and increasing competitiveness. Slovakia has also benefited from ISPA allocations (Instrument for Structural Policies for Pre-Accession, for infrastructure projects) o f Euro 171 million to support one motorway andthree railway projects, and another Euro 175.6 millionfor environment. 59. Slovakia has been allocated EUfinancing for 2004-2006 as follows: (i)Structural Funds, Euro 1,186.89 million, and (ii) Cohesion Funds, Euro 570.5 million. Accessing these funds will require budgetary realignment to accommodate requirements, in addition to pre-financing and other expenditures relatedto EUmembership. Box 1: EU Financial Support for the New Member States Recognizing that in some cases the new members require additional support to strengthen administrative capacity to implement and enforce EU legislation and to foster exchange o f best practices among peers, a Euro 426 million Transition Facility has been established for the new member states until the end o f 2006. It is intended to help strengthen administrative capacity to implement EC legislation and has no overlap with the areas covered by the Structural Funds. In addition, like all other EU member countries, the EU8 will have access to four EUStructural Funds and the Cohesion Fund. The EUStructural Funds totaling Euro 14.1 billion&om mid-2004 through 2006 are summarized below: 0 the Euronean Regional Development Fund (ERDF) aimed at promoting economic and social cohesion within the EUby reducing imbalances between regions or social groups; 0 the Euronean Social Fund(ESF) designed to prevent and combat unemployment, as well as develop human resources andpromote integration into the labor market; the Euronean Apricultural Guidance and Guarantee Fund (EAGFF) to promote structural reforms in the agriculture sector and to develop rural areas; and 0 the Financial Instruments for Fisheries Guidance (FIFG) to promote structural reforms in the fisheries sector. EUStructural Funds are allocatedas follows: 0 70 percent for regions whose development is laggingbehind (objective 1); 11.5 percent for economic and social conversion inareas experiencing structural difficulties (objective 2); 12.3 percent to modemize training systems and create employment outside the objective 1 regions where such measures form part o fthe strategies for catching up (objective 2); and 4 5.35 percent for four "community initiatives" seeking common solutions to specific problems, such as cross-border and inter-regional cooperation. The EUCohesion Fundtotaling Euro 7.6 billion from mid-2004 through 2006 is designed to finance projects to improve the environment and develop transport infrastructure in EU8 countries with per capita GNP below 90 percent o f the EU average. Inthis way, the Cohesion Fundcontributes to sustainable development o f concerned EUregions as well as strengtheningcohesion within the EU. - 16- 60. The EIBoffers Slovakia subsidized credits and has been very active. The EBRDhas also been active, having lent Slovakia Euro 625 million, investedEuro 218 million inequity, and put inplace guaranteesworth Euro 108million, for atotalexposureofEuro 952 million, insupport o fprojects with atotal value o f Euro 3,280 million. 61. The IMF continues to play a major role in assisting Slovakia. The Article IV consultations and reports play a central role in monitoring developments, identifying needed reforms, and recommending improvements. The IMF has also pursued special reports on fiscal and other matters. As a member of OECD, Slovakia also benefits from the regular, in depth analyses o f OECD staff and the collective evaluation process. VI. CREDITWORTHINESSAND RISK MANAGEMENT 62. At the macro level, Slovakia is strongly creditworthy because o f its sound macroeconomic management and its reform program which has attracted large inflows o f FDI. Total debt outstanding is 57 percent o f GDP in2003 and is projected to decreaseto 52 percent o f GDP by 2007. Debt service is only 15 percent o f exports o f goods and services, projected to decline to 6 percent in2007. Even though the recent increase inthe dollar value o f debt has not led to an increase indebt/GDP, this was due largely to the appreciation o f the Koruna, although this appreciation in turn reflected real productivity increases. The NBS has been successfully implementing a policy o f allowing for appreciation related to such productivity increases, but also seeks to avoid large currency swings and a sharp appreciation that could undermine competitiveness. While current levels o f debt anddebt service do not raise any serious issues, the Government intendsto continue to manage debt very carefully inthe future inorder to be able to meet the Maastricht criteria, and is being supported inthis by the Bank. 63. The large inflows o f FDI which have played a central role in the expansion o f the automobile industry have raised some concems about creditworthiness were there to be a downtum inthis industry. However, these large inflows need to be put into perspective. The volume o f FDI in Slovakia i s over US$9 billion,* o f which