The Czech National Bank together with the Ministry of Finance have presented to the government the draft principles of the new legislation in the foreign exchange area. The government approved these principles at its session on 22 February, 1995. The new act will replace the existing Foreign Exchange Act No. 528/1990 of the Coll. This act specifies the Czech currency as the exclusively domestic one, thus differentiating it from freely convertible currencies.
The new legislation proposes to gradually implement full external convertibility of the Czech crown, the first step being the convertibility of operations on the balance of payments current account under Article VIII of the Agreement on the International Monetary Fund.
If we compare the present legislation with these requirements, the new act should cancel those restrictions still valid which relate to:
payments connected with the export and import of goods and services, thereby to also liberalise execution of these payments by natural persons, unrequited transfers to foreign countries, e.g. meeting alimony obligations, costs related to treatment, education, transfers of salaries and wages, fees for participation in international organisations, purchases, sales, exports and imports of financial means in Czech and foreign currencies by residents and non-residents, with the alternative to restrict cash transports across the border, repurchases of Czech currency from non-residents' accounts.
However, outside the framework of the demands of Article VIII of the Agreement on the International Monetary Fund, the new act also proposes the liberalisation of some capital operations. They are as follows:
direct investments abroad (establishment or participation in the establishment of an enterprise with full or partial ownership interest of 10% and more and credits due in 5 and more years connected to direct investment), acquisition by residents of real estate abroad.
The proposed legislation is based on the following:
faster liberalisation of capital imports than exports,
faster liberalisation of long-term capital movements against short-term capital movements, so called 'hot money',
faster liberalisation of direct investments in foreign countries than portfolio investments (purchases of securities).
The new legislation proposes the maintenance of foreign exchange restrictions only on the most sensitive items. In terms of capital outflow, the restriction would be in effect for the following cases:
providing financial credit to a non-resident (this does not apply to financial credits extended by the state, credits due in more than five years, credits granted in connection with direct investments and loans between natural persons),
providing securing instruments (guarantees in particular) to secure a non-resident's commitment against another non-resident,
keeping financial means (in foreign and Czech currencies) in accounts abroad,
issuing foreign securities in the domestic primary market or their launching on the domestic secondary market (long-term securities on the capital market and short-term securities on the money market),
purchase of foreign securities (their sale will be free) in a way other than from licensed securities traders.
On the capital inflow side the restriction would only apply to
purchases of real estate in the CR by non-residents provided they are not citizens of the CR. Free access to real estate would remain in those cases stipulated by the act.
Regulation of the stated operations would be particularly through direct instruments, i.e. their execution would be conditioned by the granting of a foreign exchange license. It is assumed that indirect instruments, which could be put into effect through a CNB provision (issued in agreement with the MF) or through a decree to the new act, will be used for some operations.
The draft law proposes the cancellation of the so called obligation to offer foreign exchange means, however it strongly stresses the obligation to report, which supplements the regulation and should gradually replace it. Despite this, the extent of the reporting obligation is, for virtual and organisational reasons, smaller than, e.g., in Germany. The reporting obligation should be a source of reliable information for the analysis of the balance of payments and it should strengthen the effect of an act and mechanisms against money laundering. At the same time, in some cases a link to financial authorities is being proposed in the interest of acquiring basic material for tax purposes.
The draft also proposes the obligation of banks and other locations where foreign exchange operations are performed to examine whether these operations are in line with the Foreign Exchange Act. According to the International Monetary Fund's analysis, this is a common, world-wide obligation.
The path to full convertibility of the Czech crown was started by launching the economic reform in 1991. This involves a continuous process which started with the implementation of the so called internal convertibility and continued through the partial steps of liberalisation. In fact, a relatively high level of convertibility was achieved at that time. The proposed legislation, in this sense, is legal confirmation of the position which the Czech crown convertibility has attained. At the same time, some restrictions remain unchanged which reduce the risk of instability of the Czech crown exchange rate.
The new act on foreign exchange relations should be in effect over a long period until the full convertibility of the Czech crown has also been implemented in the area of capital operations. A flexible formulation of the act should enable further liberalisation steps to be taken in such a way that the act would not have to be continually changed.