On Tuesday, September 15, 1998 the Technical Assistance Mission of the International Monetary Fund, headed by Mr. Warren Coats, started its ten-day working visit to Croatia with a meeting at the Croatian National Bank. The mission, together with Croatian experts, will work on improvements in the Croatian banking system regulation. During this visit, members of the mission will be meeting with officials from the Ministry of Finance, Ministry of Justice, State Agency for Deposit Insurance and Bank Rehabilitation, representatives of the Croatian Bankers' Association, as well as several large Croatian banks and some other government bodies and international financial institutions which have established their representative offices in Croatia.

In the introductory meeting with Mr. Zdravko Rogić, Deputy Governor of the Croatian National Bank, and other CNB officials, members of the mission were briefed on the state of the Croatian economy : macroeconomic indicators showed low inflation, a stable exchange rate of the kuna and continuous economic growth. As forecasted, the current account deficit, that was very high in 1997, was reduced in 1998, also due to measures introduced by the central bank to curb international borrowing by domestic banks. Budget revenues and expenditures are expected to be balanced in 1998. Less favorable indicators are high unemployment, insufficient financial discipline and increased interest rates.

In 1998, the Croatian banking system entered a new phase marked by higher bank differentiation. The Croatian National Bank proposed bankruptcy for one bank and one savings bank. Dubrovačka Banka is undergoing rehabilitation, and the decision about the future of Glumina Banka must still be made within the next week. The solvency and liquidity of certain other minor financial institutions are also questionable. These developments exert upward pressures on interest rates in the domestic money market, as well as on the price of loans to Croatia in the international financial markets. They also raise concern among savers, however, without significant consequences for the Croatian banking system as a whole.

The discussion with CNB officials focused on measures aiming to strenghten the credibility, long-term stability and effective functioning of the Croatian banking system. A very important role here will be played by the new banking regulations: the new Banking Bill, which the Croatian parliament will discuss very soon; the regulation defining its usage; new rules defining banks' regulatory reporting and reporting by auditors, as well as methods to detect risky operations in banks in a timely manner. Most of this regulation should be implemented at the beginning of 1999. The changes in the existing regulation seek to strenghten normal market mechanisms, as well as control mechanisms, which will reward good and punish bad decisions in banking and discourage unsound or risky treatment of savers' and other depositors' money in Croatian banks.

These goals should be reached sooner with the help of the IMF Mission's expertise.