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25 Development of the Czechoslovak Koruna

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25 Development of the Czechoslovak Koruna FROM HISTORY DEVELOPMENT OF THE CZECHOSLOVAK KORUNA EXCHANGE RATE 25 DEVELOPMENT OF THE CZECHOSLOVAK KORUNA EXCHANGE RATE Ing. Radovan Majerský Continued from issue 1/2004 Development of the CSK exchange rate creation of a foreign exchange market in Czechoslo- over the years 1989 – 1990 vakia. Foreign exchange resources were assigned normatively on the basis of foreign exchange ear- The situation in 1989 displayed all the signs of nings of exporters and importers. It was traded in a top-down managed economy. All prices whether “lots”, where 1 LOT = CSK 10 000. Later the market for goods or work were administratively governed. In was expanded to include the public and government 1988 the attempts to introduce a real, single foreign organisations. exchange rate began to manifest themselves, where According to the Economic Reform Scenario four there had been long term monetary disequilibrium. variants of progressive amendment were at first set From 1 January 1989 the dual exchange rate was out for the Czechoslovak koruna exchange rate, replaced by a single exchange rate, which however which was later reduced to two variants. was still different for trade and non-trade payments. The first variant represented setting the koruna This exchange rate was created on the basis of lin- exchange rate at the level of approximately 20 king the official exchange rate and the exchange rate CSK/USD. This variant was supposed to be more coefficients and margins. As a consequence of the advantageous from the short-term social aspect; its world-wide tendency to exclude gold from currency disadvantage however was the very low value with systems the Czechoslovak koruna’s link to the gold regard to the overall state of the Czechoslovak eco- content was cancelled. The currency basket remai- nomy. There also existed the danger of further deva- ned, only the weighting of the individual currencies luations. represented changed. This concerned the following The second variant forecast setting the Czecho- changes: USD 0.3287; DEM 0.4093; ATS 0.1232; slovak koruna exchange rate at a level of 24 – 30 GBP 0.0905 and FRF 0.0482. CSK/USD. An advantage of this was the possibility of covering further smaller devaluations; a disadvanta- CSK currency basket in 1989 ge was the quite significant social impact. In the end the variant with the higher rate of devaluation was GBP 9 % USD 33 % adopted. ATS 12 % The process of bringing the Czechoslovak koruna exchange rate on to a realistic basis took place over three stages, representing in practice the devaluation of the foreign exchange rate: 1st stage – 8 January 1990, 2nd stage – 15 October 1990; 3rd stage – 28 December 1990. FRF 5% The Czechoslovak koruna exchange rate in this DEM 41 % period was unrealistic, which was the main reason that led to the later three devaluations. A priority aim of these devaluations was to put the koruna exchan- November 1989 came to be a breakpoint not only ge rate on a realistic footing vis-à-vis other currenci- as regards the political situation, but also in the eco- es and to support the process of bringing the balan- nomic field. It represented the beginning of a com- ce of payments into equilibrium. The balance of plex process of the economy's as well as a whole payments in relation to freely tradable currencies society's transformation. The main aims of economic had a negative balance, while in relation to the Sovi- reform were outlined in the memorandum for the et rouble it had a positive balance. International Monetary Fund and in the Economic The first devaluation was made on 8 January 1990 Reform Scenario. In 1989 foreign exchange auctions and unified the exchange rates of trade and non- were introduced, representing the beginning of the trade payments at the level of 17 CSK/USD. This set- BIATEC, Volume XII, 2/2004 FROM HISTORY 26 DEVELOPMENT OF THE CZECHOSLOVAK KORUNA EXCHANGE RATE ting of the exchange rate vis-à-vis freely tradable CSK currency basket in 1990 currencies represented a devaluation of approxima- tely 19%. The koruna exchange rate thereby adjus- ted also in relation to the rouble, which in the final FRF 4 % USD 31 % ATS 12 % consequence meant a revaluation of the Czechoslo- vak koruna by 10%. In unifying the exchange rate for trade and non-trade payments a devaluation also occurred, for trade payments by 14%, for non-trade payments by 44%. Concurrently a form of agio and disagio vis-à-vis the Soviet Union, Bulgaria, Hunga- ry and Poland was introduced. For the rouble the CHF 7% DEM 46 % agio (disagio) introduced was in the amount of 10%, i.e. an oscillation in the range from CSK 8.10 to CSK 9.90. In relation to Hungary an agio (disagio) of 10% was used, and for Poland and Bulgaria an agio