EBRD President visits the CNB

Published: 9/9/2003

EBRD President, Mr Jean Lemierre, and his associates visited today the Croatian National Bank where they had a talk with Governor Željko Rohatinski, PhD and central bank officials about macroeconomic trends, monetary policy measures, the banking system and the EBRD's role in providing support in the field of further structural reforms and integration of the Croatian economy into the EU.

President Lemierre was especially interested in the CNB's view on the recent disturbing indicators of the balance of payments, the banking system developments and the central bank's potential to keep the developments in these two areas under control. Governor Rohatinski said that with respect to the country's experiences in the last ten years, the domestic savings of 10% of GDP and investment needs twice of this value, its external borrowings and current account deficit are not unusual occurrences. Although the country has not experienced difficulties in servicing its public and private sector debt, the growing debt and the balance of payments nevertheless require special attention.

The problem primarily lies in the fact that a huge portion of borrowed funds is absorbed by the current consumption. It is not forwarded into investment that could improve the Croatian economy's competitiveness, strengthen its exports and facilitate both the future debt service and the country's participation in the international integration process. Further improvements in the foreign trade are the prerequisite to achieving the long-term sustainability of the economic. Multiple reasons lie behind the current and unsatisfactory results. In the last decade, as a result of mainly non-economic factors, Croatia participated weekly in the first huge wave of FDI into transition countries and thus lost its position as a leading supplier of some important export products. As a result of disinvestment, Croatia also lacks behind technological developments and exactly this area could benefit the most from FDI inflows. The issue of international competitiveness should also be viewed in the context of the fact that the taxes to GDP ratio is higher in Croatia than in numerous other countries with whom domestic companies should compete for prospective businesses.

These facts are sufficient proof that a considerable exchange rate change would not -as some argue - contribute to the higher export performance of the economy.

In addition, this would not eliminate a low elasticity of exports and imports of a small and open Croatian economy to exchange rate changes, and since loans were mainly extended with a currency clause, more significant movements in the exchange rate would increase the credit risk. Moreover, foreign currency assets account for about 70 percent of total liquid assets in Croatia and in the event of exchange rate instability depositors would probably made an effort to convert increased kuna savings into foreign exchange which in turn would exert the additional pressure on the exchange rate. The fact that the central bank did not intervene in the foreign exchange market in the last six months contests the assertions that the exchange rate is "artificially" maintained.

As the external debt, the balance of payments deficit itself would not be disturbing if it would not be accompanied by the government deficit. Since the changes needed in this area cannot be accomplished by monetary restrictiveness, the desired effects should be achieved by implementing the short-term and long-term measures of the overall economic policy. The monetary policy makers' efforts in the filed of competitiveness improvement and risk reduction include the maintenance of low inflation, stable exchange rate and external liquidity of the country. At the same time, these efforts continue to be goals the Croatian National Bank will pursue in the future by implementing the available monetary policy measures.

EBRD President welcomed these commitments and stressed that the EBRD stands ready to provide support to future structural reforms and development efforts of Croatia on its way to joining the EU, and concluded by adding that the EBRD will shape its support to meet the Croatian needs and mutual interests.