The Croatian National Bank (HNB) on Friday issued a response to the IMF Staff Report for the Article IV Consultation with Croatia and in that response the central bank states "that, while a substantial amount of agreement was reached on most issues in the course of the discussions, diverging views were expressed on two issues: the assessment of the adequacy of the international reserve level and the proposed changes in the foreign exchange intervention technique."
This HNB response offers comments on some paragraphs of the Report and refers again to the two above-mentioned contentious issues concerning monetary policy.
The bank "agrees with most of the recommendations made by the IMF staff, especially those regarding the need for a sustained and pressing implementation of structural reforms aimed at enhancing the international competitiveness of the economy, including a fiscal deficit reduction and restrictive wage policy."
However, the bank disagrees with the IMF staff's claim "that international reserves are relatively low and wishes to reiterate that they are adequate."
"The previous HNB response provides an explanation of what a comprehensive, country-specific analysis of the adequacy of the international reserve level should contain. Such an analysis is lacking in the Report, which renders the IMF staff's claim unconvincing. What is more, the IMF Executive Board discussion on the Report also reveals that some executive directors are not convinced that the IMF staff's assessment of the adequacy of Croatia's international reserves has a strong analytical basis," reads the bank's response.
Furthermore, the bank also disagrees with the IMF staff in that such relatively low international reserves and reduced prudential foreign currency buffers will limit room for the HNB to respond to foreign exchange market movements in the forthcoming period, as well with the IMF staff's proposal to change the foreign exchange intervention technique. It needs to be reiterated that the HNB will continue to use the entire set of available foreign exchange, kuna and prudential instruments, including, as appropriate, foreign exchange interventions, irrespective of the direction of exchange rate pressures, and to manage kuna liquidity, thereby further ensuring a sustainable growth in the country's foreign exchange reserves and exchange rate stability. The HNB will therefore continue to conduct foreign exchange interventions in the forthcoming period using the same technique," the response reads.
The bank also disagrees with the IMF staff's statement that the stable exchange rate policy has contributed to the accumulation of vulnerabilities arising from overleveraging in foreign currencies (euroisation).
The whole text of the response in English is available on the Croatian National bank's web site.