US$1.8 billion is in the banking sector, andUS$7.3 billion inthe corporate sector. Within the corporate sector, US$3.3 billion i s in manufacturing, including automobile manufacturing, more than US$1 billion in electricity, gas, and water supply, and another U S $ l billion in wholesale and retail sales, including automobile repairs. Insum, something less than half o f FDI has gone to the automobile sector. While a serious downturn in this sector would have a noticeable impact on the economy, such risks should be manageable. More important thanthe macroeconomic risks are risks arising from the fact that three-fourths o f automobile sector investment i s in the Bratislava region, so that a downtum would pose problems for this region. Thus, prudent macroeconomic management would call for the development o f infrastructure in other regions o f the country to relax constraints on development there. While FDIis certainly most beneficialto Slovakia, the current patterns o f investment do exacerbate regional disparities. Programs to redress these disparities require even more attention inthe future than they have received inthe past. 64. Potentially large capital inflows are likely to continue complicating the conduct of monetary policy. While the NBS should focus its policy on securing a low rate o f inflation, large capital inflows may lead to excessive upward pressure on the exchange rate which could undermine extemal competitiveness. The key to reducing incentives for speculative capital See National Bank of Slovakia, Monetary Survey, January 2003. - 17- inflows lies in a sustained reduction in the fiscal deficit and lower interest rates as well as allowing sufficient exchange rate flexibility. Sterilized interventions may also be warranted inthe short term, although they are unlikely to be effective over time and further could undermine the income positiono fthe NBS. 65. While a precise lending program i s not proposed within the Partnership framework, for purposes o f creditworthiness analysis, a Bank lending program in the range o f US$lOO-150 million annually was projected, the maximum amount o f lending foreseen in the scenarios outlined above. Again, to test creditworthiness, the extreme assumption was made that all o f this would be fast-disbursing. World Bank debt is now less than 1 percent o f total debt outstanding and disbursed, and, under these assumptions, would rise to 2.5 percent of total debt by 2007, while IBRDdebt service, which is now only 2.3 percent o f public debt service, would increase to 3.3 percent o f public debt service by 2007. IBRD debt service would be the equivalent of about 0.1 Iercent o f the value o f exports o f goods and services through 2007. These key indicators are we1 within the bounds o f creditworthiness. VII. CONCLUDINGREMARKS 66. Slovakia has made notable progress inrecent years. Its accessionto the EUboth certifies this progress and presages continued achievements in the future. As Slovakia assumes a new status, it is now appropriate for Slovakia and the Bank to enter into a more mature partnership. To meet this challenge, the World Bank needs to strengthen its capacity to respond quickly and flexibly to Slovakia's development needs. Through this engagement, the World Bank can also help Slovakia share its development experience with other countries and lay the groundwork for its eventual transition to donor status. James D. Wolfensohn President By: ShengmanZhang Washington, D.C. May 6,2004 Annex A1 Page 1of 2 Slovak Republic at a glance 4/29/04 Europe & Upper- POVERTY and SOCIAL Slovak Central middle- Republic Asia income Developmentdiamond* 2003 Population,mid-year (millions) 5.4 476 331 Lifeexpectancy GNI per capita (Atlas method, US$) 4,870 2,160 5,040 GNI (Atlas method, US$billions) 26.4 1,030 1,668 Average annual growth, 1997-03 T Population(%) 0.1 0.1 1.2 Laborforce (%) 0.6 0.4 1.8 Gross primary Most recentestimate (latestyear available, 1997-03) Zapita Poverty (% of populationbelownationalpoverty line) Urbanpopulation(% of totalpopulation) 58 63 75 Life expectancyat birth (years) 73 69 73 i Infantmortality(per 7,000 live bifths) 7 25 19 Child malnutrition(% of children under 5) Access to improvedwater source Access to an improvedwater source (% ofpopulation) 84 91 90 Illiteracy(% ofpopulationage 75+i 3 7 - Gross primaryenrollment (% of school-age population) 102 105 SlovakRepublic Male 103 106 -Upper-middle-incomegroup Female 101 105 KEY ECONOMIC RATIOSand LONG-TERMTRENDS 1983 1993 2002 2003 Economicratios* GDP (US$billions) 13.4 24.2 32.5 Grossdomestic investmenVGDP 24.7 29.3 25.3 Exports of goodsand servicesiGDP 56.7 71.8 78.0 Trade Grossdomestic savingsiGDP 20.3 22.2 23.8 Gross nationalsavingsiGDP 20.8 21.1 24.2 Current account balanceiGDP -4.0 -8.0 -0.9 InterestpaymentsiGDP 1.1 3.8 1.6 Domestic Investment Total debffGDP 25.4 53.8 34.1 savings Total debt service/exports 7.7 18.9 9.4 Presentvalue of debtiGDP Presentvalue of debtiexports Indebiedness 1983-93 1993-03 2002 2003 2003-07 (average annual growth) GDP -6.4 4.0 4.4 4.2 4.8 -Slovak Republic GDP per capita -6.5 3.8 4.3 4.1 4.7 Exports of goods and services 9.3 5.5 22.6 8.9 ~~ STRUCTURE of the ECONOMY I (% of GDP) Agriculture 5.7 4.1 3.7 20 Industry .. 