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Slovak crown celebrates 10th birthday

DURING its first 10 years, the Slovak crown has gone through an exchange-rate regime change and has had its stability tested several times, most seriously in 1998.
After Slovakia was declared independent in 1993 and the new currency was born, the National Bank of Slovakia (NBS) adopted the same system of pegging the exchange rate to free currencies that had been used by the former Czechoslovak State Bank (SBCS).
The crown's fluctuation range - the range in which a currency's rate can freely move without administrative interventions of the central bank - was first set at +/-0.5 per cent and was later widened to +/-0.7 per cent from the central parity.

DURING its first 10 years, the Slovak crown has gone through an exchange-rate regime change and has had its stability tested several times, most seriously in 1998.

After Slovakia was declared independent in 1993 and the new currency was born, the National Bank of Slovakia (NBS) adopted the same system of pegging the exchange rate to free currencies that had been used by the former Czechoslovak State Bank (SBCS).

The crown's fluctuation range - the range in which a currency's rate can freely move without administrative interventions of the central bank - was first set at +/-0.5 per cent and was later widened to +/-0.7 per cent from the central parity.

Gradually, the basket of reference currencies was reduced to contain only two currencies - the US dollar and the German mark.

The crown's first serious crisis came in May 1997, when an outflow of short-term foreign capital from the country initiated larger purchases of foreign currencies by domestic buyers, causing the crown to depreciate to the lower limit of its fluctuation range. The NBS intervened indirectly, and the situation stabilised, returning the crown to its previous level, in the low 30s to the US dollar.

In 1998, the crown's stability faced an even greater test ahead of the general election. Because of an expectation of political and economic changes, foreign investors started withdrawing short-term investments, while domestic banks sought to stock up on foreign currencies.

Despite the central bank's attempts to fix the crown's rate by flooding the market with foreign currencies, the currency continued to weaken. After the NBS had spent some $960 million on this activity - around 30 percent of its forex reserves at that time - the central bank decided to radically change Slovakia's exchange-rate system.

The fluctuation range was cancelled and a new floating exchange-rate regime was introduced. This meant that the crown's rate changed according to supply and demand on the market. The German mark was chosen as its reference currency, to be replaced by the euro on January 1, 1999.

Analysts say the floating exchange rate has proven to be effective. Now the NBS intervenes only occasionally on the forex market, most recently at the end of 2002, when the currency strengthened to all-time highs against the euro.

On February 14, the crown was trading at 41.96 to the euro, and 38.92 to the US dollar.

Compiled from press reports

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