At the meeting held on Wednesday, December 1, 1999 the Council of the Croatian National Bank, chaired by Governor dr. Marko Škreb, reviewed recent economic and monetary developments and made several decisions acting in accordance with its authority.

No significant changes or reversals were observed in economic and monetary developments in the past few months. Main indicators of macroeconomic stability remained completely satisfactory: in the first ten months of 1999 retail prices were 4.1 percent higher compared to the same period last year and the exchange rate fluctuations remained within an acceptable band (in 11 months the kuna depreciated against the German mark by 4.7 percent; the depreciation occurred largely in the first quarter of the year). Available monetary indicators point at the further reduction of average interest rates charged on loans granted in that period and at the continuation of the gradual increase of foreign and domestic currency savings in Croatian banks.

However, the CNB Council members believe that these developments cannot suffice for a favorable assessment of the situation in the Croatian economy, since they are accompanied by unfavorable developments in the real sector. An especially unfavorable indicator causing considerable concern is the further increase of registered unemployment, which is now amounting to more than 333,000 (at the end of October the unemployment rate exceeded 20 percent), and is accompanied by the reduction in the number of employed persons. Further unfavorable indicators are those related to foreign trade, which should be the most effective motor of growth and competitiveness of the Croatian economy. In the first nine months of 1999 exports amounted to USD 3.16 billion and imports to USD 5.64 billion. This means that exports were 5.7 percent and imports 9.7 percent lower than in the same period last year. Consequently, merchandise trade deficit was reduced by 14.3 percent and current account deficit by 19.8 percent.

At the Wednesday meeting the CNB Council made the decision defining more precisely the conditions under which the short-term liquidity facility with a maturity of up to one year can be extended to banks. This ultimate liquidity facility can be granted only to those banks, which have already utilized all available sources of liquidity on the market. The Croatian National Bank will extend this credit to a commercial bank that applied for it if it assesses that the bank is solvent and that its liquidity problems might jeopardize the stability of the financial system. The commercial bank must provide a collateral for the credit in the form of CNB bills, securities issued by the Finance Ministry of the Republic of Croatia, bonds serviced or guaranteed by the state (the remaining maturity period of the bonds may not exceed two years), securities issued by legal persons whose shares are in the first listing of Zagrebačka burza (the remaining maturity period of these securities may not exceed two years), as well as in the form of marketable risk-free securities issued by legal persons headquartered in member countries of OECD. The interest rate charged on this short-term liquidity facility will be the Lombard rate + 0.5 percent for the credit with maturity of up to three months or the Lombard rate + 1 percent for the credit with maturity exceeding three months.

At its meeting held on Wednesday the CNB Council decided to introduce the possibility of a more extensive use of Lombard credits in the period from December 15, 1999 until January 15, 2000. On the basis of this decision the amount of Lombard credits to be granted to banks was increased from 50 percent to 70 percent of the value of pledged CNB bills, Treasury notes and bills of exchange issued by the Finance Ministry, as well as from 30 percent to 50 percent of the value of foreign currency denominated CNB bills. In the above mentioned period it will also be possible to use Lombard credits up to 18 working days in the month (usually up to 15 days). The CNB Council estimated that this is the most simple way in which banks can be helped to supply the financial system with cash at the end of the year, in a period of usually increased cash demand, which may this year be even higher due to specific characteristics of the transfer in the year 2000.

Temporary administrators appointed to Hrvatska gospodarska banka, Agroobrtnička banka and Promdei banka informed the CNB Council on their findings and on the measures introduced in these banks. The CNB Council made a number of suggestions which should enhance the collection of these banks' claims and the reduction of their operating costs in the period until the final decision on the future of the banks is made. The CNB Council emphasized again that the results of such efforts directly depend on the coordinated action of all institutions in charge of handling problem banks, as well as on the effectiveness of the legal system in protecting creditors' rights and sanctioning irresponsible operation with depositors' money.