33.1 28.6 29.7 Manufacturing .. 18.6 20.1 19.5 Services .. 61.1 67.4 66.6 :::': Privateconsumption .. 54.9 56.9 55.3 - 3 0 1 General governmentconsumption .. 24.8 20.9 20.9 Importsof qoods and services -GDI &GDP 1993-03 2o02 2003 (average annualgrowth) Growth of exportsand imports(%) Agriculture 2.6 -1.6 4.4 30T Industry 2.0 0.7 9.2 Manufacturing 5.5 -1.2 6.6 Services 5.2 6.6 2.0 Privateconsumption 4.1 5.2 -0.3 General governmentconsumption 2.9 4.7 3.2 Grossdomestic investment 5.1 2.2 -9.7 -Exports -imports Importsof goods and services 9.6 9.3 5.2 13.8 Note:2003 data are preliminaryestimates. 'Thediamondsshowfourkeyindicatorsinthecountry(inbold)comparedwithitsincome-groupaverage.Ifdataaremissing,thediamondwill be incomplete. Annex A1 Page2 of 2 Slovak Republic PRICESand GOVERNMENT FINANCE 1983 1993 2002 2003 Domesticprices Inflation (%) (% change) l5 T i Consumer prices 23.2 3.3 8.5 ImplicitGDP deflatw 28.5 4.0 4.7 Governmentfinance (% of GDP, indudes current grants) Current revenue 46.5 44.8 38.3 Current budget balance -3.1 -0.7 -1.1 Overall surplusideficit -31.2 -5.7 -3.6 TRADE 1983 1993 2002 2003 (US$ millions) Export and import levels (US$ mill.) Total exports (fob) 5,447 14,382 21,838 25 000 T Other agriculture Commodity 2 Manufactures 4,554 12,584 19,510 Total imports (cifl 6,379 16,499 22,479 Food 556 850 987 Fueland energy 1,324 2,211 2,705 Capital goods Export price index (1995=100) 133 97 98 99 00 01 02 Importprice index (1995=100) 140 Exports Imports Terms of trade (1995=100) 95 BALANCEof PAYMENTS 1983 1993 2002 2003 (US$millions) Current account balanceto GDP(Oh) 1 Exports of goods and services 7,398 17,151 25,117 Importsof goods and services 8,061 18,827 25,524 Resourcebalance -594 -1,676 -407 Net income -38 -456 -120 Net current transfers 100 193 223 Current account balance -532 -1,939 -277 Financing items (net) 587 5,585 1,509 Changes in net reserves -55 -3,646 -1,232 Memo: Reserves includinggold (US$ millions) 450 9,091 12,126 Conversion rate (DEC,/oca//US$) 30.8 45.3 36.8 EXTERNAL DEBT and RESOURCEFLOWS 1983 1993 2002 2003 (US$ millions) Compasition of 2001 deM (US$ mill.) Total debt outstanding and disbursed 399 3,393 13,188 18,322 IBRD 0 151 204 179 IDA 0 0 0 0 Total debt service 43 587 1,885 3,734 IBRD 0 9 31 33 IDA 0 0 0 0 Composition of net resourceflows Officialgrants 529 107 Officialcreditors -1 96 -78 -73 Privatecreditors 5 364 1,447 -1,852 Foreign direct investment 166 4,007 580 Portfolioequity -263 552 -621 World Bank program Commitments 0 55 24 0 A IBRD - E - Bilateral Disbursements 0 40 0 0 B - IDA D -Other multilateral F - Private Principalrepayments 0 0 22 24 C IMF - G Short-term - Netflows 0 40 -22 -24 Interestpayments 0 9 9 9 Net transfers 0 31 -31 -33 DevelopmentEconomics 4/29/04 Annex B2 Page 1of 1 Slovak Republic Selected Indicators* of Bank Portfolio Performance and Management as of March 31,2004 _______ Indicator 2002 2003 2004 2005 Portfolio Assessment Number of Projects Under Implementationa 2 3 5 5 Average Implementation Period(years) 0.6 1.1 1.3 1.8 Percent of Problem Projects by Number ' " 0.0 0.0 0.0 0.0 Percent of Problem Projects by Amount 0.0 0.0 0.0 0.0 Percent of Projects at Riskby Number 0.0 0.0 0.0 0.0 Percent of Projects at Riskby Amount 0.0 0.0 0.0 0.0 Disbursement Ratio (%) e 0.0 0.0 2.9 4.5 Portfolio Management CPPR duringthe year (yedno) no no Yes Yes Supervision Resources(total US$) 62 206 380 333 Average Supervision (US$/project) 31 103 76 67 MemorandumItem Since FY 80 Last Five FYs Proj Evalby OED by Number 3 1 Proj Evalby OED by Amt (US$ millions) 130.4 50.4 % of OED Projects Rated Uor HUby Number 0.0 0.0 % of OED Projects Rated Uor HUby Amt 0.0 0.0 a. As shown inthe Annual Report on Portfolio Performance(except for FY04 and FY05). b. Average age ofprojects inthe Bank'scountry portfolio. c. Percentofprojects ratedUor HUon developmentobjectives (DO) andor implementation progress(IP). d. As definedunderthe Portfolio ImprovementProgram. e. Ratio o f disbursements duringthe year to the undisbursedbalanceof the Bank's portfolio at the beginning of the year: Investmentprojects only. f. FY05dataare projections. * All indicators are for projects active inthe Portfolio, with the exception of DisbursementRatio, which includes all active projects as well as projects which exited during the fiscal year. Annex B3 Page 1of 2 Slovak Republic IBRD ProgramSummary as of March31,2004 ProposedIBRD LendingProgram' Strutegic Fiscal year Proj ID US$(&? Rewards b Implementation b (H/M/L) Risk (H/ML) 2005 Social Development Fund 10.0 H L Judicial Reform 7.0 H H Subtotal 17.0 a. This table presentsthe proposedprogram for the next fiscal year. b. For eachproject, indicate whether the strategic rewards andimplementationrisksare expected to be high(H),moderate (Mj,or low(Lj. Annex B3 Page2 of 2 Slovak Republic IFC and MIGA Program, FY 2001-2004 2001 2002 2003 2004 IFC approvals(US$m) 70.0 0 5.0 0 Sector (YO) Finance& Insurance 100 0 100 Total 100 0 100 Investment instrument(%) Loans 0 0 0 Equity 71 0 0 Quasi-Equity 29 0 0 Other 0 0 100 Total 100 0 100 MIGA guarantees(US$m) 10.8 0.8 0.9 0.0 (gross exposure) Annex B4 Page 1of 1 SlovakRepublic Summaryof NonlendingServices as of March31,2004 Completion Cost Product F Y (US$OOO) Audience a Objectiveb Recentcompletions DevelopmentPolicy Review 2003 198 G KGIPS Food & Agriculture: Challenges ofEUAccession 2003 150 GIDIPD PS FSAP Follow-up TA IntegratedSupervision 2003 52 GIB KGIPS Energy TA 2003 52 GIDIPD KGIPS RomdSocial Development FundTA 2003 41 G/B/D KGIPDIPS Underway PensionReform 2003-04 72 GIB KGIPDIPS Cities of Change 2003-04 36 GIDIBIPD PDIPS Education Policy Note 2003-07 475 GIB KGIPD CG Assessment 2004 15 GIDIPD PS Knowledge Economy Seminar 2004 8 GIDIPD PS CG Assessment (Real Sector & Pension) 2004 15 G/B KGIPS Living Standards Measurement Study 2004-05 210 GIDIPD KGIPS FloodTechnical Dialogue 2004-06 76 GIBID KGIPS Agriculture Policy Dialogue 2004-07 280 GIB KGIPDIPS EnergyEUAccessionTA 2004-07 70 G/D/B/PD KGIPS National EnergyEfficiency Follow-up 2004-07 100 GIDIBIPD KGIPS FSAP Follow-up TA IntegratedSpn 2004-07 180 GIB KGIPS Planned Audit of Firms TA 2005 15 GIDIPD KGIPS CG Module for Banks 2005-06 90 GIDIBIPD KGIPDIPS CG Module for Insurance Companies 2005-06 75 GIDIPD KG/PD CFAA 2005-07 90 G KGIPS Institutional Fiduciary Assessment for Procurement 2005-07 30 GIB KGIPS Public FinanceManagement- Cross Country 2005-07 750 GIDIBPD KGIPDIPS Labor Market Review - Cross Country 2005-07 175 GIDIBIPD KGIPDIPS a. Govemment, donor, Bank, public dissemination. b. Knowledge generation, public debate, problem-solving. Annex B5 Page 1of 1 Slovak Republic Social Development Indicators Latest single year Same regiodincome group Europe& Central Upper middle- 1970-75 1980-85 1995-2001 Asia income POPULATION Total populationmid-year (millions) 4.7 5.2 s.4 474.6 503.6 Growth rate (% miualaveragefor pencd) 0.9 0.8 0.1 0.1 1.3 Urbanpopulation(% ofpopulation) 46.3 54.2 57.6 62.8 77.2 Total fertility rate (birthsper woman) 2.6 2.2 1.3 1.6 2.3 POVERTY(% of population) Nationalheadcountindex Urbanheadcountindex Ruralheadcountindex INCOME GNIper capita (USS) 3,760 1,970 4,550 Consumer priceindex (1995=100) 159 Foodprice index (1995~100) 34 232 INCOMEiCONSUMPTION DISTRIBUTION Shareofincomeor consumption Gini index 25.8 Lowestquintile (%of incomeor consumption) 8.8 Highestquintile (%of incomeor consumption) 34.8 SOCIAL INDICATORS Public expenditure Health(%of GDP) 5.3 4.0 3.5 Education(%ofGDP) 4.2 4.4 4.4 Socialsecurityandwelfare(%ofGDP) 10.6 8.8 Net primaryschool enrollment rate (96 of agegroup) Total 89 96 Male 89 97 Female 90 95 Access to an improvedwater source (YOof population) Total 100 91 88 Urban 100 96 94 Rural 100 83 69 Immunizationrate (% under 12 months) Measles 99 9s 94 DPT 99 94 94 Childmalnutrition (% under 5 years) 9 Life expectancy atbirth (years) Total 70 71 73 69 72 Male 67 67 69 64 68 Female 14 75 77 13 75 Mortality Infant (per 1,000 live births) 23 16 8 31 23 Under5 (per 1,000 livebirths) 26 19 9 38 27 Adult (1549) Male (per 1,000 population) 226 210 317 218 Female(per 1,000 population) 105 83 137 114 Maternal(modeled, per 100,000 livebirths) 14 Birthsattendedby skilled healthstaff (%) Note: 0 or 0.0 meanszero or less thanhalfthe unit shown. Net enrollment rate: break inseries between 1997and 1998due to change from ISCED76to ISCED97;ratios exceeding 100indicatediscrepanciesbetweenthe estimates of school-age population andreportedenrollnmt data. Source: 2003 World Development IndicatorsCD-ROM, World Bank. Annex B6 Page 1of2 SlovakRepublic Key EconomicIndicators - Actual Estimate Projected Indicator 1999 2000 2001 2002 2003 2004 2005 2006 2007 Nationalaccounts (as '% of CDP) Gross domesticproducta 100 100 100 100 100 100 100 100 100 Agriculture 5 5 5 4 4 4 4 4 4 Industry 36 32 31 31 30 30 29 29 28 Services 59 63 64 65 66 66 67 67 68 Total Consumption 77 76 78 78 76 17 78 77 77 Gross domestic fixed investment 30 26 29 27 26 26 26 26 26 Government investment 10 13 6 5 3 4 4 4 4 Private investment 20 13 23 22 22 22 22 22 21 E X P O ~ ~(GNFS)~ S 61 71 73 72 78 7s 76 78 80 Imports (GNFS) 66 73 82 79 80 78 80 81 82 Gross domestic savings 23 24 22 22 24 23 22 23 23 Grossnational savings` 23 23 21 21 24 24 22 23 23 Memorandum items Gross domesticproduct 20381 20218 20887 24184 32519 34312 36212 38217 4025 1 (US$ millionat current prices) GNP per capita (US$, Atlas method) 3900 3860 3830 4050 4920 5189 5468 5165 6064 Real annualgrowth rates ("A, calculatedfrom 1995 prices) Gross domesticproduct at market pric 1.5 2.0 3.8 4.4 4.2 4.0 4.0 4.0 4.5 Gross Domestic Income -0.1 2.2 1.6 5.1 3.6 2.0 1.6 5.8 4.0 Real annualper capita growthrates(%, calculatedfrom 1995prices) Gross domesticproduct at market pric 1.4 1.9 3.1 4.3 4.1 3.8 3.9 3.9 4.5 Total consumption 0.1 -0.3 4.6 4.9 0.6 2.1 3.7 4.5 3.3 Private consumption 2.7 -1.0 4.8 5.1 -0.4 2.3 4.4 5.5 4.1 Balance of Payments (US%millions) ~xports(GNFS)~ 12292 14118 15134 17151 25117 25768 27440 29765 32327 MerchandiseFOB 10229 