Croatian National Bank governor says introducing euro on 1 Jan 2023 feasible

ZAGREB, Sept 3 (Hina) – Croatian National Bank (HNB) governor Boris Vujcic said on Thursday that although the coronavirus pandemic strongly affected Croatia’s economy and public finances, the introduction of the euro on 1 January 2023 was feasible.

Speaking at a conference on the Croatian monetary market in Opatija, Vujcic estimated that GDP would drop 10% this year and increase 6% next year.

“We expect the economy to recover quickly,” he said, adding that it was important to meet the remaining Maastricht criteria and carry out the reforms Croatia committed to in the application to enter European Exchange Rate Mechanism (ERM II).

Vujcic said a dynamic economic recovery and maintaining fiscal indicators within the reference framework as of next year were crucial for introducing the euro.

The National Plan for replacing the kuna with the euro is being completed so that we are prepared to introduce the euro on the first day of 2023 and this project, done in cooperation with the government, will be presented soon, while adoption and implementation are expected in the autumn, he said.

The National Plan will regulate the practical steps of introducing the euro as well as inform citizens about it, Vujcic said, recalling that polls showed that sceptical citizens mostly feared that their living standards would decline and prices increase.

It is expected that the Council of the EU will establish in July 2022 that Croatia meets all the requirements, he said, adding that Croatia committed to effect by March 2022 additional reforms to strengthen the fight against money laundering, reduce the administrative and financial burden on the economy, improve management in state companies and strengthen the national bankruptcy framework.

Croatia has been meeting all nominal convergence criteria since 2016 but the pandemic crisis will temporarily obstruct the meeting of fiscal criteria, Vujcic said.

The impact of the epidemic on this year’s economy is very strong but real GDP is expected to significantly increase in 2021 after a strong contraction this year, he said, adding that inflation and long term interest rates are very low and that such trends are expected to continue.

The governor said the central bank would continue to implement a stable exchange rate policy, keeping the kuna-euro exchange rate close to the central parity during the ERM II period.

Croatia entered ERM II on July 10 and the central parity was set as HRK 7.53450 for one euro, which was the exchange rate on that day.

Vujcic said HNB and Central European Bank analyses confirmed that the exchange rate was neither undervalued nor overvalued.

The criteria for introducing the euro are clear, no more discretionary decision making nor unwritten rules to which we were exposed before entering ERM II. The pace of the process is only up to us. We have to carry out the reforms we committed to after entering ERM II, spend at least two years in ERM II and meet the Maastricht convergence criteria, Vujcic said.

Governor says public debt won’t disrupt euro area entry

Vujcic said on Thursday the public debt would strongly increase this year, and strongly decrease next year, and that won’t disrupt Croatia’s entry to the euro area in January 2023.

This year the public debt will increase strongly because of the recession, i.e. a strong GDP decrease, and the high budget deficit, Vujcic told the press in Opatija when asked if the public debt-to-GDP ratio could be reduced to 60% by 2021, which is one of the Maastricht criteria.

We will not come even close, but it is not necessary to reach that ratio because the criterion says that if the public debt exceeds 60%, it must be reduced by 1/20 of the difference between 60% and the current public debt level, Vujcic said.

Since that ratio will be 87% or 88%, that means the public debt needs to be reduced by 1.3 or 1.4 percentage points to meet the criterion. Next year we expect GDP to increase by 6%, which will make it possible for the public debt-to-GDP ratio to drop more than is required, he added.

Asked to comment on a continued increase in lending in July, with the press noting that citizens were borrowing as though nothing was happening, Vujcic said he would not put it like that.

Cash loans, which were the main component of the growth in  bank lending, have been halved this year due to the crisis, which means that the crisis is affecting consumer confidence and consequently citizens’ demand for those loans, he added.

Asked if a stay on enforcement procedures should be extended after October and if a moratorium on loan repayments should be extended as well, Vujcic said the enforcement question should be put to he government.

“Regarding the moratorium, the HNB has enabled banks to keep clients who, at the end of 2019, were classified as clients A in category A until spring next year.”

The HNB decided in the second half of March this year that banks can defer payments and approve new loans for reliable clients, classified as clients A as of 31 December 2019, whose business was or would be affected by the coronavirus pandemic.

“But it is necessary to keep in mind that we have entered the banking union, i.e. close cooperation with the European Central Bank. Now the ECB supervises Croatian banks and the criteria adopted by the ECB and the EBA (European Banking Authority) apply to the bulk of the Croatian banking portfolio, and in June already we saw an increase in provisions for non-performing loans.”