The National Bank of Slovakia (NBS) said on February 10 the crown was unlikely to come under pressure despite a new foreign exchange law which scraps the current limit on hard currency purchases by companies and individuals. The current law limits individuals to purchases of hard currencies equal to 60,000 crowns ($1,700) per year.
The new law, approved by parliament last week, will come into effect on April 1, but the NBS is not afraid that hard currency reserves will ebb. "I don't expect people to start a massive exchange of crowns for hard currencies after the law is in force," said Karol Mrva, chief of the NBS's trade and foreign exchange department.
Scrapping the annual limit on hard currency purchases is just one in a string of amendments to the foreign exchange law, approved by the NBS last year and aimed at the further liberalization of capital account operations to meet OECD standards.
Mrva continued that high interest rates are helping to sustain the crown. "Interest rates are still high, which makes it more profitable for people to keep deposits in crowns. It appeared to me that the 60,000 crown limit was already high enough for those who wanted to buy hard currencies, because even this limit was rarely used to the full extent," he added.
According to the latest data, the overall volume of combined household deposits in banks totaled 213.3 billion crowns as of November 30, 1997. Corporate crown deposits totaled 125.3 billion at the same time.
The new law also allows Slovak companies to hold hard currencies in their foreign exchange accounts without NBS approval and abolishes the so called "offer requirement for legal entities." The regulation currently obliges any legal entity to offer any received sum of foreign exchange to the NBS first, and only if the central bank is not interested in buying it for crowns may the entity keep the hard currency on account.
In the meantime, consumer price index jumped in January to 7.2 percent year-on-year, up 0.8 percent from last December, but analysts blamed it mostly on price deregulation and sales tax increases.
"This was partially expected because there were changes in regulated prices in telephone rates and other areas," said Martin Barto of ING Barings.
The Slovak Statistical Office (ŠÚSR) said telephone and related charges increased by 39.6 percent in January after they had been moved to the 23 percent value-added tax band from the previous six percent level. A similar administrative change boosted the prices of alcohol and tobacco products by 17.3 percent.
Charlie Robertson, of the London-based Hilfe research organization, said that despite the once-and-for-all nature of the January boost, the government may find it hard to meet its six percent year-end inflation target. "It could cause slight complications for the government," he said. "Seven percent looks more realistic."
Robertson said the biggest threat comes from increases in foodstuff prices such as vegetables, which rose 18.9 percent in January. "The only possible danger is if food price growth is sustained," he said, "then inflation is going to pick up and there is little the authorities can do about it."
Both Barto and Robertson said the government and the central bank were unlikely to respond to the figures with any policy changes.
"The NBS has declared that it would not change its foreign exchange policy this year," Mrva confirmed.
Author: Robin Shepherd and Peter Laca
