Foreign debt continues to rise

Published: 10/5/2006

The Council of the Croatian National Bank at its today's session examined recent economic and monetary developments, adopted central bank's annual report for 2005 and enacted several decisions within its jurisdiction.

The members of the Council, the highest central bank body, paid particular attention to data on continued foreign borrowing of banks. The country's total foreign debt reached almost EUR 26.8bn towards the end of April, which is an increase of 14.9% compared with the year before and an increase of 4.9% compared with the end of last year. In April alone, foreign debt rose by EUR 478m, of which banks accounted for EUR 416 m. During the first four months of this year, total foreign debt rose by EUR 1.25bn. Foreign debt of banks rose even more during that period (EUR 1.33bn) while the country's foreign debt fell by EUR 562m, owing, among other things, to central banks measures which facilitated gap bridging between budget revenues and expenditures through domestic financing.

The CNB Council agreed that, in order to restrain the growth of foreign liabilities of banks and thus also of total Croatian foreign debt, a combined monetary and fiscal policy efforts will be needed. Debt growth could also be controlled by means of a drastic toughening of monetary policy measures alone, but this could have an adverse effect on economic growth, mostly of small and medium-sized enterprises, which do not have direct access to foreign sources of funding. Such a policy would also negatively affect payment ability of the existing and potential users of bank loans.

Given the circumstances, the members of the Council agreed that the most acceptable solution to this problem both in terms of long-term interests of banks and of the country as a whole would lie in a further reduction in the general reserve requirement rate (currently set at 17%) which would liberate sufficient funds from domestic sources to cover the expected economic growth and appropriate growth of personal consumption, without further foreign borrowing. At the same time, this would also provide further approximation of the country's monetary policy to that of new EU Member States, in terms of monetary policy and the reserve requirement rate.

A new decision on the manner and the conditions under which residents in transactions with non-residents may receive payments or execute payments in kuna, foreign currency and checks as well as amendments to the Decision Governing the Conditions for and the Manner of Opening and Managing Non-Resident Bank Accounts were enacted with a view to achieving simplification and liberalisation of certain provisions and further approximation to international and EU practices and standards.

During the session, the CNB Council gave its approval to a group of Agram concern companies, for the acquisition of over 75% share in the share capital of Nava banka d.d. Zagreb and to Alkom Graditeljstvo d.o.o. for the acquisition of over 20% share in the share capital of Credo banka d.d. Split.