Hawkish Ivan Sramko, governor of the National Bank of Slovakia, this year steered his country closer to euro entry, tying the local koruna to it. He also helped to navigate Slovakia’s economy through an election that brought a leftist-populist coalition to power on promises of higher welfare spending.
In November last year Sramko announced the koruna-euro peg, joining the Exchange Rate Mechanism II, which commits him to maintain the koruna in a 15% band above and below the euro for two years. “We made the decision together with the government,” he tells Emerging Markets. “And we were sure that it would be the best time. Our forecast is for Slovakia to fulfil the Maastricht criteria over 2007 and 2008, and to join the single currency in 2009.”
With neighbours the Czech Republic and Hungary delaying their eurozone entry date, Slovakia’s acceptance into the ERM II is an endorsement of the central bank’s credibility and the success of reform. All the euro member states, the European Central Bank and seven other countries already in ERM II had to give their approval.
Slovakia grew at 6.1% in 2005, the highest rate in the EU after the three Baltic states. GDP growth is expected to reach 5.9% this year, slowing only slightly to 5.5% next year: Sramko does not expect June’s change of government to lead to radically different policies.
“On one side is what the government says, and on the other side is reality,” he says of the ruling Smer Party’s plans to change to the country’s famous 19% flat rate for income, corporate and value added tax. “In reality, there will be no changes to the corporate tax regime, only income tax ... and the same thing can be said of other reforms.”
The leftist Smer party’s victory, in coalition with the two nationalist parties, unnerved markets. Promises to increase welfare spending and slow down privatization and the sale of Bratislava Airport, which was cancelled last month, made investors nervous about the budget deficit exceeding the 3% of GDP Maastricht ceiling, forcing a delay in entering the euro. However, the new finance minister has pledged to honour the last government’s euro timetable.
“What is good will continue,” says Sramko. “ The government wants to make more contributions to the poor, but it will not destroy reforms in Slovakia.”
Sramko has won praise for strengthening banking supervision in Slovakia. For Sramko, one of the highlights was to place financial market regulation under one regulator within the central bank. Securities traders, pension funds and banks had had separate regulators, but integrating the responsible agencies will make for “better mediation, and faster reaction,” Sramko says. “ It was one of our most important steps last year.” —Maria Ahmed