ments at the level of 28 CSK/USD, which meant (disagio) of 5%. For tourism a new exchange rate a depreciation against the exchange rates of trade was also set, citizens could purchase foreign curren- and non-trade payments by 16%, but concurrently cy at the tourist exchange rate of 38 CSK/USD. This an appreciation of the tourist exchange rate by 12%. exchange rate was derived from the market exchan- The Czechoslovak koruna exchange rate since 1981 ge rates existing on the foreign exchange markets. had been set on the basis of a currency basket of Following the implementation of the first devaluati- five currencies of advanced economies. The shares on, positive changes were expected, which nonethe- of these currencies were changed for the first time in less did not occur. Economists forecast that there 1989. The second change came into effect in conne- would be changes mainly in the field of the balance ction with the third devaluation of the koruna. The of payments. The export ability of enterprises did not weightings of the individual currencies in the curren- strengthen, indeed there continued to be more than cy basket were adjusted as follows: DEM 0.4552; a 30% loss on exports (in the field of freely tradable USD 0.3134; CHF 0.0655; ATS 0.1235; and GBP currencies). In consequence of the devaluation and 0.0424. increase in export opportunities the export grew by Another important step, with effect as of 1 January only 16%. Czechoslovak enterprises in their expec- 1990, was the introduction of an import surcharge in tations of further devaluations paid for imports of the amount of 20%, suppressing domestic demand foreign production in cash or in advance, which had for foreign exchange. In practice this meant a further the consequence of leading to a worsening in the depreciation of the Czechoslovak koruna exchange balance of payments. rate to the level of 33 CSK/USD. The second devaluation was made on 15 October These changes were the basis of extensive mea- 1990. It was caused by the behaviour of enterprises sures in restructuring the Czechoslovak economy. that attacked the foreign exchange reserves of Setting the optimal value of the koruna became banks, paid for imports in cash and in advance. Fore- a subject of various discussions. Some claimed that ign exchange reserves of Czechoslovakia at that the exchange rate was exaggeratedly devalued. Rep- time fell to the level of USD 1 billion. The Czechoslo- resentatives of the State Czechoslovak Bank justified vak koruna exchange rate was adjusted to the level their approach by the fact that the exchange rate set of 24 CSK/USD. The devaluation was in the extent of in this way would cover in the future further minor approximately 55% against the preceding value. Fol- devaluations. The suitability of the foreign exchange lowing the adjustment of the exchange rate also policy applied was confirmed by the fact that it was domestic demand for foreign exchange fell and not necessary to adjust the foreign exchange rate began to equal the supply of foreign exchange within over the course of the following three years.The Inter- the country. The basic aim of this devaluation was to national Monetary Fund proposed a further devalua- reduce domestic demand for foreign exchange and tion by 18%. Developments however have proven that to bring it into balance with supply, which was parti- this was not necessary in the period and the Interna- ally fulfilled. tional Monetary Fund’s fears were ungrounded. In the process of bringing the koruna exchange Maintaining a stable exchange rate has been rate on to a realistic footing a third devaluation was essential for further economic reform steps in the made on 28 December 1990. This devaluation unifi- country. In Czechoslovakia there was an effort to int- ed the exchange rates for trade and non-trade pay- roduce internal exchangeability of the koruna, libera- BIATEC, Volume XII, 2/2004 FROM HISTORY DEVELOPMENT OF THE CZECHOSLOVAK KORUNA EXCHANGE RATE 27 lisation of external relations and price liberalisation. CSK currency basket in 1991 The stability of the foreign exchange rate has limited possibilities for speculation and created favourable ATS 8 % FRF 3 % conditions for foreign investment. USD 49 % Development of the CSK exchange rate over the years 1991 – 1992 As at 1 January 1991 internal convertibility of the DEM 36 % Czechoslovak koruna was introduced. This strategy CHF 4% was a component of the Economic Reform Scenario. Internal convertibility allowed Czechoslovak subjects with a foreign trade authorisation to purchase con- began to call for a division of the federation. The vertible currency at commercial banks (for settling exchange rate was set with the help of a currency liabilities resulting from the import of goods and ser- basket of five currencies in these weighting ratios: vices from abroad).
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