Monetary, credit, financial and exchange rate policy in Slovenia

(objectives and implementation)

Anton Kozar (*)


Slovenia is small (2 million people) and export oriented economy. GDP at market prices amounted to USD 14 billion while the GDP p.c. amounted to USD 6957 in 1994. Slovenia became an independent country in 1991. Institutional changes of financial system and legal framework for enterprises have been made toward market oriented economy since 1991. Shrinking of export (mainly to former Yugoslavia) markets, the real restructuring of large parts of the economy and rehabilitation of banks have influenced on the economic developments since 1991.

The legal framework for privatisation of "socially-owned enterprises" was built at the end of 1993 and the privatisation is formally in the ending phase. The adjustment process of the Slovenian economy can be seen through a number of indicators:

Indicator 1992 1993 1994 1995
GDP (real growth in %) -5,4 1,3 5,0 4-5*
Inflation (December/previous December in %) 92,9 22,9 18,3 10,0*
Foreign balance (goods+services) in % of GDP 9,2 3,0 3,9 3,4*
General government surplus (+), deficit (-) 0,3 0,3 -0,2 -0,1*
Unemployment (% by ILO definition) 8,3 9,1 9,0 8,6*
Total foreign exch. reserves (BoS+DMBs) bn $ 1,2 1,6 2,8 3,3+
Total foreign debt stocks in bn$ 1,7 1,9 2,2 2,5+

(*) Forecasts made in November 1994. (+) Latest data that refer on the end of March 1995.

Bank of Slovenia was established by law (promulgated) on June 25, 1991 and was given the independent authority to enforce monetary and exchange rate policy, whilst being responsible to the Parliament only (1). According to the Law the central bank is permitted to finance general government budget but with strict limits, e.g. up to 5% of general government expenditures or up to 20% deficit. But since 1991 there was no need to finance the general government deficit.

By the end of 1994 the number of commercial banks was 35 and 14 of them participated in foreign capital (in the range from 1% to nearly 100% ).

Ljubljana Stock Exchange was re-established in December 1989, as the first one dates in 1924. The new Law on the Securities Market was adopted in 1994. It unified the Slovenian experiences on the securities market with a number of directives and recommendations of EU. The electronic trading on the Ljubljana Stock Exchange was introduced last year.


The ultimate goal of Bank of Slovenia is price stability and to safeguard the currency. The strategic goal of Bank of Slovenia is the EU level of inflation. After October 1991 and during 1992 the central bank made efforts to bring inflation down. Inflation has been reduced gradually from 21% (monthly level) in October 1991 to near 2% (monthly level) in July 1992. The inflation rate in April 1995 was even negative -0.1% (monthly level). The result of lower inflation has been the increase in monetization (M3/GDP) since 1991. It amounted to 28% in 1992 and to 33% in 1993. Last year the monetization increased to around 40%.

When the Bank of Slovenia set up monetary and exchange regulations it was estimated that money multiplier and especially the demand for real money balances (M1/P) were stable: far more than the exchange rate. The latter had high variations because of the balance of payments current account results vulnerable to high tourist season and additionally to the short term capital flows that have even higher effect on the foreign exchange market because of the small currency area. Financial markets were not developed at that time. Interest rates margin and margin for financial inter mediation (around 20% on total assets) were high because of bad portfolio (credits) of commercial banks and because of the capital flight. So, interest rates were not only the money demand indicator. Bank of Slovenia decided to target stock of money, from October 1991 money in circulation (M1) serves as an intermediate target and monetary indicator while base money serves as an operational target. Money multiplier has been stable (with some moderate changes).

Base money was created mainly through net purchases of foreign exchange (especially in 1993) and through the increase in net credits to banks (in 1992 and 1994).

The Bank of Slovenia developed in the course of 1992-1994 a wide rage of instruments, which include besides the obligatory reserves and "discount window": repurchase agreements, interventions on the foreign exchange market, overnight, three-days and special liquidity loans, foreign exchange minimum which serves as a substitute for foreign exchange exposure, foreign exchange swap operations, Bank of Slovenia bills, twin bills, and Bank of Slovenia foreign exchange bills. Bank of Slovenia started with open outcry auctions (mainly US style) in the spring of 1992 and direct instruments were replaced with indirect ones. The reason for developing a wide range of instruments lies in problems of sterilisation of BOP current account surplus and inflow of short term capital - mainly in the small business and households sector. Bank of Slovenia has the exchange rate as a sub-ordinate goal - "leaning on the wind" policy - but within the frame of targeting of currency in circulation.


The total assets of Slovenian commercial banks at the end of 1991 amounted to USD 5.5 billion, at the end of 1994 reached USD 9,7 billion or SIT 1.222 billion. The main source for banks' funds arose from the increase in demand for real money balances (including monetization effect), then from the increase of households savings (2) and finally from the "bank rehabilitation process" which influenced on the increase of reserves and capital in banks.

The linear bank rehabilitation process started in 1992 and was finished by the beginning of 1995. Banks that were going rehabilitation have reached the capital adequacy, positive cash flow and lower operational costs. The successful rehabilitation process is due to prudential control of the central bank. The increase of banks' claims on government was due to swap process: bad bank's loans for governments securities. There was no increase in credits to government in real terms.

