The intermediate target of monetary policy of the Bank of Slovenia was accepted by the Governing Board of the Bank of Slovenia at its 157th session on 24 March 1998.

For the monetary aggregate M3 the statistical definition will be monitored. The annual increase is determined for the period from the last quarter average of 1997 to the last quarter average of 1998.

Due to a methodological break in the last ten days of December 1997 (the inclusion in M3 of time deposits of banks in liquidation), the value of the base period, which will be taken into account when monitoring, was raised by 11.6 billion Tolars.

The intermediate target of monetary policy of the Bank of Slovenia for 1998 was an annual increase of the monetary aggregate M3 in the range of 18-26 per cent.

Assumptions

Pursuant to the Law on the Bank of Slovenia, the main responsibility of the bank is to maintain stability of the national currency. In setting the intermediate target of monetary policy for 1998, the bank made assumptions regarding certain parameters that are affected by policies other than monetary policy, but which also influence the stability of the Tolar and the price level. In the case of greater divergence from these assumptions, within the year the bank will be in a position to decide whether to continue to pursue the target at the cost of various negative effects, or whether to adjust it to new conditions.

The intermediate target of the bank for 1998 is based upon annual projections of the Government of the Republic of Slovenia in the draft document Joint Assessment of Medium-term Economic Policy Priorities of Slovenia. This is to be signed between the Government and the European Union (EU) and will become the basic document of the economic policy of Slovenia for 1998 and the following years. The basic parameters of this document which bear upon monetary policy intentions are the following:

• an annual real Gross Domestic Product (GDP) growth in the range between 3.5 and four per cent;
• a general government deficit of one per cent of GDP with the orientation to balanced budgets in 1999. The financing of last year's public deficit increased the debt of the budget and other organisations of general government in domestic bank loans from 41 billion Tolars to 70 billion Tolars (banks' data). In addition, ten billion Tolars were raised through bond issue, followed by a further 15 billion Tolars in the first two months of 1998. This borrowing will mainly be reflected in the deterioration of the balance of payments and will probably also have inflationary effects. Balance of payments data shows an increase of external indebtedness by 30 billion Tolars. The continuation of this trend in the growth of the fiscal deficit would imply radically changed conditions for the projected monetary policy and inflation in 1998;
• growth of average wages by about one per cent behind productivity growth, implying about 2.5 per cent real growth and 10.5-11 per cent nominal growth.

Assuming that the consumer price index (CPI), which is the measure of real wage growth, will, as last year, increase two to three percentage points more than the price of tradables, which basically follow exchange rate dynamics, this will again produce an approximately equivalent higher growth of wage costs than revenues in the tradable sector (but not in enterprises and institutions of the Government and the public sector and in the various protected industries). This will cause at least an equivalent drop in export competitiveness, if it is not offset by further reductions in employment, which is, however, not anticipated in the Government's projections. Monetary policy instruments are not effective in this area and the Bank of Slovenia can only point out the development and social cost of certain policies.

• The projected increase in controlled prices, which will not allow (except at unacceptable cost) a lower annual increase of the CPI than eight per cent.
• The bank accepts this projection of inflation, pointing out, however, the consequences of high inflation on stability, growth and development.
• The intermediate target of the bank is finally based upon the assumption of no considerable increase of financial inflow from abroad due to domestic factors (growth of domestic interest rates because of excessive price growth or government borrowing) or to factors in the international economy.

Monitoring of the target

The Bank of Slovenia will, at mid-year, publish an estimation of current developments and of eventual deviations from the assumptions and conditions set out for the target of monetary policy (mainly concerning the growth of controlled prices and government foreign borrowing), as well as for the pursuit of the final policy goal, ie, stability of the Tolar and the gradual reduction of inflation to European levels.

Reproduced from the Bank of Slovenia's Website