A sharp depreciation of the Slovak crown, followed by an anticipated tightening of the monetary policy of the National Bank of Slovakia (NBS), can help the country to cut its ballooning foreign trade deficit, said macroeconomic analysts in the wake of the crown's October 1 flotation. On the other hand, they said, the weaker crown will also probably lead to higher consumer price inflation and may also halt Slovakia's impressive economic growth.
Analysts said that the crown's decline against major currencies after it was floated freely at the beginning of October could help to curb growing imports, mainly on the consumption side. On the other hand, a significant improvement on the export side is not expected given the high import burden on Slovakia's exports.
Analysts also estimated that the weaker crown could help cut the burgeoning trade deficit to betwen 9 and 10% of Gross Domestic Product. It stood well above 11% of GDP in 1997 as well as in the first half of this year. "I think it could help the import side of the trade balance. But it is too close to the end of the year and many contracts are already signed, so the effect will probably be limited," said Martin Barto, an analyst at ING Barings.
According to the latest figures, Slovakia's foreign trade deficit totalled 51.26 billion crowns in the January-August period of this year. The central bank has repeatedly warned that a trade deficit exceeding 10% of GDP was the main risk for the economy. It has said that a safe level for a Slovak-type economy was 3% of GDP.
The NBS said that growing trade imbalances and the large state budget deficit were among the main reasons for abolishing the crown's fixed exchange regime. Analysts said that they expected the crown's decline, caused by its flotation, would exert upward pressure on consumer prices. They forecast the move to add 3 to 4 percentage points to consumer price inflation by the end of this year.
The first reaction to the fall of the crown has already been seen in some shops, where prices of durable goods such as cars, refrigerators and microwaves increased significantly in the first days after the flotation was announced. However, both analysts and central bank have said they did not expect the weaker crown to cause a sharp increase in consumer prices.
The central bank cited the abolition of the import surcharge (3%) at the begnning of October as one of the forces that could push prices of imported goods downwards. Analysts, however, said it would take a tight monetary policy from the central bank, combined with a tough fiscal policy from the new government, to keep prices down.
"I think the impact on inflation will not be too big if the central bank continues to run tight policies to prevent an inflationary spiral," Barto said.
GDP real growth is also likely to slow significantly as a result of the weaker crown and restrictive monetary and fiscal policies. Analysts predicted a drop to between 4 and 4.5% at the end of 1998, compared with 6.1% in the first half of this year.
"The new government can not afford to spend so much on projects such as motorways. The budget cuts, tight monetary policies and the weak crown will slow growth....but we should not get into the Czech situation where they are now experiencing an economic recession," said one analyst from a Slovak bank.