July the 29th, 2021 - The Croatian National Bank (CNB/HNB) has warned of potential issues that the domestic economy might yet face despite the currently favourable Croatian economic outlook.

As Poslovni Dnevnik writes, due to the possibility of a new wave of the coronavirus pandemic and potential lockdowns, there is room for the further growth of property prices above their real value with the risk of a sudden and sharp decline, as well as the growth of bad loans after the abolition of measures and grants. These are just a couple of potential issues which could arise and directly threaten Croatia's still fragile recovery and growth throughout the rest of 2021.

The current Croatian economic outlook is good, and that growth is expected to be between 5 and 7 percent, as most analysts see it, while the most optimistic of all is the CNB itself, which in its baseline scenario expects as much as 6.8 percent of GDP growth this year. Personal consumption, investment, as well as exports are growing, and a massive stimulus from the National Recovery and Resilience Plan is expected.

Of course, all of this mostly depends on the summer season for which tourism workers are now trying to make last for as long as possible and bring at least 70 percent of revenue from pre-pandemic 2019. The success of the 2021 tourist season depends mostly on the (non)materialisation of this first risk, reports Novi list.

CNB Governor Boris Vujcic recently explained that the aforementioned growth is higher than 6 percent (6.8 percent) of the CNB's basic scenario: this is what the CNB expects as the most probable course of events, and it implies that the worst of the crisis is behind us, but dangers remain.

In short, the national bank doesn't expect that the aforementioned risks will materialise, however, there is a danger which remains and the central bank is aware of it. Therefore, if there was a significant deterioration of the epidemiological situation and the fourth wave did arrive, Vujcic said that the Croatian economy would survive another lockdown, but growth, he said, would be slower due to the situation in the most affected sectors.

There are also sectors that work independently and aren't really influenced by the pandemic, and they would still pull in some growth in such a dire scenario. The CNB has now, in a new issue of its publication Macroprudential Diagnostics, enumerated these potential triggers for the creation of a risk and analysed them in detail.

“The great uncertainty and unpredictability of the course of the pandemic poses risks in the coming period, despite the growing proportion of the population being vaccinated. The possibility of a new wave after the summer months is an important risk to take into consideration for the continued recovery of Croatian economic activity.

The possible worsening of the epidemiological situation and the strengthening of epidemiological measures, including localised measures, would adversely affect the speed of recovery and the Croatian economic outlook, as well as the sustainability of public finances,'' the CNB said.

Delaying Croatian economic recovery and premature withdrawal of measures introduced during the pandemic could lead to a deterioration in the debt service capacity of part of the private sector, especially those in which debt levels are high and support measures contribute significantly to maintaining relatively stable incomes. Total exposure to systemic risks during the second quarter of 2021 remain high, according to the CNB.

Further progress in terms of the vaccination of the population, together with the mitigation and eventual abolition of epidemiological measures, should support the continuation of the economic recovery during 2021 and secure a decent Croatian economic outlook going forward.

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July the 26th, 2021 - The Croatian National Bank has revealed just how long we'll be able to make payments in both Croatian kuna and in euros as the country prepares to join the Eurozone at the beginning of 2023, as is currently planned.

As Poslovni Dnevnik writes, according to previous announcements, Croatia should enter the Eurozone and as such finally adopt the on January the 1st, 2023, and before the euro officially becomes the country's official currency in replacement of the kuna, many preparations will have to be made.

When it comes to just who will be in charge of the technical realisation of some important things about the introduction of the euro and how the euro will work at the very beginning, the Croatian National Bank confirmed for Net.hr that the new euro coins of the Republic of Croatia will be made at the Croatian Monetary Institute.

"The production of euro circulation coins with the Croatian national symbols will begin at the earliest six months before the day of the introduction of the euro, ie after the EU Council Decision that Croatia will introduce the euro," the Croatian National Bank explained.

