During the discussion on the Annual Report of the Croatian National Bank for 2014, Croatian Parliament Deputies posed numerous questions to Governor Vujčić and expressed much criticism regarding the work of the CNB. Particularly active in the discussion on the subject concerning the entire Croatian economy were deputies Ivan Lovrinović (Most), Goran Marić (HDZ), Goran Maras (SDP), Ivan Šuker (HDZ), Ivan Vilibor Sinčić (Živi zid), Miro Bulj (Most) and Ivan Kovačić.

Following the discussion on whether the Croatian Parliament may accept or reject the report, the Governor noted that under the Amendments to the Act on the Croatian National Bank, which is in line with European regulations, the Constitution of the Republic of Croatia and EU founding treaties, the CNB's report to the Parliament can be neither accepted nor rejected, rather it is used by the central bank to inform the Parliament on the financial condition, degree of achievement of price stability and monetary policy implementation and the Parliament takes note of such a report. The Governor invited Deputy Clubs to set up in Croatia a system of ongoing dialogue between Parliamentary Members and the CNB on current economic topics with a view to improving communication between the Parliament of the Republic of Croatia and the CNB, in accordance with the practice of the European Central Bank and some other central banks.

The Governor replied to deputies' questions on deflation, explaining that the recorded small fall in prices does not lead to negative effects of deflation.

"What is the problem with deflation? Firstly, consumers tend to postpone consumption in the expectation of a further fall in prices. This means that you do not spend today in expectation of a tomorrow's fall in prices which deepens the recession. Is that happening in Croatia? No. Why? Because consumers may not postpone the consumption of food and energy, the two components whose prices are falling at this moment in Croatia, so it is certain that there are no negative effects on aggregate consumption which would come from the fall in these components. Quite the opposite, the fall in food and energy prices is good for Croatian citizens and the Croatian economy and this is one of the reasons why we generated higher GDP growth rates in 2015 than initially expected. Secondly, the possible negative effect of deflation is growth in real interest rates. This is not the problem in Croatia. The share of interest expenses in the disposable income of consumers is falling rather than rising and the same is true of the loan to income ratio."

Boris Vujčić further stressed that in Croatia's case "it is a positive supply shock which improves the country's conditions of trade. For a unit of Croatia's exports we can now obtain more than one import unit" and this is good for Croatian citizens and the economy, the Governor explained.

Responding to some deputies' criticism that monetary policy was not sufficiently expansionary, CNB Governor provided a comparison of the measures taken by the Croatian National Bank and those taken by the European Central Bank. He stressed that monetary policy of the Croatian central bank is more expansionary than that pursued by the ECB.

"The share of surplus liquidity in Croatia stands at 6% of GDP. In the euro area, it is 2.5 times smaller. The balance sheet of Croatia's central bank, as a percentage of GDP, is greater than the balance sheet of the European Central Bank. The Croatian monetary policy is more expansionary than monetary policy of the European Central Bank. These are the facts."

"The banks will not take the money if they have no one to place it to. This means that, no matter what we do, as long as there are obstacles to placement, the banks will simply not take the money. We conduct weekly repo operations at half a percentage point interest. There is interest for HRK 100 to 200m. When we cut the reserve requirement rate, we provide liquidity to the banks at 0%. Their cost is keeping the money with the CNB at 0% as opposed to granting loans to corporations at the average interest rate of 5%. And what do the banks do? They keep it in the CNB."

The Governor sees low creditworthiness of corporations as the root of the problem of further placement of money.

"Are you familiar with the interest rate currently offered on loans to good corporations in Croatia? It is two to three percent; this is the interest rate at which good corporations borrow in Croatia. Corporations which are not good can either obtain no loans at all or can obtain loans at higher interest rates. And these are the problems that we have to solve. Poor private sector balance sheets."

"If the average level of interest is corrected for the country's rating, it is clear that interest rates in Croatia are lower than the country's rating would suggest", Vujčić stressed. The Governor also suggested the introduction of a guarantee scheme for small and medium sized enterprises as a measure to ensure the flow of money and compensate for the lack of capital and collateral, which are currently non-existent and prevent money from going to corporations.

Boris Vujčić also touched upon the complaints regarding banking system privatisation and recommendations voiced many times over the years that we should have taken Slovenia's example. "For years, I have been hearing about how we should have looked upon Slovenia. See how they kept their state-owned banks and how well they are doing, I was told. And, what has happened now? All these Slovene banks have failed in the same way our banks failed when they were in state ownership. The direct cost of this for Slovene tax payers was some 10% of GDP, or more, if indirect costs are taken into account."

The Governor added that Hrvatska poštanska banka, now operating successfully and earning a high operating income, had to be recapitalised twice.  "Had state-owned banks been so good, we would have learned about it by now. However, history teaches us just the opposite - they are better off being private."

He also commented on the role of supervision and explained that the Croatian National Bank does not have a say in who will be granted loans; decisions on that are entirely in the hands of banks' credit committees.

"The role of supervision is to protect the stability of the banking system, to protect banking system deposits and provide assurance to people that their money is safe with the banks."

