Back Matter

APPENDIX I: Exchange and Trade System

Exchange arrangement

The currency of Croatia is the kuna, the external value of which is determined in the interbank market. The exchange rates in the interbank market are determined by authorized banks that transact with each other at freely negotiated rates. The National Bank of Croatia may set intervention exchange rates at which it will transact with banks outside the interbank market for purposes of smoothing undue fluctuations in the exchange rate. On December 31, 1994 the average interbank market rate for the U.S. dollar was HrK 5.6287 per US$1.

There are no taxes or subsidies on purchases or sales of foreign exchange.

Administration of control

Foreign exchange transactions are governed by the Law on the Foreign Exchange System, Foreign Exchange Operations, and Gold Transactions, which was enacted on October 7, 1993. The National Bank formulates and administers exchange rate policy and may issue foreign exchange regulations under this law. A foreign trade law (coordinated with domestic trade legislation) is under preparation. Companies wishing to engage in foreign trade must register with the commercial courts. The representative offices of foreign companies must be registered with the Ministry of Economy.

Foreign exchange transactions must be conducted through authorized banks; currently 39 commercial banks in Croatia are licensed to conduct foreign exchange transactions. Restricted licenses are given to banks that may open accounts for resident natural persons and may buy and sell bank notes and checks (currently 13 banks).

Arrears are maintained with respect to external payments to commercial creditors.

Prescription of currency

Croatia does not maintain any bilateral payments agreements.

Resident and nonresident accounts

Resident natural and juridical persons may, in principle, open and operate foreign exchange accounts only in Croatia. However, the National Bank has the authority to allow resident juridical persons to keep foreign exchange in accounts with foreign banks in order to cover the costs of business operations and meet the requirement of regular foreign trade activities abroad. The law also makes specific provisions for resident juridical persons engaged in capital project construction abroad to maintain accounts with foreign banks, subject to a license by the National Bank.

Nonresidents may open foreign exchange accounts with fully licensed banks in Croatia. These accounts may be credited freely with foreign exchange and debited for payments abroad or for conversion into domestic currency; reconversion of domestic currency into a foreign exchange currency is permitted. Juridical persons may credit these accounts with foreign bank notes up to the limit of US$20,000 without special permission from the National Bank; amounts exceeding this limit are subject to the special permission from the National Bank.

Nonresident natural and juridical persons may open accounts in domestic currency with the proceeds from sales of goods and services or with foreign exchange transferred from abroad. They may purchase foreign exchange with funds held in these accounts without restriction.

Imports and import payments

In compliance with UN Security Council Resolution, imports from the Federal Republic of Yugoslavia (Serbia and Montenegro) are prohibited. Pending the introduction of a new import regime, the product classification of the import regime of the former Socialist Federal Republic of Yugoslavia is maintained, with a free list (LB), a list of items subject to quotas and a list of items subject to ad hoc licensing (D).

Items on the free list (just under 6,000 out of a total of about 6,600) comprise about 90 percent of the value of imports. Of the restricted items, only 1.86 percent of imports are subject to licensing, and 2.2 percent to quotas. The Ministry of Economy, in consultation with the Chamber of Commerce, administers the quotas and licensing. List D includes items whose importation is controlled by international agreement for noneconomic reasons (e.g., arms, gold, illegal drugs and narcotics, and artistic and historic work). The importation of these items is allowed on a case-by-case basis and for specific purposes.

Imports are subject to a customs tariff of up to 18 percent (compared with up to 25 percent in the former Socialist Federal Republic of Yugoslavia) plus a tax of up to 10 percent, and a customs administration fee of 1 percent. The exemption for duty-free imports by travellers is US$100. Goods imported by travellers and postal shipments up to the value of US$500 are subject to a simplified customs procedure with a unified tariff rate of 8 percent. For imports exceeding that value, the regular import tariffs and taxes are applied. Returning citizens may bring into the country household effects duty-free up to the equivalent of US$45,000 for household effects and US$100,000 for private business purposes. Under certain conditions, goods imported by nonresidents for investment purposes are exempt from import duties. Also, raw materials and intermediate products used in the production of exports are exempt from all import duties and taxes, except the 1 percent customs fee, provided that the value added of the export product is at least 30 percent of the value of the imported items and that export proceeds are received in convertible currency.