11872 12645 14365 21838 22185 23639 25615 27986 Imports (GNFS)~ 13166 14584 16780 18827 25524 26645 28874 30894 33166 MerchandiseFOB 11321 12777 14770 16497 22479 23403 25471 27190 29320 Resource balance -874 -466 -1646 -1676 -407 -877 -1433 -1129 -840 Net Income Receipts -301 -353 -313 -456 -120 -84 -107 -113 -172 Net current transfers 196 118 212 193 249 158 156 154 151 Current account balance -980 -702 -1746 -1939 -277 -803 -1384 -1088 -860 Net official capital grants 160 92 78 107 100 264 390 436 404 Net total privateinvestment inflows 1384 2723 1314 4559 -40 1320 1386 800 598 Net privateforeign direct investment 761 1904 1542 4007 580 1405 1477 897 684 Long-termloans(net) 248 -497 -221 -102 -348 -297 322 241 224 Official 281 -30 60 -78 -7 0 -10 -8 68 Private -33 -467 -281 -24 -341 -297 332 249 156 Other capital flows, net -92 -793 720 1020 1797 500 500 500 500 Change inreservesd 721 824 143 3646 1232 984 1215 888 866 Memorandum items Current account balance(YOof GDP) -4.8 -3.5 -8.4 -8.0 -0.9 -2.3 -3.8 -2.8 -2.1 Externaldebt (% olGDP) 51.6 53.4 52.9 54.5 56.3 54.0 53.4 52.6 51.7 Real annual growth rates ( YROO prices) Merchandiseexports (FOB) .. 5.0 13.7 6.3 5.5 22.6 8.6 11.3 10.1 Primary Manufactures Merchandiseimports (CIF) .. -6.7 10.5 11.0 5.2 13.8 8.3 11.2 10.8 Annex B6 Page 2 of 2 SlovakRepublic- Key EconomicIndicators (Continued) Actual Esbmdte ProJectzd Indicator 1999 2000 2001 2002 2003 2004 2005 2006 2007 Public finance (as % of GDP at market prices)' Current revenues 49.4 47.3 45.1 44.8 38.3 35.9 36.3 35.9 35.4 Current expenditures 47.0 46.7 45.3 45.6 39.4 37.3 37.9 37.7 36.6 Current accountsurplus (+) or deficit (-) 2.4 0.6 -0.1 -0.7 -1.1 -1.5 -1.5 -1.8 -1.2 Capital expenditure 9.9 13.3 6.2 5.5 3.3 3.9 4.2 4.2 4.1 Foreign financing 7.1 12.3 6.0 5.7 3.6 4.0 3.9 4.0 3.0 Monetary indicators M 2 FlowIGDP 6.1 7.7 6.8 3.0 4.1 4.5 4.5 4.3 4.0 Growth ofM 2 (%) 11.2 14.0 11.9 5.0 6.4 8.0 8.0 7.5 7.0 Pnvate sector credit growth ' 4.1 0.3 0.0 11.7 9.7 8.0 5.3 5.2 5.3 total credit growth (%) 6.1 9.1 13.3 0.0 16.9 Price indices(YROO =loo) Merchandiseexport price index 88.0 100.0 106.3 112.1 137.4 149.2 166.1 182.9 203.7 .Merchandise import price index 90.5 100.0 111.0 116.8 133.0 144.0 160.1 177.4 195.3 Merchandiseterms of trade index 97.2 100.0 95.7 95.9 103.3 103.7 103.8 103.1 104.3 Realexchangerate (US$:LCU)' 90.8 100.0 109.2 106.4 82.2 85.2 89.9 91.7 93.4 Real interestrates Consumerprice index (% change) 10.6 12.0 1.3 3.3 5.5 7.8 3.7 3.2 2.8 GDP deflator (% change) 6.5 8.5 4.2 4.0 4.7 4.5 3.0 3.0 2.3 a. GDP at marketprices b. "GNFS" denotes"goodsandnonfactor services." c. Includes net unrequitedtransfersexcluding official capital grants d. IncludesuseofIMFresources. e. Generalgovernment. f. "LCU" denotes"local cumncy units." An increaseinUS$/'LCUdenotesappreciation. Annex B7 Page 1of 1 Slovak Republic Key ExposureIndicators - Total debt outstandingand 10518 10804 11043 13188 18322 18525 19347 20088 20812 disbursed(TDO) (US$m)a Net disbursements (US$m)" 248 -497 -221 -102 -348 -291 322 241 224 Total debt service (TDS) 1612 2298 1954 1885 3734 2805 1752 2459 2082 (Ussm)" Debt anddebt serviceindicators ("/I TDOIXGS~ 85.6 76.5 73.0 76.9 72.9 71.9 70.5 67.5 64.4 TDOiGDP 51.6 53.4 52.9 54.5 56.3 54.0 53.4 52.6 51.7 TDSIXGS 13.1 16.3 12.9 11.0 14.9 10.9 6.4 8.3 6.4 ConcessionaliTDO IBRD exposureindicators (YO) IBRD DSipublic DS 4.9 3.8 3.3 3.5 2.3 1.6 6.2 3.8 3.3 Preferred creditor DSipublic 19.7 30.1 9.3 10.4 6.9 11.2 21.5 13.8 13.4 DS(%)" IBRD DSiXGS 0.3 0.2 0.2 0.2 0.1 0.1 0.1 0.1 0.1 IBRD TDO ws%mId 219 184 205 204 119 275 355 428 487 O f which present value of guarantees(US$m) Shareof IBRD portfolio (YO) IDA TDO (US$mId 0 0 0 0 0 0 0 0 0 a. Includes public and publicly guaranteeddebt, private nonguaranteed.use of IMF credits and net short- term capital. b. "XGS"denotesexports of goods and services, includingworkers' remittances. c. Preferred creditorsare defined as IBRD, IDA, the regional multilateraldevelopmentbanks, the IMF, and the Bank for Intemational Settlements. d. Includespresent value of guarantees. e. Includes equity and quasi-equitytypes of bothloanand equity instruments. Annex B8 Page 1of 2 Slovak Republic Operations Portfolio (IBRD) as of March 31,2004 Closed Projects 3 IBRD/IDA * Total Disbursed(Active) 134.51 ofwhich hasbeenrepaid 0.00 Total Disbursed(Closed) 130.43 of which has beenrepaid 57.33 Total Disbursed(Active & Closed) 264.95 of which hasbeenrepaid 57.33 Total Undisbursed(Active) 201.28 Total Undisbursed(Closed) 0.00 Total Undisbursed(Active & Closed) 201.28 Active Proiects Diff. Between Last PSR OriginalAmount Expected&L Actual SupervisionRating inUS$Millions Disbursementsa' ProjectID/ProjectName Dev. ImD. Objectives Progress FY IBRD Undisb. Orig. FrmRev'd PO64542 EFSAL S S 2002 177.30 80.19 43.35 PO65954 HealthReform S S 2004 62.92 70.08 PO82879 HealthTA S S 2004 12.38 13.48 2.25 PO69864 PublicFinanceMgt S S 2003 5.45 5.56 0.44 PO38090 Social Benefit Reform S S 2002 23.50 31.98 13.89 Overall Result 281.55 201.28 59.93 a. Intendeddisbursementsto date minusactual