Satisfactory stability of the exchange rate maintained despite considerable foreign exchange inflow

Published: 13/10/1999

At the meeting held on Wednesday, October 13, 1999 the Council of the Croatian National Bank, chaired by Governor dr. Marko Skreb, reviewed recent monetary and economic developments, approved semi-annual report on operation and financial results of Zavod za platni promet and made several decisions acting in accordance with its authority.

Main indicators of macroeconomic stability have remained satisfactory. In September retail prices grew by 0.6 percent (4.7 percent on the annual level) and the cost of living by 0.4 percent (3.9 percent on the annual level) in comparison with August. The exchange rate of the kuna remained within an acceptable framework of fluctuations: in September, with only one intervention of the central bank in the foreign exchange market, the exchange rate of the kuna against the German mark depreciated by 0.57 percent. In the first eight months of 1999 the real effective exchange rate of the kuna depreciated by 4.17 percent (deflated by retail prices) or by 4.31 percent (deflated by producer prices). Due to adequate measures introduced by the central bank, the satisfactory stability of the exchange rate was maintained also in circumstances of a considerable foreign exchange inflow of privatization revenues generated through the sale of a stake in Croatian telecommunications company. Since a part of these revenues was purchased by the central bank, gross international reserves kept with the central bank reached the record amount of USD 3.15 billion. The level of net international reserves has also improved, exceeding again USD 2 billion.

The increased level of kuna liquidity immediately caused a fall of interest rates on the money market. An especially significant fall occurred in transactions among most stable banks: the interest rate fell from about 11 percent to 6.75 percent. This means that good quality banks have access to liquidity sources under very favorable terms. The fact that two recently held auctions resulted in banks subscribing about HRK 550 million CNB bills shows that banks do have surplus liquidity, but that they prefer purchasing safe securities to lending to enterprises and households, even in circumstances where lending to enterprises has been gradually trending downwards for a few months now, and in August, for the first time, lending to households also decreased.

It is definitely a cause of concern that macroeconomic stability is not followed by favorable developments in the real sector of economy and by economic revival based on structural changes and international competitiveness. In the first eight months of this year industrial production was 2.8 percent lower than in the same period last year, real retail trade turnover was 7.4 percent lower and the number of tourist night-stays 15.8 percent lower than last year. Data on semi-annual results in transportation services show that, in comparison with the first six months 1998, the transportation of passengers recorded a 13.6 percent decrease and the transportation of merchandise a 12.1 percent decrease. Trade deficit for the first six months of 1999 is 20 percent lower than last year. However, it is unfavorable that the decrease was recorded due to lower levels of trade activity including a decrease of imports.

In August, for the first time this year, budgetary revenues exceeded expenditures. The CNB Council estimated that, privatization revenues from the sale of a part of Croatian telecommunications company reckoned in, budget deficit at the end of this year will not exceed 1 percent of GDP. A balanced government budget definitely makes it easier to monetary policy to realize its basic goals. However, the CNB Council emphasized that the maintenance of the stability in medium term will not be possible if growth trends in public spending and wages will remain in disagreement with developments in production and productivity. The CNB Council members believe that the largest possible part of privatization revenues should be used to support the development and production of competitive export products, since that would strengthen the foundations of further stability and sound economic growth and also enlarge prospects for the growth of employment.

At its Wednesday meeting the CNB Council gave its approval to Kärntner Landes- und Hypothekenbank AG Klagenfurt for acquiring more than 10 percent of voting shares in Slavonska banka d.d. Osijek, as well as to Erste Bank AG Wien and Steiermärkische Bank und Sparkassen AG Graz for acquiring more than 10 percent of voting shares in Trgovacka banka d.d. Zagreb. The Council also decided to have the representation office of Kredit Schweizer bank d.o.o. Sarajevo removed from the Register of Representation Offices of Foreign Banks in Croatia, since the office engaged in operations for which it was not authorized and which, pursuant to Croatian regulation, representation offices of foreign banks in Croatia are not allowed to perform.