Let me ask you first a very actual question, the Czech National Bank has always been known for its independence in all the decisions that you have had to take in the past. Now it seems that politicians want to interfere in this independence. How do you explain this?
I think that probably one problem that we did not experience in the past period of time is high inflation. And for this I would say that we don't have much experience in understanding intimately how this relates to the economy. This can also be a reason why probably the concern from some group of politicians about the independence of the central bank is not so intense as it is, for example, in Germany where there was a very high inflation in the past and the experiences were firmly rooted in the society. It allowed I would say the independence of Bundesbank to rise and achieve high levels. So I think that this is one of the main reasons. Let's go to the present situation.
We are preparing ourselves to become members of the European Union and also to enter in the European Monetary Union, which means that we have to take into consideration and comply with European standards which are applied to the European Union. I think that the independence of the Central Bank is one of the key issue of this Bank. So, if we really want to be a member of the European Union, then our legislation must be in harmony with that of the European Union. From this point of view I am not particularly concerned as to what is going on in our political spectrum in the debate about independence because I see the European Union as the garantee of independence.
So, I do not want to underestimate the importance of the discussion because the law can change institutions and I would never want it to change in a way that the Center Bank would lose its quality and a part of its reputation and credibility which has been gained up to now in the past ten years. The debate is important but I am less concerned about the crucial issue of independence due to the guarantee of independence stemming from the European Union.
Talking about the European Union, the Czech Republic is expected to join the European Union in the year 2003. Do you think that it will be able to do so, considering what has to be done still.
First of all I would like to stress that timing is very important and I think that it is probably a mistake that the time has not been fixed yet. You can well imagine that when there is a fixed point, a deadline by which you have to have reached something, that leads to a much more intensive preparation, both from the government's side in terms of preparation of the legislation, and from the corporate side as well. I think that a decision on the exact time of our membership in the European Union would also lead to a unification of the political forces. It would also make the legislation process in Parliament, process which is now fully devoted to our preparation to enter the EU, much more rational and faster and smoother.
So, timing is important.
As far as our preparation is concerned, I think that the government made a big jump last year. The government was fully absorbed by this preparation which has been most intensive; and not only the government was so devoted to this effort but all institutions, including the Center Bank. I hope that now, after some doubts that were present in the past, we are back again in the first wave of candidate countries that will become members of the European Union.
Could you tell us your opinion about the banking sector after a few years since it happened and a lot has to be done still. Could you give us your opinion about the Czech banking sector and what has to be done still to improve the management and the banking service?
The Czech banking sector went through a very difficult development during the transition process. Of course certain problems arise during such a process and there are certain reasons for these problems, which are, in my opinion, objective reasons. One such reason was that our banks inherited a lot of non performing goals??? from the past, from the central banking system. Then, as we can imagine, the new banks and bankers which emerged from center plan system were not prepared for the market system. This means that they were simply not educated nor experienced in the credit system.
In addition, the condition was very unpredictable as to its economic development. It was very difficult to make assessments about the future and of course banks are always thinking about the future when they are granting their loans.
Then there was the initial half, I would call it the radical start of the economical reform, after which there was a period of slowing down of the institutional and structural reforms, which means that banks were not privatized quickly and some large state owned companies also remained somehow in the delicate situation of predominantly state owned mixed ownership. This also created some problems.
Talking about I must add that our local banks were a bit more optimistic about the economic development. I can imagine that they has a special credit portfolio closely related to the economic development of the country. When there is economic growth, there is optimism, and then things look much better than they really are. Then when there is the recession suddenly banks can see the deterioration of the portfolio, dwindling of the provisions and the reserves.
Now, to structure my answer I would not speak about small banks because they only represent a 1.5% of total banking assets measured by branches??
mon cher, tu dis quelque chose que je n'entends pas du tout!
But now the problem I would say is behind us. I would say only a few things about the large banks. Large domestic banks accumulated most of the problems, subsidiaries of foreign banks much less and branches of foreign banks least. As concerns large domestic banks government now in the process of privatization or preparation for privatization is really on the balance sheet.
Recapitolizing. We are probably on the peak of the provision cycle and it seems to me that what the government is doing now is leading toward a stability of the banking system so probably in the very near future we will have a much more stable banking system than it was in the past.
The privatization is a big topic at the moment. In your opinion who would be the best investors for a commercial bank? And which time frame do you envisage for privatization?
I do not want to make any specific names but we are watching this process from the prospective of supervisors, so what we want is good quality and new strategy partner which would bring stability to the bank in the long run. This is our main criteria. Less important for us is the price achieved for privatization, it is important for the government of course but we are not sellers. Something about the timing I think that it could proceed rather fast, at the same time I must admit that this is the largest domestic bank and the process then could take some time. I would be happy if most of the work were done by the end of the year. It seems a bit optimistic but it is a good thing to strive for.
Still concerning the bank sector, do you expect more foreign banks to penetrate the Czech banking sector?
We are very liberal in our license policy so getting a license is relatively easy when the investor in the bank fulfills the criteria. The structure of the banking system is more we have forty-two banks. In more detail, these banks are structured as five large banks, five small banks and thirteen subsidiaries, ten subsidiaries of foreign banks and nine specialized banks. With this I want to say is that we have thirteen subsidiaries and ten branches, which means twenty-three, plus, as I mentioned, five large banks some of which, after privatization, are foreign owned so there already is a big foreign presence in our banking sector. | How do you feel about new foreign banks coming into the Czech Republic?