disbursementsto date as projectedat appraisal. Annex B8 Page 2 of 2 SlovakRepublic Statement o f IFC's HeldandDisbursedPortfolio as of February29,2004 (InUSDollars Millions) Held Disbursed FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1999 SEF West Exp-Imp 0.79 0 0 0 0.79 0 0 0 Total Portfolio: 0.79 0 0 0 0.79 0 0 0 Approvals PendingCommitment Loan Equity Quasi RiskMgt Partic None Annex B9 Page 1of 1 Slovak Republic - Bank Engagement Additional Possible Priority Ongoing Activities ProposedNew Possible New Activity (T.A. Activity loan and/or budget support) Areas for Lending or budget support 1. Lending: Public Fiscal Finance, Health 1. AAA: EU8 Consolidation Pensions Comparative 2. T.A.: Education Fiscal Study 1. Assistance to meet EU 1. Lending: EFSAL AAA: EU8 Acquis Communautaire; Convergence: 2. T.A. Education, Comparative Legal,Judicial Reform, 2. Cofinance EU Competitiveness Legal Sector, Energy Labor Market Infrastructure(flood protection), Structural Funds (Le. for Sector, Agriculture Study energy sector, financial sector private sector/SME development); 3. Knowledge economy (La. or budget support) 1. SDF Project Social InclusionSDF Project Preparation 2. AAA: Poverty Fiscal Decentralization Assessment Annex B10 Page 1of 1 Slovak Republic - Summary of Development Priorities Reconciliation of Network Area I Country Ir=rJ" D--r-rmanceflj Mujor Issuef2J County Priority/;?] Bunk Priorityf4j Bank and County Prioritied51 Poverty Reduction and Economic Management Poverty Reduction Good Social exclusion Unemployment I H IMajor CPS focus Economic Policy Excellent Fiscal sustainability H H Public Public Sector Good administration, H H centralization Gender Good Labor force participation L L Inclusion, Education good competitiveness, M H CPS focus sustainability I Health, Nutrition, and Good Low efficiency, H population fiscal sustainability, excess capacity H I I Social Protection Good , Fiscal H sustainability Rural Development Fair Rural areas underserviced M L EU&nding,programs Environment Fair Legal framework M L EUstandards, fimdinj Social Development Poor Social exclusion o f Roma H H Financial Sector Good Competitiveness, access H H Private Sector Good Governance H H Energy& mining Good Regulation H H Infrastructure Good Management M M EBRLl,EIB lead [11Use"excellent", "good", "fair", or "poor". [2] Indicatecountry specific problems [3] To indicatepriorityuse "low", "moderate", or "high" [4]To indicatepriority use "low", "moderate", or "high". [5] Give explanation ifpriorities do not agree. Annex B11 Page 1of 3 SlovakRepublic:Consultations onthe Country Partnership Strategy As part o f the preparation of the CPS for 2005-2006, a program of consultations on the draft Strategy with the representatives of Slovak civil society was launched in Slovakia. The primary purpose of the program was to seek inputs from a wide spectrum of stakeholders in regard to the future activities o f the World Bank in Slovaha. The Bank team also used this opportunity to meet its partners including in the remote regions of the country. The draft CPS document was prepared following discussions with the representatives of the Government of Slovakia and leading opinion makers. As background, a baseline survey was conducted covering a nation-wide sample of 1,040 respondents. The survey showed that more than half of the country's population (59 percent was aware of the World Bank. Among those who heard about the Bank, 59 percent had a favorable opinion, while 13 percent held unfavorable opinions. The World Bank i s regarded less favorably in comparison to the EBRD, but more favorably than the IMF. Almost half of the respondents were unable to identify the World Bank's activities in Slovaha and more than 30 percent could not see a linkbetween the World Bank's operations and the reforms program of the Slovak Government. The CPS consultation process consisted o f several feedback instruments/ events: (i) presentation of the Strategy to the government officials at the Joint Portfolio Review Meeting in February 2004, (ii) electronic consultationthrough the Country Office website (March-April 2004), (iii) a series of consultation meetings held inthree major cities inSlovalua: Kosice, BanskaBystricaandBratislava(March 29- April 2, 2004). Both, the Slovak and Englishversions of the Strategy were placed on the Country Office website in the beginning of March 2004 and were subjected to comments by wider public. In addition, the draft CPS in Slovak was distributedalong with invitation letters to more than 700 individuals and organizations prior to the consultation meetings. This public access resulted ina number of comments submitted by representatives o f the NGO sector, local governments, and academics. All comments were made available on the World Bank web site. For the consultation meetings, a methodology was developed by representatives of the World Bank, incooperation with the Bank's key NGO counterparts in Slovakia, a Slovak consultancy company hired as an independent facilitator for the CPS consultations. Information about the