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Slovakia: The Slovak Crown Comes Under Exchange Rate Pressure

By Ivan Stulajter

Bratislava, 18 June 1997 (RFE/RL) -- When Czechs and Slovaks were united in one state, the Slovaks often felt the Czechs were stealing much of the limelight. Now they have two separate states, but sometimes it seems the same tendency continues. At least, that's the impression one gets when considering the case of the two crowns, the similarly-named but separate national currencies.

The attention of the international media in recent weeks has been focussed upon the troubles of the Czech crown, as it slipped inexorably downward, amid much hand-wringing over the Czechs' underlying economic problems.

But in a quieter way, the Slovak crown has also been under pressure, partly because it was caught in the spiral created by its more prominent neighbour, but also for reasons relating to the particular situation in Slovakia.

The pressure began about the same time as reports surfaced about Slovakia's 28,000 million crown deficit, that's about $ 825 million, during the first four months of this year. Foreign speculators, regarding the crown as overvalued, began an assault on its exchange rate.

An RFE/RL correspondent in Bratislava reports that the National Bank of Slovakia, which is the central bank, together with commercial banks in Slovakia were forced to take countermeasures which were not exactly cheap. It cost the central bank about one fifth of its currency reserves and the banking sector paid for this with a shortage of liquidity and a sharp increase in interest rates. The situation now appears to have calmed, and of the $ 600 million taken from Slovakia's currency reserves to support the crown, $ 200 million is already back in the reserves.

But the fundamental problems in the Slovak economy which were largely responsible for the atacks have not changed. These include weak exports, a strong tendency to import, low labor productivity, and low competetiveness. As long as the economy has the character it has, one will have to continue to count on speculators taking advantage of the situation.

The National Bank insists that the value of the crown be maintained within a parity band with a 7 percent fluctuation up or down. The majority of bank analysts agree that in the short term the Slovak crown will move to the lower border of the devaluation band in reaction to the high foreign trade deficit. But they express doubts about the long-term propect for staying inside the fluctuation band as long as the Slovak economy is characterized by the poor results it is currently achieving.

Prime Minister Vladimir Meciar speaking on Slovak Radio earlier this month categorically ruled out devaluing the Slovak currency. He said that despite the actions of foreign speculators "there is not going to be a devaluation of the Slovak crown".

Our correspondent however, notes the gloomy view of analysts at ING Baring Securities in Bratislava. According to them, the price of maintaining the current exchange rate will be extraordinarily high interest rates, an increase in foreign debt, paralysis of the interbank market, the restraining of the capital market as a result of pre-devaluation expactations, and losses by consumers as a result of administrative moves to protect the local market.

Analysts concede that increased costs of importing technology for the business sector and losses caused by company debts in foreign currencies speak against weakening the Slovak crown. But in their view, a speedy devaluation appears to be less expensive than adopting a series of costly measures which will only temporarily hold back unavoidable steps.

However the reality on the ground, at least for now, is that those temporary and costly measures will be implemented. Led by the example of the Czech government, the Slovak government has introduced a system of import deposits, and in addition has introduced an import quota on non-alcoholic beverages from the Czech Republic. Earlier, the Slovak government moreover adopted an import quota on Czech beer. Slovak importers, hit by the restrictions, were not pleased.

Nevertheless, looking at the matter from the other standpoint, businessman Julius Toth, the head of DMD Holdings, has called for a law that would ensure that 60 percent of any investment would have to be implemented through domestic resources. Pointing to the way local companies lose out, Toth says that for instance in the road construction industry, most of the necessary machinery used by local companies is imported from abroad. In addition, despite the government's road building program, no domestic firms have so far this year received orders for road construction.

This proposal and similar measures implemented or planned, represent an attempt to use an administrative lever to lessen the trade deficit by restricing imports. This is in effect a cloak for protecting ineffective domestic producers of non-alcoholic drinks, beer, construction machinery and so on and so forth. These temporary administrative closures of the market do not lead to improving the competability of individual enterprises, they tend to become instead a permanent instrument of economic policy in which the entire loss of economic effectiveness and of the natural resources of the country is greater than the costs resulting from devaluation, the bankruptcy of some enterprises and the increased level of unemployment.

One could put the question as follows: what besides administrative obstacles to imports can the current government offer Slovak businesses in the direction of restructuring the economy? Slovakia has a catastrophic international image, a high budget deficit, high taxes and social insurance payments, and low outlays for science and education. In addition, the government's envisaged economic "revitalization" package is with great probability contrary to the constitution and quite certainly contrary to market principles. And all this in a political system embedded in "clientelism" and corruption in an ideological wrapping from the 1950's.

It's still uncertain what what sort of political and economic system Slovakia will end up with, but one thing is clear: the bill for today will be high in the future.