Listen up. NBS head Vladimír Masár lays down monetarylaw.TASR
National Bank of Slovakia (NBS) Governor Vladimír Masár said on October 21 that the creation of a new Slovak government could be a positive signal for the crown and its stability. The role of the central bank, he added, would be to defend the crown at "acceptable" levels and to maintain a cautious monetary policy.
Masár also said that the economic programme of the new cabinet should focus on stabilizing Slovakia's current economic imbalances. He was referring mainly to the growing current account deficit and the burgeoning state fiscal shortfall.
Speaking at a press conference in Bratislava, Masár and senior central bank officials reiterated that stability of the crown would remain the bank's main goal even though it had abandoned the currency's fluctation band and abolished its fixed exchange regime at the beginning of October.
The Slovak crown has recently recovered most of the losses it posted after the flotation. The currency is currently trading at around 10 to 12% below the former mark/dollar basket parity, although it did fall at one point to as as low as minus 20% against the former midpoint shortly after the fixed regime was cancelled.
Masár said that according to the NBS, the crown was stabilizing on the interbank market. He added that the current exchange rates of the crown were acceptable to the central bank.
The markets received Masár's words with equanimity, the crown remaining steady throughout the day. "London has been quiet, and it's pretty stable. What Masár said was important, but confirmed our assumptions," one dealer said.
Asked whether the NBS thought Slovakia's economic fundamentals justified the crown's current strength, Masar responded: "The crown has found its place on the market according to market forces. If the markets think that the fundamentals are there for the crown to be where it is, we can only accept that." The governor added that "economic fundamentals are adequate to support the crown's strength, the question is whether the crown's strength is adequate for the fiscal situation."
The Slovak fiscal deficit has already exceeded the maximum allowed limit planned for the whole of 1998, totalling 8.4 billion Sk ($240 million) in the first nine months. The state budget was originally planned with a maximum fiscal shortfall of 8.0 billion Sk.
The current opposition parties, which are expected to form a new Slovak government, have said the full year fiscal gap could total up to 20 billion Sk, and that the state would have to start next year with a provisional budget.
But Masár said that this in itself was not necessarily a negative factor for currency stablity. "Looking back to 1995 when we had a provisional budget, the fact that budget expenditures were covered by revenues was a positive factor," he said. "In this sense, a provisional budget could be a positive thing. However, what will prove important is how long the provisional budget will last."
Speaking about the new government's programme, Masár said the central bank will have to wait to see its economic priorities and only then would be able to work out its monetary programme for next year. The monetary programme would support the government's economic programme as long as the latter was acceptable to the NBS, Masár added.
However, the central bank governor warned the new government against complacency. "The government cannot think that the change in the foreign exchange regime is the definite solution to all problems. This move must be followed by a realistic government economic programme...The monetary programme and government economic programme should be compatible."
The crown's flotation and its subsequent depreciation could help improve some economic imbalances, such as the foreign trade deficit, but this effect would be only a short-term one, Masár said. "The central bank cannot have short-term goals. We are looking at the medium and long-term horizon, and from this aspect a stable currency is much more favourable," he added.
