The Council of the National Bank of Croatia chaired by Governor Dr. Marko Škreb met on Wednesday, March 5, to review economic and financial developments in the first two months of this year and examine the expectations for March 1997. The Council also made several decisions that will determine the future direction of monetary policy and introduced a number of other measures, acting in accordance with the authority entrusted to the central bank.

Thus, pursuant to the decision of the Council of the National Bank of Croatia, the discount rate and the lombard rate are reduced from 6.5% to 5.9% and from 11% to 9.5%, respectively. The continued price and exchange rate stability, as well as the progress made in the area of bank rehabilitation, provided the basis for the enactment of such a decision. It is expected that this move of the central bank should additionally encourage commercial banks to reduce their interest rates, and that it would contribute to the establishment of a more favourable economic framework that would stimulate faster growth.

February data indicate that retail prices remained idle following their relatively high increase in January, while the exchange rate of the kuna against foreign currencies fluctuated chiefly due to changes in the cross rate relationships between the leading foreign currencies, which was reflected in a recorded mid-month surge of the US dollar, when one dollar was exchanged for more than 6 kunas. The beginning of the year was marked by a noteworthy increase in foreign trade: in January 1997 the dollar value of exports and imports, excluding shipbuilding, showed an increase of approximately 25% compared to January 1996. This implies that the kuna value of exports and imports gives even more reason for satisfaction, raising hopes that in 1997 exports could play a leading role in the speeding of economic activities. Another signal of more favourable economic trends is the increase in direct foreign investments, which should receive an additional boost after the recent announcement of the country's credit rating.

Due attention was also given to the fact that the average real wage in January 1997 was 12.8% higher than in January 1996, or 7.3% higher relative to the average annual wage in 1996. Nevertheless, it has been estimated that such an increase is not in significant disagreement with the existing level of economic activity and productivity, which would otherwise produce proinflationary pressures. In contrast with these encouraging indicators, the unemployment figures are on the rise. In spite of some intra-month fluctuations, the overall liquidity of the banking system remains satisfactory, which is evidenced by large NBC bill purchases in February 1997. The average interest rates were 7.5% for 35-day bills and 9% for 91-day bills.

Further, the Council approved the nomination of Mr. Tomo Bolotin for Chairman of the Management Board of Splitska Banka, as well as the nominations of Mr. Jerislav KuŠtera and Mr. Pero Vrdoljak for Members of the Management Board, which also testifies to the successful implementation of the rehabilitation program in Splitska Banka. In addition, the Council made the decision to initiate the procedure for the appraisal of feasibility and justifiability of rehabilitation and restructuring of Vukovarska Banka.The bank was requested to submit its own proposal for rehabilitation and restructuring within 30 days.

In order to prevent the improper involvement of off-shore companies in the domestic and international dealings of Croatian economic entities, whose chief purpose is to make it possible to get round the regulations governing the performance of financial, credit, foreign trade and payment operations, including cash transactions, the Council of the National Bank of Croatia made the decision specifying the documents that a juridical person shall be requested to submit when opening a foreign exchange account in one of Croatian commercial banks licenced for international operations. The Council also limited the maximum amount of cash that may be withdrawn from such accounts to HRK 15,000 per month, making any larger withdrawals subject to the special approval by the National Bank of Croatia.

In order to ensure higher transparency and reliability of indicators that are used for determining the degree of stability of the banking system and that form the basis of efficient bank supervision, the Council stipulated new methods for the calculation of bank equity capital as well as the so called liable capital, enacted new regulation concerning capital adequacy ratio, the calculation of risk assets of banks and savings banks, as well as the required level and manner of making specific provisions against loan losses.

After considering the effects of recent changes in the payment system produced in the first couple of months after their introduction, the Council pointed out that the total costs of the execution of payment transactions were reduced by nearly 25% due to the introduction of flat fees for payment transactions that replaced former fees which were calculated as a percentage of the value of the transaction amounts, as well as the increased fees for cash transactions and the reduced fees for cashless transactions. It was also noted that cost reductions could be even higher provided that all the parties involved in payment transactions tended to aggregate their payment orders and made more extensive use of electronic payments.