The Baltic Course  

Baltic central banks: highly paid and overcrowded

By Oleg Bozhko

Out of the three current prime ministers in the Baltic states, two – Einars Repse of Latvia and Siim Kallas of Estonia used to run their country’s central bank. If one were to also recall the Ukrainian ex-premier, also former president of the Bank of Ukraine, the importance of the leading position in central banks and the great role these central banks play in post-Soviet countries becomes quite obvious

Picture: S.Tulenev, Chas

One hundred years ago only 18 world countries had their own central banks but today there are some 170 of them. The Chinese central bank has the largest staff of 150,000 people but the Russian Central Bank is the most “overcrowded” with 57 staffers per 100,000 capita of population. The Russian Central Bank also has on its books another 6 foreign banks that it inherited from the Soviet Union’s banking system.


The world’s top five

All central banks in the world employ over half a million people or 9 people per 100,000 capita on our planet. It is interesting, that all Baltic central banks are among the world’s top five of banks with the greatest density of staff.

The Bank of Latvia ranks second after the Russian Central Bank and has 27 employees per 100,000 capita, the rate being three times higher that the global average. The Bank of Lithuania is in third place with 24 staffers per 100,000 capita, and the Bank of Estonia comes fourth with 20 people per 100,000 capita. At that, the staff of Baltic central banks varies from 350 (the Bank of Estonia) to 950 (the Bank of Lithuania).

One of the underlying reasons for this phenomenon is that a position with a Baltic central bank is a prestigious and highly paid job. As it is known, highly paid positions also tend to multiply, at least within state institutions.

An average monthly salary in the Bank of Latvia topped 1,000 lats (EUR 1,650) last year, being the highest wage in all sectors of the Baltic economy, while the average wage in Latvia was under 200 lats.

The sixth position by number of central banking staff per 100,000 capita is held by euro zone countries, i.e. the European Central bank and 12 central banks of the member states. According to The Economist, central banks in the euro zone will have to lay off 37,000 people to bring the number of their personnel down to the global average.

The annual salary for the Bank of Latvia’s president is 80-100 thousand lats (about 150,000 euros) or equivalent to the salary of U.S. Federal Reserve System chief Alan Greenspan and only half of what the Bank of England’s manager Eddy George receives. At the same time, it is three times as much as his Estonian colleague, Vahur Kraft, gets.

When Latvia’s new premier (and former Bank of Latvia president) Einars Repse announced a total economy and saving regime for the country’s administration, this in no way affected the Bank of Latvia. “Why interfere with the work of an agency that has been working so long and so well, and earned public trust,” the premier’s advisor Dans Titavs explained to the press.

Hypertrophy within Baltic central banks is also confirmed by the ratio of their assets against banking sector assets: in Estonia this ratio is 20%, in Latvia 22% and in Lithuania  47%, the Lithuanian figure probably setting the world record.

Accomplishments by Baltic central banks must also be recognized: contrary to central banks in other post-Soviet countries, they succeeded in protecting their national currencies against devaluation. Although the “hard” rates of Baltic currencies were bolstered by imports and did not really facilitate exports, this is another story.


They deal in billions but deposit abroad

At the beginning of 2003 the Bank of Estonia’s assets stood at 16.5 billion Estonian kroons or EUR 1 billion, but 98% of these assets (gold and currency reserves) were permanently kept abroad. The Bank of Latvia’s assets were one billion lats or EUR 1.6 billion (of which 86% were foreign assets), and the Bank of Lithuania’s assets totaled 8.2 billion litas or EUR 2.3 billion (96.5% in foreign assets).

Foreign assets of the Lithuanian central bank rose 20% in 2002, in Latvia the growth was 9% and in Estonia 2%. Nevertheless, all three Baltic states still had significant current account deficits – from 4.5% of the GDP in Lithuania to 11% in Estonia.

This means that an influx of foreign investments in the Baltic states as they are about to join the EU not only covers a large part of the current account deficit and creates a surplus of foreign currency in the region that is accumulated by central banks. For example, Lithuanian commercial banks last year sold their central bank 1.3 billion litas (EUR 385 mln) more foreign currency than they bought. As a result, currency reserves of Baltic central banks are growing.

The Bank of Latvia’s foreign assets are invested mostly in 1-3-year government bonds of countries where national currencies are part of the SDR currency basket to which the Latvian lat is pegged as it finds these government securities the most liquid and never creating a negative yield over 12 month periods, the accounting period for the central bank. In addition, a small part of the bank’s assets are deposited with international financial organizations.

Geographical distribution of the Bank of Latvia’s foreign investments is as follows: one half in Europe, one-quarter in the U.S., 15% in international financial organizations and 5% in Japan. The Bank of Latvia derives 85% of its income from foreign markets and 15% on the domestic market (short-term loans to Latvian banks, investments in Latvian government bonds). As a result, net profit in 2002 was 14 million lats upon revenues of nearly 50 million lats.

Investment strategies of Lithuanian and Estonian central banks are simpler because the litas and the kroon are now pegged to the same currency – the euro, i.e., geographically they are placed only in Europe. It’s true, however, that the Bank of Lithuania has not yet completed restructuring its foreign currency reserves after switching its peg from the US dollar to the euro a year ago and part of its currency reserves are still placed in the U.S.

Assets of Baltic central banks act as a sort of counterbalance in case of crisis or a run for foreign currency on the domestic market. In fact they are more like currency boards, i.e., not really full-fledged central banks. 

Since the key objective of central banks is to ensure stability of national currency rates, they cannot influence interest rates on the domestic market or, consequently, the national economy, as is done, for example, by the U.S. Federal Reserves System, which slows down economic activity (upon overheating) or kindles it (in case of stagnation) by raising or cutting loan costs, the fuel for feeding the market economy.