Fiscal adjustment to developments in the real economy of utmost importance

Published: 14/4/1999

The Council of the Croatian National Bank, chaired by Governor dr. Marko Škreb, met on Wednesday, April 14, 1999 to review recent economic and financial developments and the basic guidelines of monetary policy for the second quarter of this year.

In terms of economic indicators, the CNB Council noted that in 1998 the Croatian GDP grew by 2.7 percent, trade turnover by 2.2 percent (in real terms) and the number of tourist over-night stays by 3.2 percent. The first months of this year were marked by a slow-down of economic activity, a trend already observed in the last quarter of 1998. In the first two months of this year, a decrease in industrial production, trade turnover and transportation services occurred along with an increase in the level of stocks and unemployment, as well as a fall of exports and imports. Movements of retail prices remained within expectations - in March retail prices grew by 0.4 percent (3.5 percent on annual basis). The exchange rate of the kuna has stabilized with far fewer interventions of the central bank on the foreign exchange market than in the previous period.

At its Wednesday meeting the Council of the Croatian National Bank noted that unfavorable developments in the real sector have been spilling over in the financial sector more intensively. The seasonal influence on liquidity usually observed at the beginning of every year has been intensified by the aggravated liquidity of the economy, while the level of government borrowing from the central bank and commercial banks has narrowed the possibilities for lending to enterprise and household sectors. Indeed, the amount of new lending decreased in February, accompanied by a slight increase in interest rates. In current circumstances, fiscal adjustment to developments in the real economy is of utmost importance. The Council of the CNB estimated that, without the adjustment, the possibility for monetary policy to maintain the stability of prices and the exchange rate of the kuna becomes increasingly restricted.

At the Wednesday meeting the Council of the CNB made a number of decisions defining and enhancing the principles of financial discipline in domestic and international financial transactions. Having in mind the fact that - after the introduction of the RTGS - Saturday is no longer considered a working day, the Council decided that Lombard facility can be utilized 15 working days in the month (instead of 18 days, as allowed so far). Amending the Decision on Conditions for Utilization of the Mandatory Reserves, the CNB Council prescribed that banks and savings banks which have not repaid previously utilized intervention loans may no longer use mandatory reserves funds for repaying loans granted to them on the over-night money market.

In order to prevent illegal capital outflow via accounts that fictive foreign companies may keep with Croatian banks, the CNB Council made the decision listing the documents that a foreign company has to submit to a commercial bank when opening a kuna or foreign currency account, or when using previously opened accounts. The documentation that a foreign company has to submit (the latest audited semi-annual or annual financial statement) should provide evidence that the foreign company really performs the business activity that it registered with a respective court. The decision is also restricting the transfer of authorization for managing the funds on these accounts on employees of the company, its branch office or its representative office in Croatia. Further, the Council decided on regulating more precisely the advanced payment of goods and services. The right to contract payment in advance has not been restricted. However, in future the payment order has to be documented with a contract or pro forma invoice, confirming that the advanced payment has really been agreed upon. Imports of goods and services have to be realized within maximally 90 days (unless the goods are imported on the order-basis, which requires a longer waiting period) or the paid-in amount has to be returned to Croatia.

Pursuant to a further decision of the CNB Council, commercial banks' investments in land, buildings, equipment and business premises may not exceed 30 percent of their guarantee capital. The total amount of these investments and investments in ownership shares in companies may not exceed 70 percent of their guarantee capital. Banks and savings banks have to submit a quarterly report on these investments to the central bank. The central bank may allow only a temporary departure from the aforementioned restrictions.