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. The economy slowed rapidly in the first quarter of 2009–contracting 12% from the previous quarter–as the deepening recession was exacerbated by a political crisis between Russia and Ukraine that led to a 3-week disruption of Slovakia’s natural gas supply. A return to modest growth was forecast for 2010.
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 a high of 26% in 1993 to 1.4% in 2009. The current account deficit, including the cost of the second pension pillar, reached 5.0% in 2008 then moved considerably higher. The general government deficit for 2010 was forecast at 5.5%, although private sector analysts expected it to be as high as 7.0%. Government debt was estimated at 37.1% of GDP at the end of 2009.
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 remained 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.