CONTROVERSIES OF EXCHANGE RATE POLICY

The paper deals with arguments which support the thesis of existing local currency overvaluation and suggests exchange rate arrangement in the form of asymmetric interventions of central bank, which would enable gradual real kuna appreciation. The arguments for kuna overvaluation are based on the analysis of price and rate movement in relatively short period after procclamation of the Stabilization program in October 1993 and on development of costs in the years which followed. Devaluation of about 20 percent made in the moment of proclammation of program initiated adjustment and high price increase: producers prices increased for 23 percent and retail prices for 38 percent, and they kept on that level. However, the rate returned to the pre-program level already after amonth and a half. In this short episode undoubtedly happened considerable local currency overvaluation. The rate mainly remained stable after that, but labour costs, i.e. in processing industry which generates almost the whole exports of goods, were increasing almost as productivity growth did, and it also continued the tax pressure increase. Overvaluation grew by this, and competitiveness of domestic producers was decreasing not only at foreign but at domestic market as well. Increasing currency substitution (currency clauses) makes at this moment devaluation too expensive and risky move of economic policy. Therefore possible solution should be found in gradual, targeted and corrected rate by unsymmetric interventions of central bank with corresponding support of fiscal policy.