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Slovak Republic - Economy

With the establishment of the Slovak Republic in January 1993, Slovakia continued the difficult transformation from a centrally-planned to a modern market-oriented economy. This reform slowed in the 1994-98 period due to the crony capitalism and irresponsible fiscal policies of Prime Minister Vladimir Meciar's government. While economic growth and other fundamentals improved steadily during Meciar's term, public and private debt and trade deficits soared, and privatization, often tarnished by corrupt insider deals, progressed only in fits and starts. Real annual GDP growth peaked at 6.5% in 1995 but declined to 1.3% in 1999. Much of the growth in the Meciar era, however, was attributable to high government spending and over-borrowing rather than productive economic activity.

The pace of economic reforms picked up during the second administration of Prime Minister Mikulas Dzurinda, which oversaw the simplification of the tax system, reforms of the labor code and pension systems, and a large number of privatizations. With the onset of the global recession in 2008, Slovakia's highly export-dependent economy began to contract, finishing that year with 6.4% growth, following 10.4% growth in 2007. Negative growth is forecast for 2009, with a return to slight growth the following year.

Slovakia entered into the European Exchange Rate Mechanism in November 2005, and joined the European Monetary Union on January 1, 2009. Headline consumer price inflation dropped from 26% in 1993 to 4.0% in 2008, and fell below 0.6% in July 2009. The current account deficit, including the cost of the second pension pillar, reached 5.0% in 2008. The general government deficit for 2009 was forecast at 2.9%, but it is now expected to run to around 5.4%. Government debt was 29.4% of GDP in 2007 and 27.6% in 2008.

Foreign direct investment (FDI) in Slovakia accounted for much of the growth in the period 2000-2008. Cheap and skilled labor, low taxes, a 19% flat tax for corporations and individuals, no dividend taxes, a relatively liberal labor code and a favorable geographical location are Slovakia's main advantages for foreign investors. The main points of economic reform remain untouched even after the 2006 elections. FDI inflow cumulatively reached $39.4 billion in 2008; the total inflow of FDI in 2008 was $1.39 billion.

Germany is Slovakia's largest trading partner, purchasing 20.2% of Slovakia's exports and supplying 19.7% of its imports in 2008. Other major partners include the Czech Republic (13% of Slovakia's exports and 11.3% of Slovakia's imports), Italy (5.9% and 3.7%), Russia (3.8% and 10.2%), Austria (5.7% and 2.9%), Hungary (6.2% and 4.9%), Poland (6.6% and 3.9%) and France (6.8% and 4.0%). Slovakia imports nearly all of its oil and gas from Russia and its export markets are primarily OECD and EU countries. More than 85.1% of its trade is with EU members and with OECD countries (86.2%). Slovakia's exports to the United States made up 1.7% of its overall exports in 2008 ($1.21 billion), while imports from the U.S. accounted for 1.2% of its total purchases abroad ($847.24 million).