Still on course

(Prague Business Journal, 16.10.2000, Page: 20)

CNB VICE GOVERNOR ZDENĚK TŮMA TALKS ABOUT CURRENCY RATES, CURRENT ACCOUNTS AND THE FUTURE OF THE CENTRAL BANK
* When economist Zdeněk Tůma was brought back to Prague from his London job with the European Bank for Reconstruction and Development (EBRD), the Czech National Bank was perhaps not the best bet.
* It was February 1999 and the banking board had been wracked with infighting between two camps: the inflation hawks, represented by then-Vice Governor Pavel Kysilka; and the conservatives, led by Governor Josef Tošovsky, who in mid-1998 returned from a six-month stint as prime minister.
* There was speculation as to which way Tůma might go for' or `against' the governor but he has managed to steer his own course at the central bank, by many accounts.
* A year and a half later, both he and the other vice governor, Oldřich Dědek (Kysilka has since departed), are under a microscope as the CNB leadership looks set to change. Tošovský has applied for a vice governor's spot at the EBRD, only giving up that pursuit on Oct 5.
* The stakes are high for 39-year-old Tůma. After a brief academic career, he worked as adviser to Minister of Industry and Trade Vladimír Dlouhý between 1993 and 1995. Then he took a job with the influential head o f Patria Finance as his chief economist-something that has provided opponents with political ammunition, since Patria shares parent companies with Československá Obchodní Banka, the inheritor to the IPB empire.
* Tůma joined the EBRD as executive director for the Czech Republic in summer 1998, just after returning from a trip to the north saddle of Mount Everest. Climbing to the top o f the CNB may prove more difficult: the ground rules are in flux, the legislature has mounted an assault of its own in the form of a bill on the running of the central bank, and much lies in the hands of the governor himself.
* But what's more important, the Czech economy is finally back on its feet. Economists and bankers, including within the CNB, are revising their predictions. Even Tůma is pleasantly surprised, he said during an interview last week with Prague Business Journal News Editor Hana Lešenarová. But he added that there were still issues that troubled him, especially growing government spending and the widening trade deficit. The following is an edited version of that conversation.

Q: What is the atmosphere within the bank, given the ongoing debate about the salary cuts and the CNB bill, and the announcement by Governor Tošovský that he is leaving his post?
A: Well, it's quite natural that this situation increases uncertainty, and it's hard to say anything more about that. There has been some uncertainty for a couple of months, but on the other hand it's quite obvious - at least I perceive this situation as very temporary - both in terms of the potential departure of the governor and the [CNB bill]. The law will be approved in the end. And although there might be some legal disputes in the future, Parliament is going to approve the law - so it will go into effect. And the governor has already decided to withdraw his application for the EBRD job.... I think that it's very unfortunate on the side of the EBRD that the management and the president weren't able to make the appointment. I appreciate the decision by Mr. Tošovský because I think that it's appropriate to handle this situation this way as it was so slow.
Q: What was the reaction within the bank on June 5 when Mr. Tošovský announced he was leaving the bank to go to the EBRD? Were you surprised? Or were you angry that he was leaving when the bank was facing such tough times from Parliament?
A: You must distinguish persons and institutions. This institution is very well established, and I think the former board did a good job. It works relatively well, which doesn't mean that there is no room for improvement. So I believe that this institution would work quite well even without present members of the board, including Mr. Tošovský. This institution, the Czech National Bank, is not Mr. Tošovský, so I believe that this institution would survive his departure. I have great respect for him, so I didn't have any problem with his decision. He didn't speak too much about his reasons for his decision, but I can understand it and I respect it. It's his decision.
Q: You said earlier that you think this state in which the governor is getting ready to leave is not going to last very long. Do you have any idea how long before he is going to be gone and before you will have seven board members again?
A: It depends. Well, if he had left, it would have depended on the president [Václav Havel]. But nevertheless I would expect that the president would appoint somebody really soon after the departure because it's not healthy for an institution not to have the full management.
Q: Do you have any ideas on whom the president is going to appoint?
A: No, because Tošovský ... might decide to leave the bank early or he might decide to stay on.
Q: Do you think it's possible that he might stay on despite all this?
A: I think it's possible.
Q: Really?
A: Yes.
Q: Let's say he did leave and the president appointed somebody Would that somebody be you or the other vice governor, Oldřich Dědek, or would it be somebody completely different?
