1. Prevzem evra na področju plačilnih sistemov
Bank of Slovenia’s Operational Monetary Policy From the pre-ERM II phase to ERM II and the gradual approach harmonising the operational monetary policy framework to the Eurosystem
Peter Kukanja

2. Slovenia – Facts and Figures
Independent since 1991, EU member since 2004
Currencies: Slovenian tolar - SIT (1991 – 2006), € (2007 – )
Population: 2.0 million
GDP 29.7 billion €, per capita 14,811€ (2006)
GDP real annual change: 5.2% (2006)
Unemployment rate (ILO): 5.0% (Feb 2007)
Annual inflation rate: 2.3% (Feb 2007)
BoP current account: –2.6% GDP (2006)

3. Slovenia – Financial Environment
Credit institutions (end 2006):
21 banks
3 saving banks
2 subsidiaries
Banks’ balance sheet total: 120% of GDP (end 2006)
Financial markets:
treasury bills
treasury bonds
Eurobonds
domestically issued bonds – listed on the Ljubljana Stock Exchange
bank and corporate bonds
equities

4. Before Accession to the EU
Independent monetary policy
Free selection of exchange rate regime
Countries have to:
ensure the independence of the central bank
ensure the prohibition of financing the state
ensure the liberalisation of international capital flows
Slovenia:
Sep 1999: new foreign exchange legislation
Jun 2000: a schedule of the liberalisation of international capital flows was accepted
Jul 2002: a new Bank of Slovenia Act

5. Slovenia as EU Candidate Country
Preparation for the adoption of the euro (obligatory after joining the EU)
Main task: to bring the rates of price growth in line with the level of Maastricht criterion before the accession to the EU and formation of a long-term and sustainable exchange rate of tolar against the euro  macroeconomic balances and stability
Main challenge: how to control inflation at a fixed exchange rate regime and liberalised international capital flows
Monetary policy is one of the key factors in decreasing the price growth

6. Fulfilment of Maastricht criteria
as of September 2001
November 2001: adopted the Medium-term Monetary Policy Framework – with goal to enter the EMU as soon as possible (Banka Slovenije)
November 2003: adopted the Programme for ERM II Entry and Adoption of the Euro (Banka Slovenije and Slovenian government)
Convergence criterion
Slovenia
Inflation (in %)
3.3
8.2 
Long-term interest rates (in %)
6.92
13.96
Deficit (in % of GDP)
-3.0
-2.3 
Public debt (in % of GDP)
60.0
25.1

7. Inflation

8. Interest Rate Transmission Channel
    Normal conditions: with changing the interest rates of the monetary policy instruments it is possible to control the growth of monetary aggregate M3
Slovenia: possible to control M1, but not M3
Reasons:
use of indexation of the lending and deposit interest rates  slow adjustments in cost of refinancing commercial banks at the central bank
surplus structural position in the money market  banks can manage liquidity independently (with changes in the assets side of the balance, not in the liabilities side)

9. Exchange Rate Transmission Channel
General: Changing the intervention foreign exchange rates, foreign exchange buying/selling
Slovenia: Banka Slovenije controlled the dynamics of the foreign exchange market rate growth
controlled imported prices influenced on the growth of the CPI
influence also on borrowings of companies and banks abroad  indirect influence on total credit supply for financing domestic demand
defined the relative price ratios of domestic and foreign goods and services  impact on external economic balance

10. Tolar vs € Exchange Rate

11. Operational Monetary Policy (pre EU)
Two pillars strategy (since Nov 2001):
Monetary aggregates
Real economic activity indicators
liquidity of the banking system
balance of payments
short-term interest rate trend
foreign interest rates and interest rate difference
structure of monetary aggregates
foreign exchange rate
credit activity of commercial banks
wages in the economic and public sector
price rises under the control of government

