The Council of the National Bank of Croatia chaired by governor dr. Marko Skreb held a meeting an Wednesday, December 3, and reviewed recent economic and monetary developments, examined the proposed 1998 budget and possible effects of the value added tax on monetary policy. The Council reduced the obligatory reserve requirement on foreign currency deposits and also made several other decisions acting in accordance with the authority entrusted to the central bank.
Available indicators confirmed that the macroeconomic framework remained stable in November, while economic activity showed further signs of recovery. In the past ten months the physical volume of industrial production rose by 5.4 percent, indicating that the 1997 growth of about 6 percent is a real possibility. Other key activities of Croatian economy also show a consistent growth trend. An especially good news is that exports recovered, recording a ten-month growth of about 14,5 percent in kuna terms. Another favorable indicator is the increase in productivity of about 10,4 percent. Retail prices in November were by 0,4 percent higher than in the previous month, and 3,1 percent higher than a year earlier. The exchange rate of the kuna continued to be stable in November. The average lending rate of commercial banks on kuna loans stands at 14-15 percent for the third month now, the average spread at about 10 percent. The Council stated that the reduction of these indicators should be contingent primarily upon further growth of competition and progress made in the rationalization of banks' business operation.
Having reviewed the 1998 budget proposal and the approaching tax system reform, the Council said it supported the proposed solutions, since they would enable the successful continuation of the stabilization program. The Council emphasized that the introduction of the value added tax does not warrant an increase in the overall price level. Should such tendencies be observed, the National Bank of Croatia will resort to tighter monetary policy measures.
At its Wednesday meeting, the Council of the National Bank of Croatia lowered the obligatory requirement for commercial banks to redeposit abroad part of foreign exchange deposits, both sight and term deposits up to three months, from 60 to 55 percent. Thus, the total foreign currency deposits requirement ratio was reduced to 31 percent, which created USD 120 million of excess foreign exchange holdings. However, to preserve the necessary safety and the growing confidence of savers - in the past five years foreign currency savings increased from USD 162 million to USD 4.1 billion - as well as to reduce the risks to the utmost extent possible, the National Bank of Croatia made it obligatory for banks to redeposit their foreign currency reserves in OECD-countries, that is, at foreign banks rated at least AA- or Aa3 by the three leading rating agencies, Standard & Poor's, IBCA and Moody's.
The Council of the National Bank of Croatia decided to postpone the implementation of several regulations defining the operation of banks and savings banks originally planned for the beginning of January to the beginning of July 1998, estimating that after the work on a new system of regulatory reports has been completed, the implementation shall be more effective. The regulations stipulate the classification of balance sheet and off-balance sheet asset items, the method for calculating the capital adequacy and risk-weighted assets, the amount and the manner of establishing provisions for potential losses, as well as the method for calculating the capital of banks and savings banks.
The Council of the National Bank of Croatia stated that the central bank would not issue operating licenses to banks and savings banks, until a new law on banks and savings banks is adopted, however, at the latest until September 30, 1998. Building societies are exempt from this restriction. The Council emphasized that it would exceptionally grant an operating license in case of a large and important bank, which could contribute to the increase in competition and reduction of concentration in the Croatian banking sector, as well as speed up the restructuring of the banking industry.