Estimated capital flows in 2002 and 2003 and their effect on the exchange rate

The CNB´s assumption regarding the future exchange rate profile is based on the projected future development of the balance of payments. The CNB assumes a modest decline in the current account deficit in both 2002 and 2003, caused by favourable terms of trade. This positive factor will in turn depress growth in the deficit on income caused by rising transfers of profits to non-residents. On the financial account, the CNB expects a rise in the inflow of foreign direct investment, due to an increase in the sale of state-owned property to non-residents and a simultaneous decrease in other inflows. In 2003, the inflow of non-privatisation FDI should again increase slightly, owing to an expected recovery in major investor nations. The gradual deterioration of the balance on portfolio investment contained in the prediction stems from an expected renewal of residents´ interest in investing abroad.

The key factor as regards the impact of these capital flows on the exchange rate of the koruna is that the proceeds from the sale of state-owned property to non-residents (around CZK 400 bilion in 2002 and 2003) will, under an agreement between the CNB and the Government, be deposited on a CNB account and will ensure that the remaining capital inflow will approximately cover the current account deficit. Consequently, unlike in previous years, there will be no excess supply in foreign exchange on the foreign exchange market to cause an appreciation of the koruna. The CNB assumes that the exchange rate will be stable.