A: Well, what I see is only speculation in the press, and that speculation is mostly about Mr. Dědek and myself. But as long as this decision depends on the president, I can imagine that a person outside of the bank might be found as well. But it's not my job to decide or to look for good candidates.
Q: Would you want that job?
A: I wouldn't say no if I was asked.
Q: If you were to evaluate the time you've been at the bank, how does it compare to your previous job with the EBRD?
A: I have not been disappointed so far. When I was at the EBRD, I thought it was a very interesting institution but I thought that the job in the Czech National Bank would be more of a challenge for me. It meets my expectations and preferences. And so far I am quite happy and satisfied with the work.
Q: What has changed during your tenure in the bank?
A: We are on the right track toward increasing the transparency of this institution. I consider a very interesting and important point the breaking out and approval of our medium-term monetary strategy until the year 2005. I also see improvement in our communication with the government and the Finance Ministry. Here, we have already reached some achievements, for instance communication regarding the medium-term monetary strategy; regarding our inflation target for 2001; regarding, let's say, certain cooperation on the foreign capital inflow. These are quite important achievements, or improvements. What I would also emphasize is another issue - the [year and a half] was a period of getting out of recession, so it was quite important to set a monetary policy appropriately.
Q: Since you mentioned the economy - where is it right now? We seem to be constantly getting positive numbers from all over the place.
A: This is another change during the last year, and half-year, because when I joined the bank I wasn't very optimistic regarding the Czech economy and the economic growth in the short term. But during the last two years I believe - although it's quite difficult to prove in a quantitative way at this moment - that there are positive changes on the supply side of the economy. And this is an open issue for us to analyze these changes on the supply side. Today I am very optimistic that economic growth is at least double our initial expectation at the beginning of this year, and it's very likely that growth will be about 2.5% this year. What I consider very important is that this growth is balanced. That is, I don't see any imbalances, such as strong inflationary pressure, or strong pressure on the macroeconomic area. It's true, however, that there has been some worsening of the current-account deficit, but it's largely associated with the price of oil and on the exchange rate of the euro. It has led to a nominal worsening of the current account.
Q: Is there anything you can do about the current account as the central bank, or can you rather just sit and hope it improves?
A: Well, the primary objective of monetary policy is to keep price stability, and we can hardly influence or hardly set up any objective in this area. But obviously if there aren't any inflationary pressures, I would say that it would be helpful. First of all, the price stability and then stable macroeconomic framework is quite important. We don't have any objectives in this area. Obviously, if there is some significant worsening of the current-account deficit, we must analyze what the reason is and then we should speak. If we don't have suitable policy tools, we must speak to the government and we must agree on a policy mix, which would be suitable for the situation.
Q: Do you think it's likely to happen? Is the problem serious? [In 1997 the current-account deficit reached 8% of GDP, setting the stage for the sudden outflow of short-term capital that led to a currency crisis]?
A: I wouldn't worry so much at this moment. Because as I said it's quite obvious that the economy is going up, and that's why I said the analysis of the external sector is one of the challenges for us. So, the analysis is the base, and only afterward we can consider what to worry about. What we emphasized several times is the development on the fiscal side in the medium term. That can also be closely associated with this issue, because the fiscal expansion can have some implications for the external sector as well. So on one hand we appreciate the effort on the side of the Finance Ministry to keep the budget in balance, but on the other, the area of public finance requires significant reforms and this is what we're missing. We don't see any changes or any moves in this direction. But in the medium term, it can lead to a situation that the economy is growing accompanied by further fiscal expansion. There is also the danger that it can be influenced by the political cycle - because elections would be approaching, and it's not clear that the government would have enough courage to start substantial reforms of public finance before that.
Q: What kind of reforms?
A: Some of the reforms are public finances should be more transparent, and we can already see two tendencies. First, there are attempts to consolidate transition institutions. Secondly we can see setting up some new funds out of the budget funds, although it concerns budget-type expenditures, such as housing funds. The issue of transparency is one. Furthermore, mandatory expenditures amount to approximately 85% of the whole budget, so the budget is being pressed more and more by these expenditures. And reforms in this area should start as soon as possible because if it is postponed until the next elections and the reforms start after the elections, then that's relatively late and pressures on the fiscal side can be very strong.
Q: What's the optimum level?
A: I don't have the exact figure. This is not about figures, it's about political decisions. Another challenge for the government and for the public finance can be a certain fiscal decentralization, which can be expected. So this process of reform of state administration has not been fully completed yet from the legal point of view. And it also has some implication for financing of the administration.