public consultations was also placed on the Country Office website as well as on the information server of the civil society organizations in Slovakia www.chanaenet.sk. Up to 60 people participated in each of the three consultation meetings bringing together representatives from the NGO sector, local governments, academics, business, and media. Each meeting consisted of two parts. The first session focused on the socio-economic analysis o f the Slovak economy and the challenges to be addressed. Inthis regard, the participants were encouragedto review the analysis provided in the CPS and comment on issues that were either omitted or insufficiently addressed. The second session centered on how these challenges could be addressed and the possible role of the World Bank inthis process. Discussions following each o f the presentations took place in one or two worhng groups established on the basis of main themes introduced in the CPS. The worhng groups then reported their observations and recommendations duringthe plenary session. In the process of consultations the Bank indicated that all the comments and views made by the participants would be recorded, analyzed and discussed among the sector staff. They were also informed that the comments would be conveyed to the Slovak government. Participants felt that the draft CPS presentation was a good starting point for consultations and that the analysis of the social and economic situation in Slovalua includedinthe document was comprehensive and Annex Bl1 Page 2 of 3 objective. Participants also appreciated some of the special points of concern, including poverty, unemployment, and minorities. Overall, it was agreed that the presentation of the positive and negative aspects o f the ongoing transformation of public administration formed an important cornerstone of the analysis. However, the claim was made that the CPS should note that corruption and clientism i s not sufficiently combated, and many institutions are too weak to redress this problem. There was some concern about aspects of the analysis which were felt to be missing or underemphasized, including: [a) the brain drain, especially the number of people with university education who leave Slovakia, (b) gender issues, and the greater impact on women than on men in implementing education, social, pension and health reforms, (c) impact of long term unemployment (economic, psychological, and social), [d) the need to give a better qualitative as well as quantitative description o f poverty, [and that social safety nets have been weakened for fiscal reasons while subsidies increased for large corporations), (e) analysis o f the role of life-long learning; and (i) transparency of the ongoing reforms, and the causes of insolvency of the health service. The participants also felt that the CPS should look at income distribution with a view to assessingchanges neededto sustain long-term support for the reform.' The strong decline in the support of the Government coalition was caused by the fact that structural reforms were not adjusted to the situation faced by low and middle income classes. Social inclusion and poverty reduction strategies should be introduced before transformation programs are started, to prevent rather than trying to undo the problems they create. Concerning the proposals made in the CPS presentation, most of participants felt that a number of recommendations could be improved. They felt that the CPS should present a more integrated and coordinated view of all the ministries in the context of a long term vision of growth and development. Concerning the energy sector, the participants suggested a stronger focus on renewable energy while greater emphasis might be given to the use o f nuclear energy. Generally, adequate supply of electricity should be ensured. The CPS might look more closely at agriculture and how to strengthen rural development. The CPS mightalso re-evaluate the impact ofthe introductionof uniformVAT. Concerninghealth care reform, participants felt that the Bank had appropriately emphasized the need to ensure a balance between supply and demand, but that the implementation of health sector reform suffered from poor communicationresulting ina general perception of a lack of coordination." It was emphasizedthat the quality of service should be enhanced, possibly by creation of a specialized institution to evaluate service delivery. Both quality and quantity needed to be taken into account inhealth care financing. It would also be important to analyze the existing labor market for the medical professions in order to better accommodate the needs of the health sector. Primary health care should become a vehicle to better address poverty. Education was another important focus of discussion. While the Government had accepted the concept of reform through the year 2010, implementation was inadequate. Education expenditures accounted for only a small percentage of GDP. Resources flowing to science and research should be increased, especially since their share in GDP was lower than in