12. Restrictions in Conducting Monetary Policy
Liberalisation of credit operations  requires systemic regulation and supervision of foreign exchange and liquidity risk management
Underdeveloped foreign exchange and tolar money market  ineffective transfer of information from BS to real sector
Structural position in the money market  prevents fast development of money market operations
Minimum reserves system  high cost of financial intermediation of commercial banks

13. Structural Position and Liquidity Gap

14. Implementation Tools
Two groups of tools for implementation of the monetary and exchange rate policy
Group of instruments
foreign exchange rate dynamics  maintaining external balance
interest rates on a temporary sale or purchase of the foreign exchange to or from Banka Slovenije  influence on the volume of base money
standing facilities, open market operations, minimum reserves
Group of measures
capital adequacy directive  avoided exposure of banks to foreign exchange risks
tolar and foreign exchange liquidity ladder  avoided liquidity risk

15. Monetary Policy Instruments
Type
Maturity
Frequency
Liquidity
Repurchase agreement
Open market operation
one week
daily
providing
Lombard loan
Standing facility
overnight
unlimited access
Tolar denominated bills
60 / 270 days
unlimited access / weekly
absorbing
Overnight deposit
Accepted collateral: Banka Slovenije’s bills & long-term deposit, Republic of Slovenia treasury bills

16. Minimum Reserves Gradual alignment to the ECB regulations:
lowering the rates of reserves to the ECB levels
sights deposits (from 12% in 2001)
fixed term deposits (from 6%, 2% and 1% – depending on maturity, in 2001)
adjustment of the basis for the computation
according to the maturity
equalising the treatment of the tolar and foreign exchange obligations
the increase of the interest rate
from 1% to a market level

17. Interest Rates Convergence

18. Operational Basis of Exchange Rate Actions
Large capital inflows and the resulting excess liquidity  active exchange rate policy operations
Three main elements:
agreement between Banka Slovenije and banks (“Bank Club”)
temporary purchases of foreign currency by Banka Slovenije – 7-day foreign currency swap (temporary monetisation of foreign currency inflows)
sterilisation operations through the issuance of the tolar denominated central bank bills (60 and 270 day maturity)

19. After Accession to the EU
General: countries have to accede to the ERM II mechanism
ERM II: rate of national currency is set against the euro (central parity rate) – allowed fluctuation 15% (standard fluctuation band), exchange rate intervention
Conditions for accession to the EMU: fulfilled nominal convergence criteria based on Maastricht criteria:
price stability
long-term interest rates
general government deficit / public debt
participation in the ERM II mechanism for at least two years

20. Slovenia in the ERM II period: 28 Jun 2004 – 31 Dec 2006
monetary policy in line with the maintenance of the stability of the nominal tolar exchange rate
central parity rate: 1 € = SIT
lower point: SIT
upper point: SIT
calculated average deviation rate: 0.05%
no major excess of supply or demand of foreign exchange  central rate was at a level sustainable in a long-term
small deviations  no need for intervention

21. Transition to the Eurosystem (1)
Structural adjustments to ease the transition:
replacement of 270-day tolar bills with long-term deposit as a sterilisation instrument
maturities in 2007
floating interest rate: 0.2% above 60-day tolar bill
final abolition of the minimum foreign currency liquidity requirement and replacement of swaps with outright purchases of foreign exchange (final abolition of € and $ denominated bills)
final adjustment of the reserve requirement instruments to the arrangements in the euro area
excess liquidity had to be placed in a long-term deposit

22. Transition to the Eurosystem (2)
Structural adjustments to ease the transition (continued):
issuance of short-term deposit for the purpose of providing collateral for euro cash
issuance of 120-day tolar bills with maturities up to the end of April 2007 for the purpose of better planning liquidity by the banks

23. Slovenia in the Eurosystem
Accession to the EMU: 1 Jan 2007
Introduction of the € and abolition of the Slovenian tolar
Irrevocably fixed exchange rate: 1 € = SIT
Common monetary policy in whole euro area
Final national goal: to fulfil the real convergence
GDP per capita
price levels
structural reforms