With the day of the introduction of the euro as the national currency of the Republic of Croatia approaching, a sufficient amount of euro coins will be prepared for circulation to meet the needs of all people and business entities, the national bank added. What everyone is interested in at the moment, however, is just how long it will be possible to use both kuna and euro in parallel before the kuna is phased out and placed in this history books entirely.

"During the first two weeks from the day of the introduction of the euro, kuna and euros will remain in circulation at the same time, and traders should return the rest of the money to customers which have paid in kuna exclusively in euros," the Croatian National Bank explainsed After that period, the euro will be the only legal tender allowed in the country, they added.

"In order to ensure a smooth transition to the new currency, in a short transition period, the kuna and the euro will have the status of legal tender at the same time. In other words, people will be able to pay in both currencies in the first two weeks starting from the day the euro is introduced in stores. After two weeks from the day of the introduction of the euro, the euro will be the only legal tender in the Republic of Croatia,'' they stated from the Croatian National Bank.

Money, meaning Croatian kuna, can be exchanged for euros free of charge for the first six months of the euro being in use in the country. However, if someone does forget to exchange any kuna cash they have into euros after that deadline, it will still be possible. Namely, in the first six months from the day of the introduction of the euro by the bank, Fina and Hrvatska posta d.d. will allow kuna cash to be exchanged for euros in all branches free of charge, and in the next six months they will be entitled to charge a fee for this service.

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June the 20th, 2021 - The Croatian National Bank (CNB/HNB) has pumped a huge amount into the system for the second time since this year began as the economic situation globally continues to be rocky.

As Poslovni Dnevnik/Ana Blaskovic writes, for the second time this year, the Croatian National Bank has needed to intervene in the foreign exchange market to correct the exchange rate of the domestic currency (kuna) against the euro.

The central bank bought 120 million euros from commercial banks on Wednesday at an average exchange rate of 7.497346, pumping 900 million kuna back into the Croatian financial system.

Although there were no significant slips to speak of in the market before, the supply of the banking sector slightly pulled the exchange rate from 7,488 down to 7,485, but after a continuous appreciation in the previous month, the Croatian National Bank, as the regulator, decided to intervene and make the move.

While the second intervention this year resulted in the ''printing'' of Croatian kuna, when the previous such intervention took place back in April, the Croatian National Bank made a withdrawal from the system. With the sale of 190 million euros to banks, around 1.44 billion kuna in total was withdrawn, which stabilised the exchange rate back then at the level of 7.570405 kuna.

On Thursday, the middle exchange rate of the euro on the exchange rate list of the Croatian National Bank (which has been applied since Friday) reached 7.484807 kuna. When we last saw these levels, it was mid-August last year at the very peak of the tourist season, which ended very abruptly shortly after when Croatia unfortunately ende up being placed on the red lists of most countries from which the tourists were typically arriving here from.

This year, a better yet still wobbly summer season is expected than last year, and with it the inflow of euros, which will, as every year at that time, push the kuna exchange rate down. It should be noted that by joining the exchange rate mechanism, Croatia undertook to keep the exchange rate in the range of +/- 15 percent around the central parity of 7.53450.

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April the 10th, 2021 - The Croatian National Bank (HNB/CNB) has made the very first foreign currency exchange market intervention of the year to stabilise the Croatian kuna.

The ongoing coronavirus pandemic has made life very difficult for banks, not in terms of revenue so much but in terms of attempting to stabilise domestic currencies as economic blows keep on being dealt by the spread of the virus and the subsequent introductions of lockdown measures to try to mitigate the escalating public health crisis.

The Croatian National Bank, with Boris Vujcic as its governor, hasn't been immune to the proverbial storm clouds caused by this unprecedented and seemingly unrelenting global situation, and numerous interventions involving the euro and the kuna have taken place over the last pandemic-dominated year.

On Thursday last week, the Croatian National Bank stepped in to make its first foreign currency exchange intervention of 2021.

