Statement by the Staff Representative on the Republic of Croatia Executive Board Meeting

In this study, the economic stability of Croatia is overviewed after the global crisis. The reforms outlined in the government’s economic recovery program (ERP) are in progress. Judicial reforms are instituted to strengthen bankruptcy procedures for companies. To improve the medium-term growth prospects of the economy, there is a need to tackle the structural rigidities. Executive Directors agreed that monetary policy should aim at gradually building up reserves in order to increase Croatia’s resilience to external vulnerabilities, while exercising caution toward shifts

Abstract

In this study, the economic stability of Croatia is overviewed after the global crisis. The reforms outlined in the government’s economic recovery program (ERP) are in progress. Judicial reforms are instituted to strengthen bankruptcy procedures for companies. To improve the medium-term growth prospects of the economy, there is a need to tackle the structural rigidities. Executive Directors agreed that monetary policy should aim at gradually building up reserves in order to increase Croatia’s resilience to external vulnerabilities, while exercising caution toward shifts

This statement provides information that has become available since the issuance of the staff report (SM/11/114). The new information does not alter the thrust of the staff appraisal.

  • On June 10, 2011 the European Commision proposed to the EU Council of Ministers to close the final chapters in the accession negotiations with Croatia. This outcome was broadly anticipated, and paves the way for Croatia’s EU membership as of mid-2013 if the Commision’s recommendations are retained by the Council.

  • The Croatian National Bank reduced the discount rate, but left the Lombard rate, which sets the ceiling to the interest rate corridor on the money market, unchanged. On June 8, 2011, the discount rate was reduced from 9 to 7 percent. From July 1, 2011, this will result in a proportional reduction in the statutory default rates, and a largely proportional reduction in the maximum contractual interest rates. However, this change will have no direct impact on bank lending rates, as current rates are below the maximum threshold.

  • The enhancements introduced in early 2011 to the official credit support scheme (Model A) have accelerated its utilization (Box 5, SM/11/114). As of early June 2011, the total amount of funds originally allocated for this scheme of about 1.4 percent of GDP was approved for disbursement, and just over half was disbursed.

  • The government announced measures aimed at reducing the financial burden on foreign currency borrowers. The government signed a memorandum on June 17, 2011, with representatives of eight banks to enable extension of loan maturities on mortgages in Swiss francs, while taking into account regulatory and banks’ internal procedures. At this point, staff is not in a position to make an assessment of the possible impact on bank profitability and loan classification.

  • The parliament passed amendments to the labor law which allow for more flexible working hours. Companies can now manage temporary changes in work load without having to hire or fire extra workers.

Republic of Croatia: 2011 Article IV Consultation: Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Croatia
Author: International Monetary Fund