Economic Recovery Loan Project
Report No: ; Type: Report/Evaluation Memorandum ; Country: Slovak Republic; Region: Europe And Central Asia; Sector: Macro/Non-Trade;
                                          Major Sector: Economic Policy; ProjectID: P008848


The Implementation Completion Report (ICR) for the Slovak Republic Economic Recovery Loan (ERL) was
prepared by the Europe and Central Asia Regional Office. The Borrower's contribution to the ICR is included as
Appendix B. Loan 3666-SK for US$80 million, approved in November 1993, was the first Bank adjustment loan
to the newly independent republic, and was part of an international effort to support Slovakia's reform program.
The Export-Import Bank of Japan cofinanced the Bank loan in the amount of US$60 million equivalent. The
IMP'S assistance consisted of a systemic transformation facility and a standby arrangement. The Bank loan, a one-
tranche operation, was fully disbursed by January 1995 and closed on December 31, 1995.

The overriding objective of the Bank's assistance strategy to Slovakia was to help accelerate the state's withdrawal
from productive sectors, rationalize the remaining state activities, and promote the development of a strong
private sector. To this end, the ERL aimed at supporting key reforms in four areas: (a) fiscal retrenchment; (b)
strengthening and diversifying the financial sector; (c) privatization, private sector development and enterprise
restructuring; and (d) a more efficient social safety net. The ERL aimed to address poverty issues through social
safety net reforms that guaranteed funding of social assistance and through measures to promote job creation and
labor mobility. The ERL was also designed to lay the ground for future adjustment and investment operations
through its support for needed policy reforms in key areas such as energy and environment. The loan contained
both upfront conditionality and commitments for further actions to be taken by the authorities after disbursement.

The loan's main objectives were partially achieved. On the positive side, the Government succeeded in achieving
its macroeconomic stabilization objectives: following three years of sharp decline, GDP rose by 4.9 percent in
1994 and by 7.4 percent in 1995, among the fastest growth in the region; export growth reached 20 percent in
1995; the current account of the balance of payments turned around from a deficit of 5 percent of GDP in 1993 to
surpluses of a similar magnitude in 1994 and 1995; foreign reserves increased five-fold and Slovakia gained
access to international capital markets; a large fiscal deficit was wiped out and inflation declined steadily to 6.2
percent in early 1996.

In contrast with these achievements, progress on the structural reforms was at best mixed. On the plus side, the
private sector participation in the economy increased from under one tenth to about two thirds; in banking there
was some progress in provisioning for bad loans and in encouraging new entrants. But on the negative side,
privatization fell short of the original expectations and became less transparent, energy prices were not adjusted as
planned, most of the social safety net reforms were not implemented, and there was backtracking on some reforms
against the spirit of the ERL. The two main factors responsible for these shortfalls were political and institutional.
A fluid political scene, with shifting coalitions and two government changes in a short period of time, led to
wavering commitment for some of the reforms. Other reforms were delayed owing to administrative capacity
constraints. As a result, the Bank has not been able to make any new loans to Slovakia or to implement fully its
country assistance strategy. But the progress attained in macroeconomic management and in the growth and
consolidation of the private sector is likely to be maintained.

The ICR rates project outcome as marginally satisfactory, sustainability as likely and institutional development
unpact as moderate. The ICR also rates the Bank performance as satisfactory. OED agrees with these ratings.
Three valuable lessons emerging from the experience of this operation are: first, although the reform program was
ambitious given the conditions prevailing in the country, and a one-tranche adjustment loan did not provide
enough influence to promote implementation of the reform agenda, it was justified for the Bank to take this
calculated risk; second, the Bank should have addressed more forcefully the need to strengthen Slovakia's
administrative capacity to carry out the demanding reform agenda; and third, one-tranche adjustment operations
are appropriate in
the case of new borrowers with an unproven track record.

The ICR is of good quality, but it does not include comments from the cofinancing agency. An audit is planned.