As Ana Blaskovic/Poslovni Dnevnik writes, to be more precise about what the intervention entailed, the central bank sold 190 million euros to the banks at an average exchange rate of 7.570405 Croatian kuna per euro, as such withdrawing a massive 1.438 billion kuna in total from the system.

This was, as previously stated, the very first foreign exchange intention of 2021, which was done to stabilise the Croatian national currency. The previous intervention by the national bank took place back at the end of March 2020, as the pandemic began to errupt across Europe.

Back then, 618.5 million euros were sold to the banks, and the exchange rate stabilised at 7.608529. In the meantime, four interventions were held in which the Croatian National Bank was the one to purchase the euros.

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January the 29th, 2021 - Boris Vujcic, the Croatian National Bank's Governor, has been awarded for the Croatian monetary reform policy which enabled the stability of the Croatian kuna against the euro.

As Poslovni Dnevnik/Ana Blaskovic writes, CNB Governor Boris Vujcic has received the Lamfalussy Award for 2021, named after the "father of the euro" Baron Alexandre Lamfalussy, of the Hungarian National Bank.

Vujcic was awarded for the Croatian monetary reform policy, which enabled the stability of the kuna against the euro, which subsequently enabled Croatia to join the European Exchange Rate Mechanism back during the summer, and they also state his key role as deputy chief negotiator with the European Union (EU).

In his thanks for this recognition, Vujcic focused his speech on the issue of monetary policy in emerging markets when the largest central banks resort to unconventional instruments.

With humorous associations to the novel A Hitchhiker’s Guide to the Galaxy and Monty Python, he emphasised the extremely low real interest rates that are likely to become permanent features of economies.

"The main reason why emerging market countries started implementing APP from today's perspective is obvious - these programmes were successful," said Vujcic, recalling that the CNB made one of the largest buyouts in emerging markets last year, about 5.5% of the country's GDP, which is only about half the amount of the ECB programme in that year”.

He added that Croatia's conclusion of a currency swap agreement with the ECB and its entry into ERM II also helped stabilise the market. He pointed out that the recent development of the monetary policy regime in emerging markets “cannot be taken for granted” because they do not issue reserve currencies and heavily depend on foreign borrowing.

The Belgian economist and central banker Lamfalussy was born in Hungary in 1929. He participated in the work of the Delors Commission, which laid down the foundations of the European Economic and Monetary Union, with a prominent role in founding the ECB and creating regulation of the European financial system. He died in 2015, the Lamfalussy Prize was established back in 2014 and is awarded for outstanding professional achievements and life achievements of individuals that affect the work of central banks and the functioning of the international financial system.

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As Poslovni Dnevnik writes on the 3rd of November, 2020, the Financial Inspectorate of the Republic of Croatia has issued a decision by which the otherwise popular Zagrebacka banka was found guilty and fined an eye-watering amount.

The guilty verdict comes as a result of the supervision of the Croatian National Bank which established that in the period from the 1st of January 2017 to the 8th of November 2019, Zagrebacka banka failed to implement all of the necessary measures, actions and procedures as prescribed by the Law on Prevention of Money Laundering and Terrorist Financing (ZSPNFT). As a result of the finding, a single fine in the amount of 33,000,000 kuna was published on the CNB's website. However, as Poslovni Dnevnik/Ana Blaskovic reports, the bank has earned a discount on that huge fine, and will now pay ''only'' 22 million kuna.

According to the Misdemeanor Law, if the bank pays the fine within a month, which it will do, Zagrebacka banka will ultimately only pay the aforementioned ''discounted'' amount of 22 million kuna.

The decision of the Financial Inspectorate was made and became final on October the 30th, 2020. This fine is the highest misdemeanor ever imposed on a credit institution in all of Croatia, not only in the field of the prevention of money laundering and terrorist financing, but also in all areas for which the misdemeanor liability of credit institutions can be prescribed. In this case, the Croatian National Bank, as the supervisory body and authorised prosecutor, complied with the obligations under the Misdemeanor Law, informed Zagrebacka banka of its right to come to an agreement, which Zagrebacka banka used, admitted guilt and agreed to accept the aforementioned large fine.

