Country Study, Slovenia: Winning the Transitional Economies Race

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Privatization

In 1994, the Slovenian government took its first steps towards privatization. At first the country observed the other Eastern Bloc countries and learned from their failures. The companies or enterprises’ were allowed to choose between five privatization models, which were then approved by the Agency for Privatization.[21] Most of the companies were sold off to the workers and managers.

The citizens were given privatization coupons valued at 100,000 -
400,000 Tolars, depending on the age of the individual. The coupons could be used to buy shares or invest the money into securities. Over 45% percent of the coupons were invested into fund securities.[22] According to Price Waterhouse, over 400 enterprises have been successfully privatized and another 1000 will soon be at the same status. However, some companies, such as public utilities, national telecom, and two commercial banks have not gone through the process; the government states that these entities will undergo special privatization processes.[23]

Political Situation

On the 25th of June, 1991, Slovenia declared the end of its political ties with the former Yugoslavia. Although, the government of the former Yugoslavia did not want the republic to secede, after a mild show of military force, Yugoslavia gave Slovenia up. Since then, the National
Assembly has been the main legislative body of the Republic of Slovenia.
This national legislature consists of 90 members that are directly elected by the people for four year terms. In addition, there is the Council of
State that is elected for five years. This council has 40 members, 22 representing local interests, 12 evenly divided between employers, and 6 representing non-economic activities.[24]

Slovenia is currently governed by two dominant parties who have formed a government coalition, the Liberal Democracy of Slovenia (LDS) and the Slovene Christian Democrats (SKD). The LDS stems from the youth movement of the former communists while the SKD originates from a Christian tradition dating back before the Second World War.[25] The differences in these groups are the main reasons why there seldom is cooperation in making government decisions. However, there are other parties with greater opposition: the Social Democrat Party of Slovenia(SDSS), the Slovene
National Party (SNP) and the Slovene People’s Party (SLS).[26]

One aspect that has helped Slovenia remain stable politically is that the ethnic make-up is not extremely diverse. Almost, 91% of the population is Slovene and they are predominantly Roman Catholic.[27] (See Appendix
VIII ) This composition has allowed Slovenia to focus on economic revival rather than religious ethnic conflict, quite unlike their neighbors to the south in Bosnia-Herzogovina.

In November of 1996, Slovenia had elections and most of the incumbents were re-elected. The LDS won the most seats (25) and the
Slovenian People’s Party, conservatives, won the second largest at 19.[28]
This could cause a conflict because, both the liberals and the conservatives have gained a significant amount of power after this election. In the coming months the coalitions that form with the parties with fewer seats could be significant for the political climate of
Slovenia. The far right conservatives, United List of Social
Democrats(ZLSD- former communists), do not back Slovenia’s entrance into
NATO, claiming neutrality should be considered an option; the entrance into the EU will be supported by the ZLSD.[29] However, economists warn that
Slovenia should not rely on its economic successes in the past but instead should focus on increasing privatization and address the slowing industrial production and rising unemployment.[30] The new government needs to continue to work towards improving the economic state of the Republic if they expect to become more like a Western European country.
Budgetary and Monetary Conditions

Slovenia began to stabilize its economy before it had gained its complete independence because inflation was increasing drastically.
Although, Slovenia made a clean break to independence, there were some costs involved. Slovenia had 33 percent of its exports going to
Yugoslavia, however, with its independence Slovenia had an instant 6 percent decrease in its GDP.[31] This economic shock was small in comparison to the 38 percent decrease in industrial production Slovenia faced because of its transitional state. Slovenia stabilized its economy by October 1992. This was achieved through the introduction of a new currency, the tolar, and the creation of an independent central bank, the
Bank of Slovenia.

The financial sector plays a key role in the transition process. In
1995, the financial and market services sector comprised 14% of the GDP, the second largest contributor.[32] In addition, a strong financial sector is necessary for resource allocation and mobilization, and a prerequisite for any large-scale privatization scheme.

In 1991, there was a lack of financial regulation in Slovenia, which produced many problems. Most banks were owned by the firms to whom they lent. As a result, 30-40 percent of the loans on the books were non- performing.[33] This combined with a monopolistic structure, lead to exorbitant lending rates, preventing many viable enterprises from access to capital. In addition, a healthy banking system requires recapitalization and investment to improve service. This was not happening right away in
Slovenia. As a result, banks were audited in 1991 and in the autumn of that year, the Bank Restructuring Agency was founded to deal with these problems and to help restore competition. Now, most banks in Slovenia have been privatized except two which remain state-owned.

Monetary Policy

Facing expansionary monetary policy, Slovenia needed some financial discipline for the newly created enterprises and government, thus, they created the Bank of Slovenia. The bank was created with the objectives to stabilize prices and establish a balanced functioning of domestic and international payments. The law that mandated the Bank of Slovenia, allowed the bank to execute monetary policy, free from political control.
Another characteristic of the Bank of Slovenia that helped its success, was that the bank would only give out short-term loans to the government to cover cash flow problems. This restriction served to be effective in preventing the accumulation of deficits. In 1994 the Bank of Slovenia introduced a number of legislative acts which covered the following areas:

* accounting standards and financial statements

* methods of calculation of capital and capital adequacy

* criteria for the classification of balance sheet and off- balance sheet items

* the levels of provisioning for potential losses

* the level of exposure to a single borrower

* capital investments and fixed assets reducing the capital

This legislation was adopted with the intent to ensure safer bank operations that conform to the basic principles of liquidity, solvency and profitability.[34]

In the early years of transition 1991-1992 the Bank of Slovenia allowed several new banks to start up. Now, in 1996 Slovenia has the highest concentration of banks in their region, with 31 banks and a relatively small population of 2 million. The central bank was faced with the problem of deterring speculators to avoid any kind of banking crisis.
The central bank decided to increase the amount in minimum capital requirements for banks to $35 million. This move prevented any future mis- happenings while also pushing banks towards consolidation.

Currency

In October 1991, the Tolar was introduced. As a means of inflation- proofing, the law allowed contracts and wage agreements to be denominated in foreign currency so no exchange was required. The deposits in the banks were converted automatically on a one-to-one basis and 86 billion dinars of personal cash were converted within a short period of time. The tolar’s introduction came with ease as more than 80 percent of household monetary savings were in foreign currency deposits.[35] The Tolar’s exchange rate quickly stabilized due to a highly restrictive monetary policy which was aimed at decreasing inflation, increasing stability and strengthening the domestic currency.[36] Between 1993 and 1995 the Tolar was depreciated to reflect a real exchange rate. (See Appendix IX) This monetary policy aided in stabilizing the Tolar and making it fully convertible. On November 19,
1996, 1USD was equivalent to 137.69 Tolars.[37] In addition, the stabilization allowed for foreign investors to conduct business in USD, DM or Tolar.

Slovenia put tight controls on foreign currency movements in order to maintain the stability of the tolar. Since the introduction of the Tolar, total savings deposits have increased by over 494 billion Tolars. Savings in 1995 accounted for 23.3 percent of GDP.

Also, Slovenia has a positive balance between the foreign debt and exchange reserves. By August of 1996, foreign allocated debt had reached
$4.21 Billion and the exchange reserves were at $4.3 Billion. (See Appendix
X) This positive balance shows that the country’s economy continues to stabilize.