Croatia Central Bank Statement

Author: | Published: 19 Oct 2018
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Croatia had another successful year in macroeconomic terms, despite a number of challenges along the way. The domestic economy continued to grow propped up by expanding personal consumption and favourable exports performance. Positive trends also continued in the labour market, with declining unemployment, while inflation returned to positive territory. The current account remained in surplus, supported by growing exports, while external vulnerability indicators have continued improving. Fiscal policy commitment to a balanced budget ensured the continued decrease in public debt. Expansionary monetary policy supported economic recovery and improvement in financing conditions – interest rates fell and lending recovered.

It is under such circumstances that the Croatian National Bank remains watchful of potential external and domestic risks, while at the same time maintaining prudent supervision of the banking system. The limited impact of the crisis in Agrokor – the largest non-financial private sector company – on economic activity and financial stability confirms the validity of this approach. Due to strict monitoring of lending limits, banks' exposures to Agrokor and related parties were less than 20% of their capital when the Agrokor crisis started, and losses were immediately recognised and provisioned for without major problems for the banks.

Having in mind the implications of potential policy tightening in developed countries to financial conditions in Croatia, in 2017 the central bank issued a recommendation to banks to offer clients the possibility to refinance existing loans with variable interest rates to fixed-rate loans. In addition, the central bank started publishing a list comprising all relevant information for consumers about the available loan offers with fixed and variable rates, all with a view to increasing consumer risk awareness and the predictability of future debt repayments.

Finally, in 2017 the policy focus in Croatia shifted to consider the prospects for adoption of the euro. Progress in reducing Croatia's macroeconomic imbalances and the abrogation of the Excessive Deficit Procedure, coupled with the continuous strengthening of the Economic and Monetary Union's institutional infrastructure and initiatives for the additional deepening of integration processes, provided favourable timing to initiate a comprehensive public discussion on euro adoption in Croatia. The deeply rooted "euroization" of Croatia speaks in favour of a stronger orientation towards euro adoption. But that said, the euro adoption process will largely depend on the success of our reform efforts to strengthen Croatia's economic competitiveness and resilience. This requires a continued effort in structural policy implementation in a number of areas – from education, public administration and regulatory framework to pension and health care systems.

Ambitious reform agenda is a precondition for improving the fundamentals of Croatia's economy in general, irrespective of the introduction of the euro. And the best time for the reforms is now, while the sun is (still) shining on the global economy. These efforts will continue to be supported by the prudent monetary policy, which will remain committed to safeguarding price and financial stability, thereby contributing to the macroeconomic stability of the country.