The Council of the Croatian National Bank, chaired by Governor dr. Marko Skreb, met on Friday, May 7, 1999 to review recent economic and monetary developments and examine the measures implemented so far and efforts that still have to be made for the purpose of improving the effectiveness of the banking supervision. Mr. Borislav Skegro, Vice President of the Croatian Government and Finance Minister of the Republic of Croatia attended the Friday meeting of the CNB Council.

In the first quarter of this year industrial production was 3.6 percent lower and the number of tourist night-stays 9.8 percent lower than in the same period last year. The January and February indicators show that retail trade turnover fell by 8.7 percent in real terms, while producer stocks recorded a 10.9 percent increase in comparison with the first two months last year. Along with the aforementioned movements, the number of employed persons was reduced by 3.2 percent, while registered unemployment reached a 7.6 percent higher level than in the same period last year.

These movements in the real economy were carried over into monetary developments. Wages remained above the level recorded in 1998 (in the first quarter of this year the average gross wage was 7.5 percent higher and the average net wage 12.5 percent higher (in real terms) than in the same period last year. However, compared to February, the average net wage paid in March was 2.1 percent lower in nominal terms and 2.6 percent lower in real terms. The growth of commercial bank lending was very modest in March: lending to corporate sector stagnated, while lending to household sector increased by 0.2 billion kuna. It was observed that a number of households began covering amounts missing from their current revenues with assets stemming from their bank deposits. Consequently, foreign currency deposits as well as domestic currency deposits recorded a certain decrease in March. However, commercial banks' reports submitted to the central bank on a daily basis show that in April this trend slowed down significantly.

In 1998 the current account deficit amounted to 1.55 billion dollar (about 7.3 percent of the GDP), a 35 percent decrease compared to 1997. In this year the narrowing of the current account deficit continued: in the first quarter the deficit was reduced by 17 percent in comparison with the same period last year. It is, however, unfavorable, that the relation between exports and imports became more balanced on lower levels of merchandise trade - exports decreased by 11.1 percent in dollar terms and by 7.7 percent in kuna terms, while imports decreased by 13.8 percent in dollar terms and by 10.4 percent in kuna terms.

A slowdown in collections of revenues (for three consecutive months budget revenues have been lower than expenditures) influenced borrowings by the government with the central bank - it reached 1.4 billion kuna at the end of April. Now, as the CNB Council noted, this amount still lies considerably below the legally prescribed limit, but in current circumstances fiscal adjustment - referring both to revenues and to expenditures of the budget - is inevitable, if the macroeconomic stability is to be preserved. Main indicators related to this issue are still favorable: in April, retail prices grew by 0.3 percent or by 3.5 percent year-on-year. The exchange rate of the kuna settled on the level of 3.88 to 3.89 kuna to the German mark, with central bank interventions on the foreign exchange market being fewer than in any of the preceding months this year. The stabilization of the exchange rate, a recent growth of foreign currency supply and a most recent increase in mandatory reserves of Croatian banks arising from the growth of the deposit base may signal that the downward trend of economic activity has reached the lowest point which is to be followed by upward movements.

At the Wednesday meeting, the members of the CNB Council were presented a report on the progress achieved in the development of the banking supervision. This process began in the Croatian National Bank in 1993 practically from the zero level, in an environment having no experience with supervisory activities, as well as no sufficient understanding of actual goals and targets of the banking supervision that can realistically be reached in a financial system functioning according to the principles of the market economy. In the past six years considerable progress has been achieved in that area. However, if the banking supervision is to contribute more efficiently to the stability of the financial and banking system, additional and urgent efforts have to be made: relevant regulation is to be developed, the supervision department to be better staffed and the coordination and exchange of information with other Croatian and international supervisory institutions to be improved. Further, the transparency of banks' operation has to be brought to a higher level and the activities that would facilitate a timely identification of possible problems in banks' operation as well as the introduction of adequate measures enhanced.

The Council of the Croatian National Bank was informed that commercial courts decided on opening bankruptcy proceedings against Glumina banka Zagreb, Komercijalna banka Zagreb, Gradska banka Osijek and Zupanjska banka. Once the decisions were made, the mandate of temporary administrators who were appointed to these banks at the end of January terminated, and their authorities were assumed by receivers. The payment of guaranteed deposits at failed banks lies within the competence of the State Agency for Deposit Insurance and Bank Rehabilitation.