In order to have effective preparatory activities for the introduction of euro, six coordination committees will be established
Governor of Croatian National Bank Boris Vujčić explains for Diplomacy&Commerce that HNB will be responsible for an especially complicated part of the procedure for the introduction of euro relating to organization and implementation of the cash replacement procedure, i.e. for the production and procurement, as well as distribution of euro banknotes and coins, for preparation and distribution of sets of euro coins and for withdrawal and destruction of Croatian kuna banknotes and coins. Encouraging news about the development of the COVID 19 vaccine and about the new potential medication reduce the uncertainty and increase chances for achievement of HNB’s underlying macroeconomic scenario according to which, after an 8% drop in this year, we can expect a GDP growth of 5.2% in the next year, Vujčić states.
We are in the Exchange Rate Mechanism 2 from the middle of this year, which means that we are starting a public consultation which should be completed soon with a document that should define more closely all those adjustments, both legislative and implementing, from the position of public and private sector, and implementation of everything that is important at the national level of introducing the euro as the official currency in Croatia. What are the specific steps and what is HNB’s role in this?
Accession to European Exchange Rate Mechanism (ERM II) in July this year is a key step towards the introduction of the euro in Croatia. In order to achieve this goal, it is necessary, on the one hand, to meet the criteria of nominal convergence and implement the reform measures we committed to when joining ERM II, and, on the other hand, to plan and implement all operational activities to make everything ready for successful transition to a new currency. In connection with the operational activities for the introduction of the euro, a draft National Plan for the Changeover from the Croatian Kuna to the Euro, which was jointly drafted by the Croatian National Bank and the Government of the Republic of Croatia, was recently presented. The document describes legal, administrative and logistical activities and the main elements of the euro introduction process such as the manner and deadlines for currency exchange, rules for converting prices and other values, converting deposits and loans and consumer protection mechanisms such as dual display of prices and their monitoring. The interested public has the opportunity to comment on the draft National Plan for the Changeover, and then the document will be officially adopted so that detailed planning and implementation of numerous activities aimed at replacing the kuna with the euro can begin as soon as possible.
The currency changeover procedure will be extremely complicated and it will require a timely preparation, coordination of a large number of participants and good information. In order to have effective preparatory activities for the introduction of euro, six coordination committees will be established – for cash changeover, for legislative adjustments, for the general government adjustment, for the adjustment of the financial system, for the adjustment of the economy and consumer protection, and for communication. Each committee will develop the necessary activities in its area of responsibility and then monitor their implementation.
As expected, the Croatian National Bank will be active in all the areas of preparation for replacement of kuna with euro. HNB will be responsible for an especially complicated part of the procedure for the introduction of euro relating to organization and implementation of the cash replacement procedure, i.e. for the production and procurement, as well as distribution of euro banknotes and coins, for preparation and distribution of sets of euro coins and for withdrawal and destruction of Croatian kuna banknotes and coins. It will be necessary to ensure fast and simple transfer to euro in every part of Croatia. This will be a logistically demanding operation – just to illustrate: we will have to withdraw around 500 million kuna banknotes and 1.1 billion kuna coins, and at the same time issue an appropriate quantity of euro banknotes and coins into circulation.
Considering the dedication of the central bank, Government of the Republic of Croatia and other participants, and the experience with two currency changeovers during 1990s, I am certain that all the preparatory activities will be conducted with high quality and on time, so that we would be fully prepared to switch to the new currency as early as January 1st 2023, which is the first possible date when we could introduce the euro.
In conditions of the pandemic, it is extremely difficult to predict economic trend, but what are the prognoses for GDP recovery, and how do you rate the current state of the banking market and inflation control?
After the outbreak of a new coronavirus epidemic and very severe epidemiological measures affected the extremely strong decline in economic activity in the second quarter, the improving epidemiological situation and the unexpectedly good tourist season spurred its strong recovery during the third quarter. However, the level of activity is still well below the level at the beginning of the year, and the latest available monthly data show a slowdown in the intensity of recovery compared to the “second wave” of the epidemic. As we pointed out, it is extremely difficult and ungrateful to estimate economic developments in the next year, primarily because they will be tied to the epidemiological situation and to application of an effective health solution. Encouraging news about the development of the COVID 19 vaccine and about the new potential medication reduce the uncertainty and increase chances for achievement of HNB’s underlying macroeconomic scenario according to which, after an 8% drop in this year, we can expect a GDP growth of 5.2% in the next year.
Even though the share of non-performing loans in total loans is still stable at 5.5 percent, which was made possible by the favourable regulatory treatment of moratoriums granted by banks to their clients, the banks have started to form provisions for expected losses, so their profitability has already halved this year. Extremely unfavourable economic trends that we are witnessing in some elements are even more severe than previously used scenarios in the process of testing the resilience of the banking system. However, dealing with the consequences of the crisis is facilitated by the extremely high level of capital and liquidity of the banking system, i.e. by the moves taken by HNB before and during the crisis, such as ordering banks to keep profits made in the past year. Therefore, I am convinced that banks will successfully overcome this disturbance and will support the economic recovery in the conditions of historically low interest rates.
Due to the drop in oil prices on world markets, we expect that the inflation rate this year could remain at a very low level on average, only 0.2 percent. As the impact of low oil prices weakens, inflation should gradually rise, so we expect it to average around 1 percent next year. Even such a high degree of price stability achieved makes it easier to pursue a very expansive monetary policy with the aim of maintaining favourable financing conditions and supporting economic recovery.