Payments for authorized imports by juridical persons are not restricted. Advance payments for imports are not permitted, except where down payments are required by suppliers in accordance with customary international practices.

Payments for invisibles

Payments for invisibles related to authorized imports by juridical persons may be made freely. Payments of leasing fees are permitted provided that temporary imports have been registered with the Customs Office. Natural persons may also purchase foreign exchange in the interbank market for the payment of goods and services abroad and for deposit in a foreign exchange account for the purpose of future payments. Resident juridical persons (including tradesmen, natural persons engaging in independent activity and individual dealers) may purchase foreign exchange only for due authorized payments abroad and not, with the exception of purchases related to scientific, humanitarian, cultural and sport activities, for deposit in a foreign exchange account. Payment of royalties, insurance, and legal obligations and contracting of life and casualty insurance policies with foreign companies are also permitted.

Resident natural persons may take out of the country foreign currency equivalent of DM 1,000. An additional amount equivalent up to DM 2,000 may be taken out, provided that it is withdrawn from foreign currency accounts or purchased from banks for travel expenses. In both cases the National Bank may allow higher amounts to be taken out on a case-by-case basis. The exportation of Croatian currency by both residents and nonresidents is limited to HrK 2,000 a person.

Exports and export proceeds

In compliance with UN Security Council Resolution, exports to the Federal Republic of Yugoslavia (Serbia and Montenegro) are prohibited. In principle, exports are free of restrictions except for certain products for which permits must be obtained (list D products: e.g., weapons, drugs and art objects); several basic foodstuffs to ensure adequate domestic supplies; and high quality wood.

Export proceeds must be collected and repatriated in full to Croatia within 90 days of the date of exportation; this period may be extended with the permission of the National Bank. If payment terms in excess of 90 days have been agreed with foreign importers, the credit arrangement must be registered with National Bank.

Proceeds from invisibles

Proceeds from services are, in principle, subject to the same regulations as those applying to merchandise exports. The importation of Croatian currency by both residents and nonresidents is limited to HrK 2,000 a person.


Resident juridical persons, including commercial banks, may borrow abroad. They are required to register the loans contracted, including commercial credits, with the National Bank. Financial credits may be extended to nonresidents by resident juridical persons, including tradesmen, natural persons engaging in independent activity and individual dealers only if they are financed from profits or credit obtained from abroad. Natural persons are permitted only to obtain loans from nonresidents in domestic or foreign currency. The foreign exchange positions of commercial banks are subject to a limit.

Foreign direct investment by nonresidents may take the form of joint ventures or full ownership and shall be registered with the commercial courts. Repatriation of capital and transfers abroad of profits are not restricted. In principle, domestic and foreign investment is treated equally, but in practice nonresident investors enjoy certain benefits. If the foreign capital participation exceeds 20 percent, inputs used in the project are exempt from import duties. Earnings in the first year of operation are exempt from the profit tax, and 50 percent and 25 percent of earnings in the second and third years, respectively, are exempt from the profit tax. Foreign direct investment abroad by residents must be registered with the Ministry of Economy. Such investment must generally be undertaken through loans abroad or through reinvestment of profits. Inward portfolio investment is not restricted, but outward portfolio investment is.

Nonresident natural persons may acquire real estate in Croatia through inheritance as long as their country of residence extends reciprocal treatment to residents of Croatia. Nonresident natural persons not engaged in economic activities in Croatia may purchase real estate only under the same conditions. Nonresident natural or juridical persons engaged in economic activities in Croatia may also purchase real estate under these conditions and may sell it to resident or nonresident juridical persons. In principle, residents may acquire real estate abroad on the basis of reciprocity of treatment, but in practice, they are not permitted to purchase foreign exchange in the exchange market for this purpose; the use of balances in foreign exchange accounts for this purpose is also prohibited.


The exportation or importation of gold, except unprocessed gold by producers of gold and gold coins by authorized commercial banks, is subject to the approval of the National Bank.

Changes during January-May 1995

On March 21, 1995, Croatia concluded an agreement with Paris Club creditors.

As of May 29, 1995, Croatia has accepted the obligations of Article VIII, Sections 2, 3 and 4. The only exchange restriction subject to approval under Article VIII still outstanding is that evidenced by arrears to official bilateral creditors and the elimination of these arrears will take place in the near future when the bilateral agreements with Paris Club creditors are signed.

changes during 1994

Exchange Arrangement

May 30. The kuna replaced the Croatian dinar as the national currency at the ratio of 1 kuna equals 1,000 Croatian dinars.