Boris Vujčić also explained that supervision imposes on the banks the obligation to keep a minimum capital adequacy ratio, i.e. the minimum capital they need to have in relation to the risks they assume and that it conducts periodic checks whether the banks comply with this capital adequacy requirement, assessing the risks of their placements by which they reduce capital. He also spoke of banks' attacks in connection with the requirement to increase provisions and stressed that 56% of non-performing loans are covered by provisions which ensures banking system stability and reduces the risk of poor performance by banks for Croatian tax payers. Responding to remarks that our international reserves were too high in comparison to some Central and East European countries, the Governor explained: "Why not look up to Slovenia or the Baltic countries? Because these countries belong to the euro area and we do not. As soon as Croatia enters the euro area, we will not have to keep such reserves anymore."

Governor Vujčić noted again that we were not in the euro area and that it would take some time before we were. "I have been explaining for the past two days how long it would take and how to do it. To get there we have to do our homework. We have to make structural reforms which will enable reduction of the public debt to GDP ratio and this is something everybody is telling us. The IMF also tells us that and so do the European Commission and the investors worried about their money. I do not recall any of them mentioning monetary reforms; they all speak of structural reforms and fiscal adjustment. Only then will we be able to reduce international reserves and we will do that."

The deputies were particularly interested to know why long-term (structural) repo auctions were launched now instead of in 2013 or 2014. "There are several reasons for that. Firstly, in 2013 and 2014, as well as from the beginning of the crisis, monetary policy was extremely countercyclical which means that it created huge surplus liquidity already at that time. So, why not long-term repo? Because we were still in recession at that time and foreign liabilities of banks exceeded foreign assets of banks, which means that there was a danger of further bank deleveraging, export of capital abroad and the issue of collateralising long-term repo operations in the banking system. At that time we did not have such a surplus in our current account." The Governor further stressed that there was a danger of depreciation of the exchange rate, since at that time we were not in the phase of GDP recovery and the demand for kuna loans such as that which exists today when kuna loans are growing faster than euro loans, did not exist.

Governor Vujčić also described the reasons for Croatia's euroisation and noted that the process of de-eurisation might take place in the conditions of a credible economic and fiscal policy that people can trust and in the conditions of gradual appreciation of the exchange rate of the domestic currency, since the process of depreciation present for a long time is responsible for the high level of euroisation.

Commenting on the question of remuneration paid to the Croatian National Bank Governor, the Governor stressed that Governor's salary is not paid from the budget of the Republic of Croatia and underlined that all recruitment is made in accordance with public job announcement procedures which are very fair and rigorous and help select only the best candidates which explains the high quality of CNB staff.

As regards the issue of loans with a currency clause in the Swiss franc and the conversion of those loans, the Governor emphasised that on 20 January 2015, a week after the policy of the Franc's peg to the euro was abandoned, the Croatian National Bank published a comprehensive report on the causes, structure, and possible impacts of some of the suggestions put forward for the resolution of the problems associated with those loans and a new report was submitted to the Croatian Parliament before the adoption of the Act on Amendments to the Consumer Credit Act in September 2015. The Governor reiterated that the banks had until now reported a loss of HRK 7bn, but that banking system stability was not threatened, the fact underlined by the CNB already in September 2015. The Governor stressed that in the same way that he had warned of the risks of borrowing in CHF in 2015, then as Deputy Governor, he now warned of the risks associated with the resolution of the issue of loans in francs. "On both occasions I received no support", stated Boris Vujčić, responding to the questions on loans in Swiss francs.

Responding to the question of loans granted by Austrian savings banks, the Governor stressed that borrowing abroad had been and still was allowed and that those loans agreements had been entered into in Austria and as such were outside the jurisdiction of the Croatian National Bank or its supervisory competence. Explaining the question of the sale of gold in 2001 that was also brought up during the discussion, the Governor said that the Croatian budget would have received a billion kuna less in payments from the Croatian National Bank had we decided to keep in the reserves the gold inherited from the Bank for International Settlements.

In his concluding statement, Boris Vujčić emphasised the importance of mutual alignment of monetary and fiscal policies. He stressed that: "Monetary and fiscal policies must be aligned. The task of monetary and fiscal policies is to act in a countercyclical manner. What does that mean? When the downward economic cycle begins and GDP growth rate starts falling, to prevent a sharp fall. The monetary policy was able to do that due to its restrictive character prior to the crisis. In other words, we pursued a very restrictive policy until 2009 and then we were able to start relaxing it from 2009 until today and have this countercyclical effect. Owing to that, Croatia was able to stay out of imposed programmes, was not managed by the IMF or the European Commission but was able to pursue its policy independently."

"Neither monetary nor fiscal policy can improve productivity or solve structural issues of public administration efficiency, poor business climate in Croatia, investment impossibility and legal uncertainty. These are the matters that have to be dealt with if we want to see faster GDP growth. Then we will have a more efficient monetary policy as it will be possible to channel all that money that will be generated to the economy. At the moment, monetary policy provides historically the cheapest government financing, but sovereign risk, with given public debt and rating, is still high and requires to be addressed. This will not be solved by monetary policy."

Boris Vujčić repeated his invitation to Parliamentary Deputies to a discussion outside the Session of the Parliament and noted that discussions such as this one are always beneficial. One of the ideas put forward by the CNB is to invite Deputy Clubs to the Croatian National Bank to discuss individual topics. "So, when the Parliament is not in session, you can pick the topics that you want to discuss with us at the CNB, with presentations, explanations, and come up any questions you might have", said Governor of the Croatian National Bank in conclusion.