Q: What do you expect from this government?
A: I don't want to speak about issues outside of our field. At this moment, cooperation with the government is pretty good, such as the agreement on how to handle inflows or receipts from abroad from privatization.
Q: What's your view on the pieces of legislation that are to significantly change the position of the Czech National Bank - the bill on the CNB and the constitutional amendment?
A: I wouldn't worry so much about the constitutional changes, where probably the most important and the most discussed is the change in the appointment of the board. I understand that you can have different models, and I can imagine that even the model that is proposed can work. In fact, my opinion is different, that from the point of view of the independence of the bank the better partner for the president would be the Senate. On the other hand, from the point of view of cooperation I can imagine that the partner would be the government. Nevertheless, if the government is the partner for the president and if the government makes the nomination, then I would appreciate the principle of overlapping contracts. Because in this way it can happen that the government would nominate five people within half a year, because four people were replaced at one moment and the governor was appointed a couple of months ago. This could lead to significant changes in monetary policy, and I see that as potentially dangerous. But principally I wouldn't oppose changes in this area. What I worry about is the financial independence of the bank. I don't think it's reasonable that the budget of the Czech National Bank should be approved by the Parliament, although it's only its operational and investment budget. Firstly, it's not technically easy to do - to distinguish expenditures according to individual activities. The law says that it would approve the budget's operational investment: that means the budget that is not associated with the main goal of the central bank's activity. But looking at the law on the Czech National Bank, it specifies activities that can be done by the central bank and we don't have any intention to do anything else. And the law is quite specific on what we can do. So the question is what Parliament approves. On one hand, the obvious main activity is monetary policy, but banking supervision also belongs to important activities of the central bank. But we take into account other activities, like currency distributions and payment settlement, because they are all associated with these activities specified by law. Secondly, if somebody controls the budget of any institutions, in the end it controls the institution and the decision-making in this institution. And that's also why the European Central Bank (ECB) and the European Commission (EC) were opposing this new principle very strongly.
Q: What's your prediction? Is it going to stay in the bill?
A: It's difficult to say. Parliament seems to be determined to approve the bill in this version, so for me it's very hard to assess the position of the ECB and EC. It's true that we will not join the system of European central banks in the next two years, so obviously it's possible to have a law that would not be fully compatible with principles of the system of European central banks for some time. It's possible. But I don't think it's good that the move in the direction of harmonization of the legislation in our direction would make this exception.
Q: Are you concerned about the salary cuts as well?
A: Yes, that's another important point. Firstly, it's a question of how to interpret the law because it's relatively vague. And secondly, if it's interpreted in a very strict sense, and if we are pressed to set up wages according to the state administration then it would lead to departure of ... let's say to worsening of our human capital in the bank. And in the medium term it can influence the functioning of this bank. This institution is not the state administration. People who work in the area, for instance in dealing department, banking supervision and many other professions, it's impossible to qualify people like that.
Q: Have any of them already left?
A: No. It might happen within weeks. It's not really an immediate problem. I wouldn't expect any massive exodus right away, but it would be dangerous in the medium term. It would take some time, they will want to see how the institution works - and then the best people leave.
Q: How much longer is the bank going to exist, given the plans to join the European Union and its central bank? Because one could argue that since it's going to happen some time after 2003 these arguments right now about the bank's independence and paychecks may not be so relevant anymore.
A: I don't think it's going to happen in the near future. First of all, we must join the European Union, and afterward we can concentrate on joining the EU currency. Until then the monetary policy will remain independent, although it will be more and more influenced by what's happening in the eurozone. But nevertheless, even after adopting a single currency - and there's no date for that -we can look at some examples in the eurozone, nothing important has happened in those central banks. Because on one hand you can reduce your staff in the monetary department, but you must take into account that the head of the institution, the governor, actively participates in the decision-making (of the ECB), that he or she needs very good documents and analysis for this participation. You know it's true that the ECB itself has a very good staff and its analytical capacity has been growing, but even in the future the governors would like to come up with some regional comments, remarks and analysis as well as the European view. Secondly, the Czech National Bank has almost 1,500 people, and the monetary department accounts for approximately 80 people. So all other functions of the central bank would continue - the currency distribution, the payment settlement and so on. There would be more requirements in the statistical area, obviously. So I don't expect any kind of big changes, and I don't think that this institution will cease to exist because the single currency affects only one aspect of its activities.