October 7. Foreign exchange repurchase agreements were introduced by the National Bank of Croatia. Although these are offered to the commercial banks at the initiative of the National Bank for monetary management purposes, they could be used by commercial banks to manage forward exchange risks.

Prescription of Currency

June 30. Croatia canceled unilaterally the bilateral payments agreement with Slovenia.

The Privatization Process in Croatia

1. Recent developments

The first phase of the privatization program in Croatia has been relatively successful, particularly with regard to small enterprises. By December 31, 1994 approximately 47 percent of the enterprises approved for privatization had been fully privatized; the Croatian Privatization Fund (CPF) had a minority stake in 37 percent of the enterprises and a majority stake in the remaining 16 percent (Table 1). In the second phase, the Government intends to streamline the privatization process for the formerly Socially-Owned Enterprises (FSOEs) held by the CPF and extend it to cover public enterprises. In early 1994, the authorities allowed the holders of frozen foreign exchange deposits to use them towards the purchase of enterprise shares generating sales of nearly DM 800 million (Table 2). In addition, in November 1994, the Ministry of Privatization was established to formulate policies and facilitate privatization of the public enterprises. A Privatization Law which builds upon the 1991 Law on the Transformation of Socially-Owned Enterprises, was submitted in June this year and is expected to be passed by Parliament by end-October 1995. 1/ The Government is also discussing an Enterprise and Financial Sector Adjustment Loan with the World Bank to support the process of privatization and restructuring. This note outlines the main features of the proposed Privatization Law and provides an overwiew of recent developments in the public enterprises with regard to the privatization process.

2. Proposed Privatization Law

The proposed legislation calls for the divestiture of all FSOEs with the exception of about 30 large troubled enterprises that would be dealt with by the Bank Rehabilitation Agency (BRA) and privatized following their restructuring. The law is expected to improve upon the existing privatization methods, particularly in the use of market-clearing prices in auctions or tenders and in the use of frozen foreign exchange deposits.

This proposed legislation differs from existing legislation in several respects. Deferred payments for small investors will be extended to 20 years, with substantial discounts for early payment. A minimum sale price based on the estimated value of share capital and recent book value will be established by a Price-Setting Commission. 2/ The shares may be acquired by either local or foreign investors. Larger enterprises will also be broken up into smaller units that can be more easily privatized. Fifty percent of the proceeds from the sale of the enterprises shall be transferred to the budget (after covering the costs of the CPF) and the remaining 50 percent to the Croatian Credit Bank for Reconstruction.

In addition to the above methods, enterprises will be privatized through large-scale mass privatization based on free distribution of DM 2-3 billion in vouchers to disabled war veterans, displaced persons and refugees. The recipients can exchange these vouchers for shares of companies of their choice in the CPF portfolio, or contribute them to newly created Privatization Investment Funds (PIF) in exchange for PIF shares. The privately managed PIF’s will in turn use the collected vouchers to build up their portfolios by using them to purchase enterprise shares from CPF. The Government will foster the creation of PIFs by regulating them, setting minimum eligibility criteria and professional management standards, and in some cases, by capitalizing them with the minimum required cash equity.

3. The Zagreb Stock Exchange

The development of the PIF’s is closely linked to the development of the Zagreb Stock Exchange. At this stage, secondary trading is hampered by the lack of share registry and a clearance system. Current shareholders are sometimes required to offer outstanding shares to either all existing shareholders or to the management of the company before offering them to outside buyers. In addition to the law on Investment Funds, a new Securities Law has been proposed which will correct the deficiencies of the existing system.

4. Privatization of public enterprises

The authorities plan to privatize public enterprises (i.e., the large utilities), in particular their non-core assets, beginning in 1996. The sale of core assets of the public enterprises will require a break up of the large public enterprises along activity lines as well as the development of an adequate regulatory framework, particularly in the electricity and telecommunication areas. The Privatization Law would authorize the Government to proceed with privatization of these enterprises through the transfer of 25 percent of their equity to pension funds, preferential subscription of 25 percent of the shares by the public as well as sale to strategic investors. The law would extend privatization, currently limited to minority holdings in INA (the state oil company) and the electricity company to larger stakes in all public enterprises.