Sources and uses of money in circulation

(in bn SIT,current prices) Stock at
the end of

Change in year
Stock at
the end of
1991 1992 1993 1994 1994
MONEY (M1) 38.7 42.7 34.2 54.6 170.2
INCREASE (+) 188.9 239.8 268.3 314.4 1011.4
Net foreign assets (NFA)
Claims on government*
Claims on households+enterprises
DECREASE (-) 150.3 197.2 234.0 259.8 841.3
Non-monetary deposits
- households+enterpises: time+saving dep.
-general government.
Other items net (ION)
Nominal GDP at m.p. (bn SIT), current prices 349,4 1.005,3 1.435,0 1.808,1

* The increase in 1993 was due to linear "bank rehabilitation process".

In December 1992 the Bank of Slovenia tightened the conditions and criteria for the banking licence, whereby the minimum capital required for establishing a new commercial bank has risen to 680 million tolars for a limited banking licence and for an unlimited banking licence has risen to SIT 4080 million. Some banks are still over-capitalised and they will have to adapt to a new conditions (3) by the end of October 1995. It is expected that Slovenia will have fewer but stronger banks.

The Bank of Slovenia has improved the "on site" and "off site" banking supervision. For example, in 1993 it introduced the new calculation of the capital adequacy according methodology of the Basle Committee.

Real interest rates decrease since the end of 1991 and the margin for financial inter mediation (interest margin plus non-interest margin) have been lowered. Interest margin was lowered to 3.5% (on total assets and liabilities) and the margin for financial inter mediation to 4.4% in 1994. The Inter bank (money) rates were around 8-9% in 1994. In the first quarter 1995 were around 5%, The implicit long-term interest rates on governments securities was around 8-9% last year and remained on this level in 1995. In the beginning of 1995 the banks reached the agreement on capping the deposit interest rates (by the pressure of the Bank of Slovenia).


The currency of Slovenia is the Tolar (SIT) and the initial exchange rate October 1991 in terms of DEM in October 1995 was SIT 32 per 1 DEM. That was even the level of high depreciation of tolar which enabled the economy to realise high surplus in BOP current account for building foreign reserves. The Bank of Slovenia declared with the IMF that would maintain the system of "managed floating". It may buy and sell foreign exchange from/to commercial banks and government budget. Bank of Slovenia also buys (and sells) foreign exchange with BoS foreign exchange bills and thus sterilise the surplus on the foreign exchange market. Namely, the surplus in the current and capital account (which amounted in some quarters to near 10% of GDP) caused the central bank problems It worries that if the tolar appreciation continues this would drive many marginal exporters out of newly acquired markets, mainly in EU. The balance of payments developments in 1995 are similar to those in previous years.

Tolar has appreciated between 31% to 38% (measured by relative PPP or Unit Labour Cost rule) in the first six months from initial setting. From March 1992 to the end of 1994 the tolar further appreciated by 6% in terms of relative PPP while the additional appreciation measured by ULC rule was even 20%. The market exchange rate (4) of tolar in terms of DEM was at the end of 1993 SIT 76,9 per 1 DEM. It has amounted to 81,8 at the end of last year. During the first four months in 1995 it has slightly dropped to SIT 81,3 per DEM.

There are no payment restrictions on current account transactions. Slovenia formally fulfilled the conditions for the article VIII of the IMF Statute in 1994.


The income policy was one of the weakest element in the economic policy since 1991. But the new "social-partnership agreement" was signed in April 1995 (government, Trade Unions, Chamber of Commerce and Association of employers). The government made commitment of 10% inflation in 1995. Trade Unions commit themselves for the 80% growth of wages relative to CPI. Government and Bank of Slovenia will take measures to lower the volatility of interest rates caused by the indexation (tied on CPI and with strong season) for short term (up to 3 months) assets and liabilities. The indexation on the labour market will be complied with the rules on quarterly basis.

Slovenia will change the custom tariffs in 1996. The introduction of VAT is planned for 1997. At that time the reform of payments system will be in the main process.


(*) Assistant General Manager Analysis & Research Department, Banka Slovenije - Bank of Slovenia. Slovenska 35 61001 Ljubljana - Slovenija. The views expressed in the article do not necessarily correspond to those of the Bank of Slovenia.

(1) The governor and other members of the Board of Bank of Slovenia have 6-years long (renewable) term of office and there is no provision for dismissal.

(2) Households took a large volume of foreign currency (cash) from tha matress, sold it to banks for tolars and put them as tollar deposits (because of higher interest yield) with banks. These transactions were recorded in BOP financial account as short-term inflow.

(3) The Hirschmann-Heirfindahl index was around 2800 at the end of 1991. Since then it had a downward trend. At the end of 1994 it was below 1300.

(4) The Bank of Slovenia publishes daily official rate which is a moving 60-day average market exchange (spot) rate for customs valuation and accounting purposes. Forward transactions are not prohibited but there is no market.