Inflation report - attachment
I/2002

Strategy for dealing with the exchange rate effects of capital inflows from privatisation of state property and from other foreign exchange revenues of the state

At the end of 2001, the nominal exchange rate of the koruna appreciated sharply against the euro and also in terms of the effective exchange rate. The extent of the appreciation was inconsistent with the development of fundamental factors. Underlying it were market expectations that, in line with the Government's pronouncements, the year 2002 will see a multiple increase in privatisation proceeds in the Czech Republic and that sooner or later these revenues will - to a comparatively large extent - have to be converted on the foreign exchange market. To forestall any further unbalanced nominal appreciation of the exchange rate, the CNB and the Government agreed on a joint strategy to deal with the effects of increased foreign exchange revenues of the state on the foreign exchange market. The joint document of the Czech Ministry of Finance and the Czech National Bank was discussed and approved by the Government at its session on 16 January 2002.

The strategy follows on from the 2000 document Monetary Policy Strategy in a Period of Foreign Capital Inflow. The strategy is based on three groups of measures:

  1. The first group is based on a stocktaking of the existing and potential commitments of the state. The measures are as follows:
    1. In 2002 the Ministry of Finance (MoF) will not issue bonds denominated in foreign currencies;
    2. In 2002 the ministries and selected state-owned institutions will, in co-operation with the MoF and the CNB, meet their foreign exchange commitments out of the proceeds from privatisation;
    3. The National Property Fund's proceeds from the sale of Komerční banka set aside for settling the costs and losses of the Czech Consolidation Agency (ČKA) will not be converted on the foreign exchange market.
    4. Priority in dealing with other ČMZRB foreign exchange commitments will be given to converting koruna into euro with the ČKA;
    5. ČEB will ensure its prospective needs for financing foreign currency assets through a transaction with the State;
    6. The MoF will keep the funds acquired from the de-blocking of Russian debt on the CNB's foreign exchange account until at least 31 May 2002. These will be converted into koruna using the mechanisms stipulated in Government Resolution No. 74 of 16 January 2002.
  2. The second group of measures focuses on ways of affecting the course of future privatisation transactions. It was agreed that future negotiations with privatisation advisers and investors will be directed at ensuring that part of the privatisation price is paid in Czech koruna using koruna credits.
  3. The third group of measures is based on an agreement that the remaining privatisation (and other foreign exchange) revenues which the state is unable to keep on the foreign exchange account at the CNB and for which it fails to agree payment in koruna with the investor will be purchased directly from the State into the CNB's foreign exchange reserves. To eliminate or mitigate the CNB's losses from sterilising these direct conversions, and to partially address some of the as yet unsettled past relations between the Government and the CNB, the following solution will be applied:
    1. an amount with a koruna equivalent of CZK 25 billion will be deposited on a non-interest-bearing foreign exchange account at the CNB.
    2. the remaining foreign exchange resources of the State (both the existing resources and those acquired in the future) which will need to be converted into koruna will be purchased directly from the State into the CNB's foreign exchange reserves. To offset partially the future losses of the CNB arising from the sterilisation of these additional foreign exchange reserves, the CNB will charge the State a fee for direct conversions of foreign exchange revenues according to an agreed scheme.

The full versions of the background document for the Government and of the Government resolution are available on the websites of both institutions: http://www.cnb.cz
http://www.vlada.cz