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OECD Says Slovenia Needs Swift Competitiveness-Boosting Action

Brdo pri Kranju, 18 February (STA) - The Organisation for Economic Co-operation and Development (OECD) said in its 2011 Economy Survey for Slovenia, presented on Friday, that the country is recovering gradually following the financial and economic crisis, but added that swift measures for establishing balance in the economy and boosting competitiveness are necessary.

The OECD also recommends in its first report on Slovenia after the latter joined the organisation last July that the country carries out sustainable consolidation of its public finances and an even more comprehensive pension reform.

While noting that the crisis had hit Slovenia hard, the organisation said that the country was recovering and projected economic growth between 2% and 3% for this year and 2012.

Similar to other international organisations, the OECD pointed out that the export sector is making good results, while recovery of domestic demand is being hampered by a high unemployment rate and deleverage by companies and financial institutions.

Recovery will also be hampered in the short-term by consolidation of public finances, which is nevertheless necessary according to the OECD. It said that "sustainable consolidation" was of key importance for Slovenia to regain the confidence of international investors.

The organisation said in the report presented on Friday as part of a conference at Brdo pri Kranju that the consolidation strategy had to be credible and that Slovenia had to define in detail all austerity measures by 2013.

According to the OECD, there is some maneuvering space for measures also on the revenue side of the budget, for example by introducing real estate tax.

The organisation proposes that the Institute for Macroeconomic Analysis and Development become the only relevant body for making macroeconomic analyses for fiscal policy, and that the analytical and administrative role of the Fiscal Council should be boosted.

The OECD has assessed the pension reform, which is facing a referendum, as a step in the right direction, but noted that its effect on the public finances was too weak considering the long-term challenges Slovenia is facing.

The organisation proposes giving an emphasis on inflation in indexation of pensions, an additional increase of the retirement age from the proposed 65 and equalisation of the years of service criteria for retirement for men and women.

In the light of problems of Slovenian banks with bad loans, the OECD recommends that the central bank carries out stress tests for all banks to establish which are in need of a capital injection and where bad investments have to be restructured.

Also proposed are measures to increase labour market flexibility, boost effectiveness and coordination of the innovation policy, as well as the introduction of incentives for foreign direct investments. Growth of the minimum wage should meanwhile be tied in the long run only to inflation.

The State Enterprise Asset Management Agency should regularly and transparently assess costs and benefits of the state's investments in individual companies and on this basis facilitate the privatisation process, the report says.

The state-run funds KAD and SOD should meanwhile become more or less portfolio investors and mostly independent from political influence.

The majority of the participants of the conference expressed support for the report, however with certain reservations, and emphasised the issue of stability of public finances.

Labour, Family and Social Affairs Minister Ivan Svetlik agreed that the minimum retirement age should be further raised, but gradually. He added that he was not interested only in sustainability of the system, but also in decent pensions, above the level of the minimum costs of living.

The minister does not agree with the proposed curbing of the minimum wage, saying that this could lead to an increasing number of employees with insufficient pay. But he agrees with the recommendations for a more flexible labour market.

Finance Minister Franc Krizanic emphasised as problematic the declining budget revenues. If revenues do not increase, Slovenia will need additional long-term stability measures along with the existing short-term measures, he said.

Veteran economist Joze Mencinger said he did not agree with many of the recommendations, noting that structural reforms were actually about cutting social transfers. He added that it did not make sense to make any projections for 2060 regarding the pension reform.

Mencinger sees inflation as one of the possible solutions for high debt, as alternative options would probably be bankruptcies and debt restructuring proceedings in companies.

Janez Sustersic of the Koper Faculty of Management meanwhile agreed with the recommendations, saying that Slovenia was slow regarding structural reforms because of the complicated decision-making system and too little understanding for reforms.

According to him, this is why Slovenia is "slowly crawling out of the crisis" and has little chances of exiting it. The main problems now are not in the economy, but in the legal and political system, Sustersic added.

Ladislav Rozic of the ZSSS trade union confederation could not agree with the recommendations. He stressed that structural reforms would always depend on consensus of all social partners.

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