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Croatia
(Prepared by Jurica Božić & J. Puljiz)
1991-1993: Hyperinflation and stabilisation programme
The period prior to 1993 was characterised by the dismantling of the Yugoslav monetary system
and establishing of the Croatian National Bank (CNB) as well as of its functions and instruments.
The macroeconomic environment was highly unstable with undergoing transitional processes,
plunge in GDP, hyperinflation, major political insecurities and war.
After the dismantling of Yugoslavia and the Yugoslav monetary system, the new Constitution
(21st December 1990) defined the CNB as central bank of Croatia. The functions and
responsibilities of the CNB were defined later by the Decree on the Croatian National Bank
(enacted 8th October 1991) that also regulated the conversion of Yugoslav dinars into Croatian
dinars. The overall legal framework for the functioning of the CNB was defined by the Croatian
National Bank Act enacted the 4th November 1992. The main goal of the CNB defined in the
1992 act was ensuring price stability and overall domestic and foreign liquidity. However, the
breakdown of the previous monetary system left the CNB without international reserves,
resulting in their strong accumulation during the period.
A successful stabilisation programme was implemented in October 1993 (cutting down inflation
from 1,149.7 % to -3.0%) after which the economy begun a fast recovery. An exchange rate
anchor was chosen (although never announced) due to high dollarisation of the economy and
correlation between exchange rate and domestic prices which resulted in a dirty-float regime with
a never-announced range of floating that is still present today.
The monetary policy was in great part determined by the stabilisation programme. Preparatory
activities for the programme included the shift from administrative to market instruments of
monetary policy (e.g. the derogation of credits for selective purposes), institutional and regulatory
changes (new Banking Act) and liberalisation of foreign currency transactions. During the
stabilisation programme the nominal money supply growth slowed down accompanied by a 25%
devaluation that decreased the real money supply. After a short liquidity crisis the money supply
begun to grow faster.
As for the monetary policy instruments, the CNB introduced foreign currency transactions as
main means of money creation and decreasing the share of direct bank crediting. The CNB
introduced CNB Bills auctions as a new instrument aimed, with reserve requirements, to the
sterilisation of the monetary effects of foreign currency transactions.
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1994-1997: Post-inflation period
This period is characterised by low inflation, high growth rates, sound fiscal policy, strong capital
inflows, active bank rehabilitation, strong nominal money growth and stable exchange rate.
Although the relevant CNB Act changed in 1995 the main goal and responsibilities remained the
same.
The 1994 was marked by the introduction of a new currency – the Croatian kuna. The
macroeconomic environment was characterised by a drop in inflation (actually a deflation of 3.0%), fast growth of economy (5.9%) and fiscal and current account surplus. The process of remonetisation of the economy (i.e. the re-usage of domestic currency as measure of value and
means in transactions) that started after the stabilisation programme was still very present in
1994. As a result, monetary aggregates grew at high rates: reserve money and money increased
110% and 112% respectively. The monetary policy adjusted to those pressures increasing the
money supply more than planned. Part of the increased money supply is due to high seasonal
foreign currency liquidity of commercial banks that forced the CNB to purchase the surplus of
foreign currency in order to avoid the depreciation of the kuna.
In 1995 Croatia pursued two military actions (in May and August) in order to reintegrate the
territory that was occupied. As a consequence of rising insecurity, domestic demand declined and
the tourist season failed. The CNB responded by lowering the money supply. This was achieved
through increase in reserve requirements from 26.20% to 30.90% and through foreign currency
auctions.
Year 1996 was marked by the receipt of an investment grade credit rating which allowed Croatia
to access international capital markets and increased the credibility of pursued policies. This
encouraged capital inflows and foreign investments. The increase of revenues from tourism and
transfers increased the supply of foreign currency leading to some appreciation pressures.
However, the CNB kept the exchange rate stability through foreign currency auctions and than
sterilising the increased money supply.
In 1996 the banking sector was further consolidated by the rehabilitation of three major banks. As
a result, money market interest rates went down. The increased credibility of the banking sector
and trust in domestic currency caused a faster growth of deposits held in kunas compared to those
held in foreign currency although the later were still predominant. The main channel of creating
money were foreign currency transactions while the sterilising effect was achieved by selling
CNB Bills: the net effect was a slight adjustment of the growth of reserve money (from 43% to
30%) with increased growth of money supply (M1 and M4 increased 38% and 49% respectively).
In 1997 the fast growth continued with low inflation and stabile exchange rate. The current
account deficit as well as the fiscal deficit increased and reached their peak in the period 19941997. The money market interest rates and commercial bank interest rates on loans continued to
decrease as the consolidation of the banking sector continued. The receipt of an investment grade
credit rating contributed to the increase of commercial banks’ foreign borrowing and to the
expansion of domestic credit that increased 44% compared to only 3% in 1996. Although
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monetary policy instruments indicated an expansion (reserve requirements rate, discount rate and
interest rate on lombard credit decreased), the growth of monetary aggregates slowed down
(reserve money, M1 and M4 increased 18%, 21% and 38% respectively) as the main instrument
of creating money were foreign currency transactions.
