Don't devalue the kroon: Eesti Bank

  • 2007-03-14
  • By Joel Alas
TALLINN - The Bank of Estonia has rejected calls to devalue the national currency, the kroon, saying such a move would be difficult and would not solve any short-term economic problems. Calls to devalue the kroon have been growing louder within the business community as the timeline to join the euro currency zone recedes.

The latest came on March 6 in an editorial written by Janek Maggi, former communications head of Uhispank (now owned by SEB), who said devaluing the kroon 's which is pegged to the euro at a rate of 15.65 to 1 's was a necessary move.
A week later, the central bank responded by issuing a statement which said such speculations were "incompetent."
However, the discussion caused jitters in financial circles, given the impact of similar currency speculation in Latvia last month. Confidence in the lat was shaken after a newspaper article by a Danish academic called for a devaluation, sparking a frantic round of currency trading. Even the Latvian president stepped in to call for calm.

The Bank of Estonia said the national growth rate was expected to ease in the coming years, but predicted that Estonia would still remain one of the fastest growing economies in Europe.
"Allegations that the exchange rate of the kroon will change have been made on a regular basis starting in 1992," the bank said.
Rather, the central bank said any attempts to stabilize the economy should be made by operating an open market, a fixed exchange rate and a budget balance or surplus.

A devaluation of the kroon would also be useless in trying to curb inflation, which is one of the key reasons Estonia continues to fail the Maastricht criterion for eurozone accession, the bank said. Weakening the currency would only increase the rate of inflation.

University of Tartu Faculty of Economics associate professor Viktor Trasberg agreed with the bank's statement, saying currency devaluation would only assist big businesses with large loans to repay.
"If you have high loans, devaluation can help a lot. We should not threaten our economy to help bail out some businessmen," Trasberg said.

"Devaluing your currency is an extremely negative sign for a country to give out. We don't have any proof that the kroon is overvalued. Prices are increasing, it's not a question of exchange levels. Other factors are forcing prices up."
Further, Trasberg said re-pegging the kroon would push the euro accession timeline back even further.
"One of the Maastricht criterion is exchange rate stability. If we destroy that, there will be another obstacle to the euro," he said.
According to Estonia's currency board system, any revaluation would have to be approved by Parliament, making such a situation even more unlikely, he said.

The currency speculation came days after Statistics Estonia released figures showing Estonia's gross domestic product grew by 11.4 percent in 2006.
The statistics also showed a fourth-quarter reduction to 10.9 percent, prompting analysts to speculate that the economy had passed its growth peak and was now slowing down.

Hansabank macroanalyst Maris Lauri told BNS that a shortage of production capabilities and the weakening competitiveness of local enterprises both locally and internationally would contribute to the slowdown.
Lauri said there were also positive signs, such as the growth in investments, increased capital acquisitions such as machinery and equipment, and the development of manufacturing industries.