Government and Central Bank join forces to fight against strengthening of koruna

The strong Czech crown has been causing concern for economists for several months now, as its value increases to record levels. This development has been extremely unfavourable for Czech exporters and the government and the Czech National Bank have joined forces in an effort to stop it. Vladimir Tax has the details.

Although the Czech Prime Minister Milos Zeman recently said that he had no objections to a strong crown, the expected massive foreign exchange proceeds from privatisation of the Czech power industry and Czech Telecom could send the crown even higher - this would seriously affect exports, one of the main driving forces of the Czech economy.

On Tuesday, the Prime Minister Milos Zeman, finance minister Jiri Rusnok and the Czech National Bank governor Zdenek Tuma met to discuss a strategy to prevent further appreciation of the Czech Crown. Although no details have been provided as yet, the news of such an agreement was enough for the market to react, although the initial drop was soon compensated for by renewed moderate growth. Another factor that helped bring the crown down were media reports on the likely postponement of the privatisation of the Czech power utility CEZ.

On Tuesday morning, the crown depreciated from 32.15 CZK/EUR to 32.35 CZK/EUR. Later in the day, it traded at around 32.30 CZK/EUR. In a long term comparison, two years ago, the crown stood at 37 crowns per euro and 42 crowns per US dollar, whereas now, it trades for around 35 crowns per dollar.

Economists see three possible ways to reduce the impact of the privatisation revenues upon the exchange rate: Firstly, the Central Bank could buy up a certain amount of the foreign exchange from the government for Czech crowns. Second, the government could retain part of the privatization income for future foreign exchange expenditures. And finally, foreign investors could pay partly in Czech crowns.

Analysts say the crown's strength is mainly the result of the knock-on effect of high levels of foreign direct investment in recent years. While on the one hand, it encourages a rise in labour productivity, helps ensure price stability and keep interest rates down, on the other, it represents a major problem for exporters, as it makes Czech goods more expensive and therefore less competitive abroad. Yet there is a positive aspect even to this: as Prime Minister Milos Zeman said recently, it encourages exporters to raise productivity and be more innovative, which should help them prepare for keener competition once the Czech Republic joins the EU.