1998-2000: Economic slow-down
In the period from 1998 to 2000 Croatia’s growth rates decreased substantially accompanied with
the growth of fiscal deficit and a slow-down of capital inflows. The inflation increased (from
average 3.63% in the previous period to 5.73%) but was still in the CNB’s target range. Also, a
mild depreciation occurred. The period is characterised by mild money supply growth and a
decrease in domestic credit growth. The banking sector experienced problems with liquidity and
bankruptcy as a consequence.
Year 1998 saw a decline in growth rates from 6.8% to 2.5% that is partially due to international
shocks (Asian financial crisis) but in great part in a result of structural imbalances of the Croatian
economy. The introduction of the VAT system substantially raised budget revenues resulting in a
budget surplus. However, it also caused a one-time increase in prices that generated higher
inflation (from 3.8% in 1997 to 5.4%).
The monetary policy was aimed to restrict the domestic credit in order to decrease the current
account deficit generated by high imports. The CNB introduced mandatory deposits on foreign
credits in order to restrict the banks’ foreign borrowing and the credit rate on lombard credits
increased from 9.5% to 12%. At the same time, the Asian crisis made more expensive the
borrowing on international markets. As a result, domestic credit growth was halved. Reserve
money and money decreased 3.8% and 1.5% respectively. The credit contraction caused a
decrease in domestic demand and the current account deficit decreased from 12.5% of GDP in
1997 to 6.7%.
The banking sector experienced problems. Two banks had serious insolvency episodes that were
further exacerbated by payment arrears present in the whole economy. Due to such problems with
liquidity in the banking sector, the CNB lowered the interest rates on intra-day refinance facility
(from 17% to 7%). The banking sector problems caused a rise in money market interest rates and
an increase in banks’ interest rate spread.
In 1999 the situation worsened as Croatia experienced a recession (the growth rate fell to -0.9%)
with relative price stability (inflation rate was 4.4%). The fiscal deficit as well as the current
account deficit continued to increase. The foreign debt reached 50% of the GDP.
Problems with unpaid claims increased with the government being the main generator of
payment arrears. A second bank crisis occurred and four banks went bankrupted. The rising
insecurity increased interest rates and triggered a run into foreign currency causing depreciation
pressures. The CNB countered those pressures mainly with foreign currency transactions.
However, the kuna depreciated 6%. The CNB pursued a more active role in bank crisis resolution
granted by the new Banking Act enacted that year. The CNB increased the interest rates and
reserve requirements and reintroduced the short term liquidity credit.
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In 2000 Croatia experienced economic recovery (2.9% GDP growth), higher inflation (7.4%),
appreciation pressures and a decrease in current account deficit. The main causes of higher
inflation were the increase of oil prices on international markets and the increase of import
excises. Appreciation pressures came from tourism, privatisation of major banks and foreign
borrowing and were mainly neutralised.
As a result of the successful restructuring of the banking sector and increased efficiency and
security, the banks’ liquidity increased leading to a growth of domestic credit and interest rates
decline. The high liquidity of the banking sector increased the need for sterilisation measures.
However, the monetary policy was aimed to a mild nominal growth of money supply.
2001-2003: Recovery
The period after 2001 is characterised by higher growth rates, higher fiscal deficit, speeding up of
capital inflows, bank privatisation and internationalisation, stable exchange rate, lower inflation
and faster money supply growth.
The main characteristic of monetary policy in 2001 is the fast increase of reserve money (51.9%
compared to 2000) and other monetary aggregates. The overall excess of bank liquidity was the
base for a domestic credit expansion (23.1% of credit growth) and triggered the need for
sterilisation (again the main sterilisation instruments were CNB Bills and reserve requirements).
Interest rates of the CNB declined (interest rates on lombard credit fell from 12% to 10% and on
short-term liquidity credit declined from 13% to 11%) as well as the reserve requirements rate
(from 23.5% to 19%). However, the deposit base against which the reserve requirements are
calculated was widened so the net expansion effect was smaller. The instrument of intervention
credit was abolished. The exchange rate pressures came mainly from tourism, privatisation of
telecommunications, increased banks’ foreign borrowing and financing of major infrastructure
projects by foreign credits.
The capital inflows continued their growth from 13% of GDP in 2001 to 15% in 2002. The
foreign borrowing continued in 2002 resulting in an increase of the foreign debt that reached
68.7% of the GDP. Foreign borrowing and the fast growth of foreign currency deposits after the
conversion to euro in the beginning of 2002 allowed for. As a result, current account deficit
worsened reaching 8.5% of GDP. The main instruments of money creation were again foreign
currency transactions while great part of the created money had to be sterilised by CNB Bills
auctions.
In 2001 changed the relevant central banking legal framework. The new CNB Act shifted the
CNB’s aim from pursuing currency stability and general domestic and foreign liquidity towards
the only aim of pursuing price stability. The tasks were redefined in order to stress the importance
of the policy making and regulative role of the CNB along with other central bank functions.
Also, the 2001 Act banned central bank lending to the Government.
