The Council of the National Bank of Croatia chaired by Governor Dr. Marko Škreb met on Wednesday, September 3, to review recent economic and financial developments, introduce a number of new monetary policy measures, and discuss the report on the state of the banking system at the end of 1996 which is to be presented to the Parliament. The Council also examined the work plan and the budget of the Agency for Domestic Payments prepared for the year 1997.

Available indicators confirmed that economic activity showed further signs of recovery, so that the rate of economic growth in 1997 could turn out to be even higher than expected. In the past seven months industrial production recorded a growth rate of 5.2%, retail sales grew at approximately the same rate, the number of effective working hours in construction industry showed an increase of 15.5%, while the growth rates of tourism exceeded all expectations. If these trends continue and if macroeconomic stability be preserved, a number of other indicators which, at the moment, cannot be considered satisfactory (such as, primarily, the level of employment and the value of exports) could also improve.

According to statistical data, after a decrease of 0.3% recorded in July, retail prices increased by 0.8% compared to the previous month. Taking this into consideration, the increase in prices over the past eight months totaled 3.6% compared with the same period last year, remaining within the range of the anticipated inflation target. The Council of the National Bank of Croatia concluded that since the central bank successfully introduced adequate policy measures, no room was left for inflation to pick up. Favorable reports on the collection of public revenues indicate that there will be no demands from the budget for bridging loans from the central bank. Lending activities of commercial banks should be monitored more closely, so that the Bank could respond timely and adequately to too rapid credit expansion.

Purchases of foreign exchange during the tourist season were effected smoothly and the exchange rate of the kuna remained stable due to, among other things, interventions of the central bank in the foreign exchange market. Thus, in the past two months the National Bank of Croatia purchased foreign exchange in the value of USD 141 million, which amounts to approximately 900 million kuna. A significant part of the liquidity created through NBC foreign exchange purchases was sterilized through the regular maintenance of required reserves at the currently valid rate, as well as through somewhat higher purchases of NBC bills by commercial banks. Since no excess liquidity was observed at the beginning of September, the Council concluded that it was not necessary to introduce additional sterilization measures. The only novelty in the area of monetary policy is the introduction of the daily liquidity facility, which can be utilized on a daily basis but has to be secured by a pledge of NBC bills and repaid during the same day. In order to ensure that this daily liquidity facility, which replaces the previous central bank facility whose purpose was to provide banks with sufficient funds for payment of savings deposits and current account balances, is used only as a last resort, the Council decided that the interest rate charged on this loan shall be 17%.

During the discussion about the state of the banking system in Croatia, the members of the Council noted with pleasure that Croatia had not experienced bank failures which occurred in other transition countries and that the overall picture of the Croatian banking system had improved. Successful rehabilitation of four important banks strongly influenced these developments. In addition, a significant step forward was made by including savings banks in the system of bank regulation and supervision. It was also stated that savings and loan cooperatives should also be included in the same regulatory and supervisory framework as soon as possible. Modernization of the legal framework and strengthening of bank supervision, with significant progress already being made, should both contribute to further improvement of the soundness and the stability of the financial system although they cannot - as experienced by developed economies - replace prudent behavior based on market principles and adequate assessment of business risks.

At the Wednesday meeting the Council of the National Bank of Croatia granted an operating license to Štedionica Mediteran d.o.o. Split. The Council also approved the nominations of Mr. Frano Donadini for Chairman of the Management Board of Štedionica Mediteran and Mrs. Julija Perković for Member of the Management Board of the same savings bank. In addition, the Council approved the nominations of Mr. Darko Medak for Member of the Management Board of Trgovačko-turistička banka d.d. Split, Mr. Zoran Svoboda for Chairman of the Management Board of Štedionica splitsko- dalmatinska d.o.o. Split, Mrs. Nada Hamilton for Member of the Management Board of Građanska štedionica d.o.o. Zagreb and Mr. Ljubinko Skakić for Member of the Management Board of Štedionica Sonic d.o.o. Zagreb. Further, the Council approved the nominations of Mr. Zlatan Kuljiš and Mrs. Zdenka Batinić for Members of the Management Board of Prva obrtnička štedionica d.o.o. Zagreb. The Council of the National Bank of Croatia gave its approval to the Croatian Bank for Reconstruction and Development for minting of the gold medal "Vukovar".