| BUSINESSWEEK ONLINE : NOVEMBER 1, 1999 ISSUE | ||||||||
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| INTERNATIONAL -- FINANCE
Bringing Down the Czech Crown (int'l edition) A Central Bank plan to weaken its currency angers Prague The Czech Republic, unlike most of its Central European neighbors, has always been inordinately proud of maintaining free exchange rates. Now, though, the Czech National Bank is proposing to create what amounts to a two-tier rate. The idea is to divert some direct foreign investment into a special account because big inflows have been driving the Czech crown sky-high, while the economy is in recession. ''If the state of the crown coincided with the state of the economy, it'd be 10% to 15% weaker,'' says CNB Vice-Governor Zdenek Tuma. The trouble is that foreign cash inflows more than doubled, to $2.5 billion, in 1998, and they could well reach $5.5 billion this year, thanks to government privatization programs. Prague plans to sell off such assets as Czech Telecom, carmaker Skoda Auto, and possibly even Czech Airlines. The inflows push up the currency, make exports less competitive, and threaten the republic's still-fragile recovery--growth of just 0.9% is expected this year, after a 2.3% downturn in 1998. An increasingly desperate central bank has tried to weaken the crown by cutting key interest rates 17 times since mid-1998--bringing them down to 5.75%--and lately by intervening in markets to buy euros. But those measures provided only limited relief. The bank wants long-term protection. If the CNB gets its way, it would require foreign investors buying government assets to purchase crowns at rates it would set rather than on the open market. The bank would hold the foreign currency in a separate account. That plan has angered Prime Minister Milos Zeman. He's worried that less money will flow into government coffers to finance an expected budget deficit of $1.1 billion next year. Besides, he fears that it may be a bad move to impose currency controls just as the country negotiates to join the European Union. Tension between the central bank and the government is high. But the bank will make the final decision. The plan wouldn't change the rules for investors such as Austrian supermarket chain Julius Meinl, which has opened 28 outlets in the Czech Republic in the past year. And many exporters side with the central bank in the hopes that a weaker crown will make their products more competitive. But others worry that the bank is intervening where it shouldn't. ''Diverting privatization money would mean that the normal money market wouldn't be driven by normal market forces,'' says Petr Benes, deputy CEO of Investicni a Postovni banka, the country's third-largest bank. Maybe, but at this point, the central bank is willing to step in wherever it can. Never mind Czech national pride. By James Drake in Prague _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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