Year 2002 was also marked by a new bank crisis (a dealer was accused of fraud) which was
solved quickly as the CNB secured enough liquid assets with the available instruments in order to
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counter the deposits withdrawal. However, the crisis didn’t cause major episodes of panic and the
bank was later on acquired by another bank.
In 2002 a new Banking Act was enacted. The changes predominantly concerned adjustments to
the regulatory framework of the European union.
The macroeconomic environment in 2003 was characterised by a mild slow-down of growth
(4.3%), additional lowering of inflation (1.7%), stagnation of capital inflows, and decrease of the
current account deficit. However, the fiscal deficit continued to grow and reached 3% of the GDP
while the foreign debt reached the highest amount ever (83% of GDP).
The monetary policy was aimed to restrict the growth of domestic credit. The CNB promulgated
two decisions, the so-called “16% decision” and “35% decision”. The “16% decision” was aimed
to banks whose annual credit growth exceeded 16% (or 4% quarterly). In that case they had to
purchase CNB Bills amounting 200% of the exceeded credit amount. The “35% decision”
required that at last 35% of daily foreign liabilities had to be covered by foreign claims. As a
result domestic credit growth fell to 14.6% despite a relatively strong growth of reserve money
(32.8%).
Research and publications issued by the CNB
Research activities are present in each organisational area or department of the CNB depending
on the field of work. However, the main research activities are concentrated in the Research and
Statistical Area.
The publications issued by the CNB are as follows:
Regular Publications
 Standard presentation format (SPF) – presentation charts on Croatian economy and the
Croatian National Bank
 Bulletin – issued monthly, contains information on economic trends and quarterly reports
as well as a statistical survey mainly presenting data collected by the CNB
 Banks Bulletin – information on banks and banking sector in Croatia
 Annual Report – information on economic trends, monetary policy, international
relations and general information on CNB; also includes the financial report of the CNB
Occasional Publications
 Working papers
 Surveys
Other
 Currently published only a book on tourist consumption in Croatia
Euro
 information on the euro and its introduction
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All publications are available on the web (www.hnb.hr).
Appendix: Main indicators
Table 1: Main macroeconomic indicators
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
GDP
(millions
USD,
current
prices)
10903
14585
18811
19872
20109
21628
19906
18427
19863
22436
28335
GDP
annual
change
(%)
Retail
price
inflation
(%)
-8.0
5.9
6.8
5.9
6.8
2.5
-0.9
2.9
4.4
5.2
4.3
1149.7
-3.0
3.7
3.4
3.8
5.4
4.4
7.4
2.6
1.8
1.7
Current
account
balance
(% of
GDP)
External
debt
(% of
GDP)
5.6
4.9
-7.5
-4.8
-12.5
-6.7
-7.0
-2.5
-3.7
-8.5
-7.2
24.2
20.7
20.2
26.7
37.1
44.8
50.1
60.0
57.0
68.7
83.2
Average
exchange
rate
HRK/USD
3.5774
5.9953
5.2300
5.4338
6.1571
6.3623
7.1124
8.2768
8.3391
7.8637
6.7014
Average
exchange
rate
HRK/EUR
Capital
inflows
(% of
GDP)
4.1336
7.0874
6.7578
6.8047
6.9597
7.1366
7.5796
7.6350
7.4690
7.4068
7.5634
0.7
3.3
8.2
12.7
15.3
7.5
14.4
9.7
13.0
15.4
15.5
Fiscal
deficit
(% of
GDP)
1.6
-0.9
-0.4
-1.3
0.6
-2.0
-5.0
-2.4
-2.0
-3.0
Table 2: Monetary and credit aggregates
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Reserve
money
growth (M0)
(%)
109.6
43.1
30.0
18.0
-3.8
3.6
13.6
51.9
29.3
32.8
Money
growth (M1)
(%)
111.9
24.0
38.1
20.8
-1.5
2.4
30.1
31.5
30.2
9.8
Broadest
money
growth (M4)
(%)
75.7
39.3
49.1
38.3
13.0
-1.2
28.9
45.2
9.5
11.0
Domestic
credit growth
(%)
36.3
18.6
3.1
44.4
22.4
-6.5
9.0
23.1
30.0
14.6
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Table 3: Monetary policy instruments and money market interest rates
Year
Weighted
average
reserve
requirement
(%)
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
25.32
26.20
30.90
35.91
32.02
29.57
30.50
23.22
19.67
19.00
19.00
Lombard
credit
interest
rate
(%)
18.00
25.49
11.00
9.50
12.00
13.00
12.00
10.00
9.50
9.50
CNB
discount
rate
(%)
34.49
8.50
8.50
6.50
5.90
5.90
7.90
5.90
5.90
4.50
4.50
Intervention
credit
interest rate
(%)
19.00
19.00
19.00
19.00
19.00
19.00
18.00
18.00
Intra-day
refinance
facility
interest rate
(%)
289.60
17.00
17.00
17.00
17.00
7.00
Short-term
liquidity
credit
interest rate
(%)
14.00
14.00
14.00
13.00
11.00
10.50
10.50
Money
market
interest rate
(%)
86.90
17.76
27.15
10.41
9.41
15.81
12.72
4.46
2.67
1.71
6.13
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