Zagrebacka banka: We have implemented all of the due regulatory measures

''Zagrebacka banka has resolutely implemented all of the due regulatory measures in close cooperation with the competent authorities and remains strongly committed to the continuous strengthening of the system and its processes. The entire set of measures (75) identified by the bank, and ordered by the CNB in ​​its decision, was fully implemented three months before the deadline set by the CNB,'' Zagrebacka banka stated.

The Croatian National Bank has identified a total of 11 violations related to violations of the Law on the Prevention of Money Laundering and Terrorist Financing, in the following areas:

Risk assessment of an individual business relationship
Identifying and tracking suspicious, complex and unusual transactions
Reporting suspicious transactions to the Office for the Prevention of Money Laundering
Implementation of measures of enhanced in-depth analysis of all parties
A system of internal controls to reduce and effectively manage the risk of money laundering and terrorist financing.
The aforementioned violations established by the CNB upon the supervision of Zagrebacka banka were committed in the period from the 1st of January 2017 to the 8th of November 2019, and relate to the following omissions:

It did not implement measures of enhanced in-depth party analysis for 72 clients
It did not analyse the background and purpose of 1,126 transactions that were identified as complex and unusual and didn't have an obvious economic or visible legal purpose
For 2,028 transactions made by parties, the lists of indicators weren't used as guidelines in determining the grounds for suspicion of money laundering or terrorist financing
It failed to report 1,122 suspicious transactions to the Office for the Prevention of Money Laundering
It hasn't established an effective system of internal controls to reduce and effectively manage the risk of money laundering and terrorist financing.
The number, type and duration of identified illegalities indicated structural shortcomings in the implementation of prescribed measures, actions and procedures to prevent money laundering and terrorist financing. Such conduct is particularly unacceptable given the position held by Zagrebacka banka in the financial system of the Republic of Croatia as the largest credit institution.

The amount of the fine imposed is proportional to the determined number and severity of the committed offenses.

After the completion of the CNB's supervision, Zagrebacka banka reorganised its operations and increased its capacity to detect and prevent money laundering and terrorist financing, and proceeded to implement supervisory measures based on the decision of the Croatian National Bank. Zagrebacka banka demonstrated an appropriate degree of readiness to address all of the identified weaknesses within the anti-money laundering and anti-terrorist financing system. Among other things, Zagrebacka banka has committed itself to implementing 75 measures to increase the efficiency and effectiveness of its anti-money laundering and anti-terrorist financing system. In the meantime, Zagrebacka banka informed the CNB that it had implemented all of the measures it undertook.

This case emphasises that the implementation of measures to prevent money laundering and terrorist financing by banks remains an important priority of the CNB and that it is more than determined to take all of the measures to ensure that banks comply with regulations in the field of the prevention of money laundering and terrorist financing. The Croatian National Bank expects banks to have effective and efficient anti-money laundering and anti-terrorist financing systems that should be proportionate to their size, type, scope and the complexity of their operations.

In accordance with the law, the CNB informed the Office for the Prevention of Money Laundering in detail about their decision, as well as all competent state institutions.

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As Bernard Ivezic/Poslovni Dnevnik writes on the 15th of February, 2020, the Chinese are already testing out the digital yuan and are closest to launching their own national digital currency, the European Central Bank has therefore stepped up preparations for the digital euro, and the Fed has asked the US Congress to move in the same direction. Would the introduction of the digital kuna be worthwhile?

Although the Croatian Government is preparing to join the Eurozone and with that replace the kuna with the euro, it is a pity that the Croatian National Bank (CNB/HNB), Hanfa and the Ministry of Finance aren't currently using the heated debate on central bank digital currencies (CBDC) to open up more new business opportunities in Croatia.

