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.

       Furthermore, Slovenia has managed to get credit ratings higher than those of Greece and other countries with longer histories of being democracies and having market economies.[38] As of May 1996, Slovenia had the following Country Credit Ratings : [39]

                              Moody’s Investor’s Service          A3

                              Standard’s & Poor’s                     A

                              IBCA                                            A-

In addition, according to Institutional Investors, Slovenia ranks 47th among 135 countries, with regards to potential areas for investment.[40]