Public enterprises intended for privatization are required to carry out reorganization plans along business lines and profit/loss centers which are expected to be completed by the end of the first quarter of 1996. In order to facilitate the restructuring of these enterprises, the Government may take over their external debt. Recent developments in the major public enterprises are summarized below:

In January 1995, a law for the restructuring of the Croatian Electricity Company went into effect separating power generation and distribution. The new law permits the company to sell 41 percent of its shares. A regulatory framework for entry by the private sector into electricity production and distribution is also being examined.

A restructuring program for INA was passed at the end of May, which included a change in its management structure. Some subsidiaries of INA are to be merged in order to streamline operations later in 1995. The Croatian authorities are also negotiating an Enterprise and Financial Sector Adjustment Loan with the World Bank that would provide assistance for restructuring INA. The restructuring program also allows for the sale of equity of up to 30 percent as part of the privatization process with the consent of Parliament.

Regarding the Croatian Post and Telecommunication (HVPT) Company/ a new law is under discussion in Parliament which is expected to be passed by the end of 1995. It would split the company into postal and telecommunication entities. The postal authority would be held by the Government and the telecommunication unit would become a joint stock company that would be privatized by the end of 1996.

The coastal shipping company, Jadrolinija, receives subsidies to cover some of their operating costs in serving remote or sparsely populated islands. There are preliminary discussions on whether to privatize the more profitable routes and keep the unprofitable lines under state operation. A reorganization of the Croatian Railways Company is proposed which would include partial or complete privatization of its subsidiaries and an increase in share capital through conversion of previous foreign debt into government equity.

Table II.1.

Croatia: Number of Enterprises Privatized by Category 1/

(In thousands of deutsche mark)

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Source: Croatian privatization Fund (CPF).

End May 1995.

Total equity is based on the book value of equity in the enterprises at the time privatization plans were developed, and has been revised upward for new injections of capital

Table II.2.

2. Croatia: Receipts from Privatization fin deutsche mark

(In deutsche mark)

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Source: Croatian Privatization Fund

High–yield bonds in hard currency issued by the Ministry of Finance which can be swapped for shares at 30 percent discount


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Table 1.

Croatia: Quarterly GDP at Constant 1990 Prices

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Source: Central Bureau of Statistics.
Table 2.

Croatia: Gross Domestic Product at Current Prices

(In millions of kunas)

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Source: State Institute for Macroeconomic Analysis and Forecasting.
Table 3.

Croatia: Gross Domestic Product at Constant 1992 Prices

(In millions of kunas)

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Source: State Institute for Macroeconomic Analysis and Forecasting.
Table 4.

Croatia: Gross Domestic Product Deflators


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Source: State Institute for Macroeconomic Analysis and Forecasting.
Table 5.

Croatia: Gross Domestic Product at Current Prices

(In millions of kunas)

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Source: A breakdown of GDP by expenditure is not provided by the authorities; this table reflects staff estimates.

Includes Road Fund in current & capital expenditure from 1994.

Extrabudgetary Funds include the social and water funds. The Road Fund is included prior to 1994.

Series break in import and export data from 1992.

Table 6.

Croatia: Gross Domestic Product at Constant 1991 Prices

(In millions of kunas)

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Source: A breakdown of GDP by expenditure is not provided by the authorities; this table reflects staff estimates.

Includes Road Fund in current & capital expenditure from 1994.

Extrabudgetary Funds include the social and water funds. The Road Fund is included prior to 1994.

Table 7.

Croatia: Trends in Industrial Production 1/

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Source: Croatian Economic Trends

Seasonally unadjusted indices unless otherwise indicated; average 1990=100.

Table 8.

Croatia: Mining and Industry - Indices of Production. Stocks, Consumption, Employees and Productivity

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Source: Central Bureau of Statistics.

Consumption of electricity and fuels includes only fuels used for production and technology purposes. Fuels used as raw materials for further production are not included.

Productivity indices show the change in the period from January to the month for which the data is given in comparison with the same period in the previous year

Table 9.

Croatia: Agricultural Production


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Source: Central Bureau of Statistics.
Table 10.

Croatia: Tourism Industry—Overnight Stays and Available Beds

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Source: Croatian Economic Trends.