Boris Vujčić: Governor of the Croatian National Bank Help at the right moment is the key

The most important policy goal during the lockdown was to preserve the commercial fabric of the society, stated Boris Vujčić, Governor of the Croatian National Bank for Diplomacy&Commerce magazine.” The pandemic and the lockdown we implemented to cope with it have put the economy into a state of hibernation.” – he said.

1. Which measures has CNB specifically taken to mitigate the effects of the crisis caused by the Covid19 pandemic?

In mid-March, following the onset of instability in international financial markets, the CNB started implementing measures to preserve the stability of the exchange rate of the kuna versus the euro. The CNB thus sold a total of EUR 2.6bn to banks in the last two months, with the largest amounts sold in late March and early April, in order to meet the increased demand for foreign currency by companies and financial institutions and to a smaller extent by citizens. As the precautionary domestic demand for foreign currency receded in mid-April, the exchange rate of the kuna strengthened somewhat against the euro.

In parallel with carrying out foreign exchange interventions, the CNB was creating and releasing additional kuna liquidity in order to maintain favourable financing conditions for all sectors of the economy. Monetary policy cannot spur economic activity while businesses are closed in the lockdown and citizens are afraid to leave their homes due to fear of contagion. However, it is important to maintain favourable financing conditions to help businesses and citizens work through these adverse circumstances and make a quick recovery once the virus is under control and the economy starts getting back on track.

2. How do you think this will affect the Croatian economy and stability in general, and what can we expect in the period ahead, how long do you estimate the crisis to last and what consequences will it cause? What are the potential traps and what should by no means be done to reduce the consequences?

Unprecedented fiscal monetary and supervisory actions were taken in order to help businesses pay incoming bills even as they lost revenue. Now, with easing of the restrictions, we are moving into the next phase. Economy cannot be simply restarted at the simple push of a button. Recovery will most likely be only gradual and spread over this and the next year even under rather optimistic scenario of no major second wave of epidemic. In addition to strengthening of the testing capacity of the health system in order to track and monitor the epidemic, take quick actions to keep down the number of new cases and take care of those who fall ill, it is now important to proceed cautiously with taking away exceptional support measures. If we proceed too quickly, we risk sending too many viable businesses into bankruptcy. However, if we move too slowly, the risk will mean burdening of the society with excessive public debt and making the economy even more sclerotic. The key is to get the ordering right with removing exceptional fiscal measures first and maintaining easy financing conditions for some time. Finally, there is also the perennial issue of structural reforms such as reducing costs and improving efficiency of the state apparatus and making business environment more predictable and conducive for new companies. The likely expansion of the role of the government in the aftermath of the crisis is only making structural reforms more paramount.