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Czechoslovakia BANKING AND FINANCE
http://www.photius.com/countries/czechoslovakia/economy/czechoslovakia_economy_banking_and_finance.html
Sources: The Library of Congress Country Studies; CIA World Factbook
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    The koruna (Kcs), or crown, is the national currency and consists of 100 halers. In 1986 the currency continued to be convertible only under restricted conditions and at official rates. Violation of exchange regulations constituted a serious offense. The koruna could be used only within the country and was not used in foreign trade. In 1987 the official, or commercial, exchange rate was Kcs5.4 per US$l; the tourist, or noncommercial, rate was Kcs10.5 per US$l. The koruna was legally defined in terms of 123 milligrams of gold, which provided a historical basis for the commercial rate.

    At the head of the country's banking system was the State Bank of Czechoslovakia. The State Bank was the central bank, the government's financial agent, the country's commercial bank, an investment bank, and the clearing agent for collection notices. It also supervised the other banking in the country and, in conjunction with specific ministries, formulated the financial plan for Czechoslovakia. The other banks, also state owned, were subordinate to the State Bank and relegated to special functions. The Commercial Bank of Czechoslovakia was primarily the bank for foreign currency transactions. Three additional banks--two of which were savings banks, one for each of the republics, providing credit to individuals--completed the banking system in 1980.

    The main function of the banking system was to act as the government's agent in implementing the financial plan, an important part of which consisted of expanding and contracting credit to meet the economy's needs. The central authorities controlled most investments directly, and the national plan regulated production. The State Bank acted as a supervisory agent in extending credit to the enterprises, ensuring that the investments met plan goals. The bulk of bank credit was for working capital, largely utilized to finance the purchase of materials and the sale of finished products. The powers of the State Bank appeared to be somewhat limited, however, since credit was extended according to guidelines for planned production. The central authorities set interest rates, which neither reflected the cost of capital nor appreciably affected the flow of credit. Instead, beginning in the 1970s, interest rates were differentiated to accomplish objectives of the plan. Interest rates were low for enterprises modernizing a production process. Punitive rates were used if firms deviated from plan goals. In the mid-1980s, the greatest portion of investment credits went to the industrial sector, followed by agriculture, construction, and retail trade.

    The banking system operated within the framework of the financial plan. Major elements of the financial plan included allocation to consumption and investment, foreign and domestic financing of investment, and wage and price changes. Planning authorities were in a position to use the centralized banking system to carry out major corrective measures, as occurred in 1953 when inflationary pressures became serious and the population's accumulated savings were largely wiped out by a conversion of the currency. After this experience, officials placed stricter controls on investments, permitting real wages and the standard of living to rise gradually. But in the late 1970s, and particularly in the early 1980s, the worsening terms of trade, bottlenecks in the economy, and the need for large investments in energy and industry combined to limit the allocations for consumption.

    Imposition of the Soviet model introduced a chronic inflationary bias into the Czechoslovak economy, although the inflation was not necessarily reflected in prices. Control of prices (only private food produce, especially fruit and vegetables, were priced freely) repeatedly produced inflationary manifestations in other areas, such as shortages in the market and increased savings by the population. Although officials generally limited the rise in prices (causing price indexes to advance slowly), by the mid-1970s prices had to be adjusted upward more frequently. This trend continued into the 1980s, and major food price increases occured in 1982.

    In addition to the banking system, another major financial tool for implementing economic policies and the annual plan was the central and republic government budgets. The Czechoslovak government published little budget information. Western observers believed that small surpluses of revenues were more common than deficits, however. Budget revenues were derived primarily from state economic organizations and the turnover tax. Income taxes provided a small part of revenues. Other minor revenue sources included agricultural taxes and customs duties. The planning authorities redistributed these budget funds according to the plan guidelines, using the budget to encourage certain sectors through subsidies or investment funds. Official policy, for example, stressed rapid development of the Slovak economy, which required the transfer of funds collected in the Czech lands. In 1983 the Slovak Socialist Republic received a fractionally larger share of total revenue (34 percent) than population figures alone would have warranted (32 percent of the country's total population lived in the Slovak Socialist Republic).

    Central authorities set prices on over 1.5 million kinds of goods. State enterprises were theoretically autonomous financial entities that covered costs and profits from sales. Because the government set production quotas, wage rates, and prices for the products manufactured and the inputs used in the process, however, managers had little freedom to manage. In the 1950s, the government had collected nearly all enterprise funds above costs for redirection according to its priorities. After the 1958 reforms, enterprises obtained a little more control over surplus funds, although the government continued to control the amount of the surplus. In the 1980s, the government was encouraging enterprises to undertake modernization and other limited investment from their own funds and bank credit and to rely less on budget funds.

    The turnover tax, another major source of budget revenue, was originally employed in the Soviet Union as a simple and effective method of collecting most of the funds needed by the government without requiring extensive bookkeeping and estimating. It was introduced in Czechoslovakia in 1953 and lost its importance as the chief source of revenue only in the late 1960s, when other levies extracted funds from state enterprises. The tax was collected on goods destined for retail, the rate varying according to the difference between the producer's costs plus approved margin and the selling price as specified by pricing officials. Retail prices of manufactured consumer goods, such as clothing and particularly tobacco products, alcoholic beverages, and sugar, were substantially higher than those of such basic necessities as potatoes, milk, and eggs. The turnover tax appeared to be both a source of revenue and a tool used to influence consumption patterns.

    Data as of August 1987


    NOTE: The information regarding Czechoslovakia on this page is re-published from The Library of Congress Country Studies and the CIA World Factbook. No claims are made regarding the accuracy of Czechoslovakia BANKING AND FINANCE information contained here. All suggestions for corrections of any errors about Czechoslovakia BANKING AND FINANCE should be addressed to the Library of Congress and the CIA.

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