According to the current view of the CBDC, the digital kuna should be the same as the normal kuna as we know and love it, only in digital form. Therefore, the CNB would play the same role in its creation as it does with regular coins and notes and ensure its stability. The digital kuna would also be issued in parallel with paper money. Digital kuna, on the other hand, would be easier to use, much like virtual cryptocurrencies such as Bitcoin.

However, the main advantage of the digital kuna would be that transactions with it would be cheaper than they are with cash, so, for example, in tourism, Croatia's major cash-dependent industry, as well as in trade, the CNB and the Ministry of Finance would give entrepreneurs the opportunity to make significant savings because of the high cost of manipulating cash.

European fintechs have already shown that the Croatian market is one of the most desirable in all of Europe when it comes to testing financial innovation. The country receives a significant number of tourists, thus generating an interesting volume, but what helps it is that it is not large in terms of population, so every market experiment here is fairly easy to get under control.

It is important to understand that the digital kuna, euro or dollar would not be the same as Bitcoin, as they would still be entirely managed by central banks, not solely by the law of supply and demand as in the case of cryptocurrencies. Back in January last year, the Bank of International Settlement (BIS) published a report: "Proceeding with caution - a survey on central bank digital currency", stating that more than seventy percent of the world's central banks operate on their own digital currency (CBDC).

Despite the proud title of the report, all central banks have indicated that they're working on the study of digital currencies. Half of them have entered the prototyping phase, with one in ten already spinning some sort of pilot. Mostly, this isn't done in public. Central banks, moreover, are increasingly cooperating on such projects.

The European Central Bank and the Bank of Japan are working together on the Stella project, and the Bank of Canada, the Monetary Authority of Singapore and the Bank of England also have a joint project. The overwhelming interest in digital versions of national currencies has not recently intensified without good reason. Central banks are in awe of Facebook's Libra, which, after losing support from a number of big financial players, is still carrying on strongly. Even Google is worried about it, so it is launching a new chat app, although all of its previous ones disappeared without much notice.

In addition, despite problems with coronavirus over recent weeks, the People's Bank of China has applied for as many as 84 patents for its own CBDC concept. According to financial circles, China is the closest to launching its own national digital currency - the digital yuan. Concerns are growing in the US and in the EU as well, and central banks are now seeking quick answers. In January, the European Central Bank agreed with the central banks of Sweden, Switzerland, Canada, Japan and the United Kingdom to launch a special task force for the CBDC.

It will outline steps towards the introduction of national digital currencies in Washington in April. The initiative was launched after the European Central Bank introduced EuroChain, a prototype of the digital euro. This week, the Fed has asked the US Congress for support to move in this direction, citing the dangers of Libra and the digital yuan. What is left unsaid is that the US does not want the digital euro to appear before the digital dollar.

The leaders of the central banks of France and Germany are divided over the subject of the creation of a digital euro. In Germany, there is a belief that banks should be pressured to improve their payment services in order to cope with the development of crypto services, the emergence of currencies created by social networks, and think that there should be no fear of China. However, the central bank in Germany supports blockchain and is already testing out this technology to offer such services to commercial banks, but not to citizens.

In France, however, they believe that the emphasis should be placed on a national initiative, that is, to start testing the digital euro or, as they call it, the e-euro. They want to enter the first pilot phase by April. The question, then, is why Croatia should not scramble and become an incubator for the future digital euro. If not instead of France, then with France. The digital kuna project could thus become a template for the digital euro.

It would certainly work as a great template for all non Eurozone EU member states, as the digital kuna would at some point be replaced by the future digital euro. It would also become a template for other countries around the world that want their own national digital currencies. There is no lack of IT knowledge for the digital kuna project.