Poland, Hungary, or the Czech Republic. There was a high degree o f mistrust in the academic community towards the Ministry of Education concerning implementation o f accepted targets. It would be important to depoliticize the quality assessment system for the universities by creating an independent body rather than leaving this with the Ministry o f Education. The Government should enable and encourage the flow of funds to universities, includingfrom external sources. There was also some support for funding university tuition from the state budget. The participants felt that stronger support should be given to enriched/accelerated education for talented and gifted children, especially outside Bratislava where such facilities were particularly lacking. Primary education should be emphasized to better address poverty/socialinclusion. The proposedLSMS (Living StandardMeasurementStudy) for FY05 would address this point. loThis is to be addressedby the DGF (Development Grant Facility) for communications Annex B11 Page 3 of 3 Education reforms being implemented had addressed low teachers' salaries, lack of resources for research and development and libraries. Facilities were so poor that it would be difficult to implement a merit based faculty selection. Any plan to introduce tuition payments for university students should be accompanied by a carefully formulated plan to assist poorer students Adult education was not laclung as many schools and businesses had established Lifelong Learning Institutes. But there was little demand for these due to costs, insufficient assistance from employers, and little social impact. A system i s neededto be implementedto support efforts of adults striving for a university degree. With respectto Slovalua's development agenda, inclusive development shouldalso promote equality between men and women. There is a need to pro-actively reduce gender disparities, takmg account of gender analysis under all reforms. The CPS sh.ould also take into account the aspect of poverty among females and the increasing income gap between women and men. Concerning social benefits reform, the new system to be launched in January 2005 should take account of gender analysis and adopt measures to prevent the poverty of females in retirement age groups. A gender mainstreaming strategy as well as gender budgetingshould be adopted, and a gender analysis system and related measures for government reforms introduced. Eventually, the expected broad outcome from the World Bank-Slovak partnership should be the reductionof gender disparities and equal opportunities for men and women. Concerning public administration, reforms to derogate responsibilities to regional authorities had not been accompanied by fiscal decentralization. There is also some duplication between the central and regional administrative authorities. The civil service was overstaffed with continuing staffing increase, without commensurate increases in administrative capacity. Service standards were low, and the administration was heavily politicized. Concerning private sector development, there was a need to remove administrative constraints and otherwise improve the environment for SME development. There were also a number of suggestions concerning poverty and social inclusion. The CPS should look at regional disparities and regional development patterns which lead to the marginalization of particular social groups. Many measures of the Government (e.g. FDI incentives) promoted rather than reduced regional disparities. Unemployment needed to be tackled through sustainablejob-creation in rural areas. Grants and loans by the World Bank through commercial banks could be important if transparency and involvement of local stakeholders was assured. Assistance should be allocated regionally. Quality standards needed to be introduced in social services. Some participants felt that independent institutions should be developed to provide information and counseling inthe social and legal spheres. There was also a suggestion for a law to be passedto protect vulnerable groups. Regarding the Roma in particular, examples of successful projects for the Roma population should be more broadly disseminated. Ecological agriculture for the Roma shouldbe supported. Education for Roma children is not satisfactory and should be enhanced, from pre-school through university. For example, many Romas attend primary schools for handicapped children. A task force o f Roma experts i s neededto comment on and improve the National Action Plan for Roma Communities. For the future, institutions needed to be strengthened through transparent technical assistance and twinning. The World Bank's activities should help ensure transparency, partnership, sustainability, and implementation of environmental and social impact assessments. A thorough evaluation of past and ongoing structural reforms which were supported by the Bank should be carried out by an independent agency. Following the consultations, comments were placed on the World Bank's Slovak Country Office website. MAP SECTIOK