As I said, already a big part of our domestic banking sector is composed of foreign banks where practically all large banks from our neighbors are participating: Germany, Austria and also France and the Netherlands. I would not expect some new large venture of foreign banks to penetrate the Czech Republic. However, I can imagine new banks from other countries to penetrate our market in the future, when we will be part of the European Union. Then there will be more space for European banks to establish subsidiaries and branches here and at the same time there will be no need for a license. Then I would expect new foreign banks.
What are your expectations in inflation related to the Consumer Price Index and what do you consider a good exchange rate for the Czech crown?
If you looked at how inflation has been going in the past long period of time you would see that we have really been trying to keep inflation under control, and with success, I would say. At the end of last year the Consumer Price Index was 2.5%, which is low and close to Europe's ???. This year, due to some deregulation in prices by government, which brought the prices to rise especially in January, we expect that the Consumer Price Index could be around 4% in the end of the year.
We have a long term strategy in which by the year 2005 we should be close to 2%. That will allow us to think about achieving the Unitary Money membership, as similar criteria will be applied to candidate countries. We have to be close to European Union standards. As you can see we are not far from these standards even now.
Concerning the economic development, we have good expectations for this year in the medium run. After the recession the economy started to grow, we have seen recovery, although this recovery is still rather fragile. Probably the take off will be rather slow but will last long. At the same time I am happy to say that the economy is very well balanced. There are no visible big imbalances in the trade deficit, current deficit which probably will be somewhere between 1-2% of Gross National Product. I already mentioned our acceptable inflation, so I think that we are ready for take off and at the same time we shall carefully watch that take off will not be accompanied by growing imbalances. About our forecasts on the growth of our Gross National Product this year we think around 1-2%. No miracles but steady progress of economic activities is anticipated.
Concerning the exchange rate, it is now influenced by a great and steady inflow of foreign capital. This, together with our relatively small current account deficit, means that the exchange rate should be rather steady. So the capital account of balance of payments is pushing the currency towards appreciation. We have to be very careful in order not to allow this appreciation to be too strong, which could then undermine the competitiveness of our exports and could result in a lower output and a lower economic activity.
The currency is pretty strong now and we would welcome a currency a little weaker than it is at present.
Talking about the foreign investors that the Czech Republic has compared to the other eastern European countries which do you think are the best opportunities for our investors and which are the threats that they should be concerned about?
I will be very general in my answer because it is not my field directly. Relating back to my previous answer, which could have been interpreted as if I were not very happy about foreign capital inflow. On the contrary, I think that foreign investments, especially direct investments are most welcome because it means that we can use for our restructuring and growth not only our domestic saving but imported foreign saving as well including know-how, markets and more. This is very important and welcome. We expect that this tendency will continue up to at least to our membership in the European Union, because we can see examples from other countries where similar patterns occurred.
The only problems for the Center bank and for macroeconomic stability is when foreign investments are accompanied by some other inflow of capital. Then it can lead to macroeconomic problems: money supply can grow too fast, the demand can grow too fast and it can cause instability which then needs to be corrected.
Concerning the direction of these investments I think that the capital should mainly go to manufacturing and industry. Industry is very diversified so there are many opportunities for many investors. If you take into consideration that our economy is small and very open without practically any resources of energy or raw material then we cannot rely on heavy industry so manufacturing is probably the key.
What is the general relation the Czech National Bank has with the International Monetary Fund and the World Bank?
First of all, our relation with the IMF and World Bank and ??? institution is very good in general. Concerning specifically our meeting in Prague we are very happy that the meeting will take place in Prague, because this is the opportunity for many people who will come to see Prague, to see the country and I think that for some of these people it will be quite a unique opportunity. I am talking about delegations from Africa, some Asian and Middle East countries, but also from Latin America, as Latin Americans are not very frequent visitors of our country. It is good to change sometime the site of the meeting and not have always in the same place. I think that Prague will be very attractive for all these visitors.
I think that preparation will be very intense and I think that the World Bank is hoping and supporting and controlling regularly the state of preparation. My main concern now is what can happen after the experience from Seattle. The NGOs with their activity it can give a good give overall picture to the whole meeting if the final result is positive, or it can spoil the meeting and make it very negative. So this is my main concern at present I hope that we shall reach some reasonable consensus.
On a more personal level, Governor, which have been the most positive aspects you have discovered since you have been Governor of the Central Bank?
I am usually pleased when somebody who is visiting my country and who does not come here very often asks me what has happened in the past three years or so, because sometimes I feel as a gardener who does not see the grass growing as fast as it grows. Therefore, looking back, thank to your question, the changes I have seen happen are really impressive, and I am proud and happy that I could take part in them.
As a final issue, what is your final message to our readers?
This is a difficult question! Your magazine is covering many countries including candidate countries in center and eastern Europe. I would be only pleased if most of the population in Western Europe were positive about the process of unification and looked at this process as bringing stability, peace and improvement of the standard of living. |