That knowledge, which would thus accumulate in the financial and IT sectors in Croatia, could later become an important export product, further motivating the employees of the Ministry of Finance, the CNB and Hanfa. It would also give perspective to the strong IT operations of banks in Croatia, such as Erste Bank and PBZ, which develop products that are later transferred to other countries within their groupings here.

The benefits of such a project for the future development of the fintech industry in Croatia and job creation in the financial sector, followed by a wave of layoffs in banks due to digital transformation, go without saying.

These are all the reasons why a digital kuna would be worth investigating, and why it would be good for the Ministry of Finance, CNB and Hanfa to find ways to launch this project. Especially now, when Croatia presides over the European Union and when it itself emphasises that it wants to contribute to the Eurozone.

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Just how ready is Croatia to join the Eurozone? The topic is one that has many sides to it and a lot of opposition from both the public and from certain politicians and political parties, yet it seems the Croatian Government is steaming ahead with their plans for the country to enter into the Eurozone and abandon the kuna.

As Poslovni Dnevnik/Jadranka Dozan writes on the 19th of May, 2019, the Croatian Government has proposed urgent amendments to the ZOKI, which creates a normative framework for the accession process to the banking union, a step that implies officially applying for the country's entry into the ERM II Exchange Rate Mechanism.

However, the Republic of Croatia has not yet submitted the aforementioned type of official request for entry into the ERM II Exchange Rate Mechanism, which is considered to be one of the first steps towards official entry into the controversial Eurozone.

This news could see more steps actively taken to enter into the banking union and establish "close co-operation with the European Central Bank (ECB)", which is usually part and parcel of a request to enter the ERM II.

In addition to the fact that the process of close co-operation with the ECB was the subject of a panel discussion on the first day of the Croatian Money Market conference in Opatija in Kvarner, the Croatian Government issued a proposal for a supplement to the Credit Institutions Act on Wednesday for public consultation, which refers precisely to the creation of a normative framework for the assignment of certain tasks to the European Central Bank.

In practice, this means, in the first instance, Croatia's inclusion in a Single Supervisory Mechanism (SSM), and that means that in the furure, the ECB will be able to carry out comprehensive assessments of such credit institutions, while for example, Asset Quality Review has so far covered euro-denominated countries.

At the aforementioned Opatija conference, the introductory speech on the path to Croatia's entrance into the Eurozone was given by an envoy to the President of the Republic of Croatia, with the Croatian Minister of State Property, Goran Marić, also having a part to play. It was stated that the single currency is one of the important aspects of unification, ie, in Croatia's accession to the European Union, and that Croatia has an obligation to respond readily and properly to this process.

That means, as was stated, the need to carry out all of the necessary preparations - monetary, political and others, including those aimed at the wider public, with a view to understanding the changes and eliminating fear, propaganda and potential insecurity. The main focus of the presentation of the Governor of the Croatian National Bank (HNB/CNB) Boris Vujčić was the macroeconomic prospects and challenges, and this is usually a reference to structural reforms without which Croatia will lag behind in reaching the level of development of much older EU member states, especially in terms of Croatia's development in comparison to other, older member states of the Union.

Croatia's business climate in us is still not good enough, remotely. To improve the country's overall business environment, the governor emphasised that what is particularly important is the raising of the quality of Croatia's institutions which greatly affects the general level of investment into the country, and that this is a key to faster productivity growth.

Therefore, in the first quarter of 2019, the indicators are solid: strong growth in industrial production, personal consumption and construction, the continued growth of exports (as well as imports) and favourable labour market trends (but with the increasing and very concerning problem of a lacking labour force owing to Croatia's demographic crisis).

In the case of economic slowdown today, however, there is a significant fiscal space that, at least according to Boris Vujčić, should be used in the case of a recession occurring. Otherwise, the Croatian National Bank expects to further reduce surplus on current and capital account balances this year, as well as significant appreciation pressures on the Croatian kuna.

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Click here for the original article by Jadranka Dozan for Poslovni Dnevnik