The International Monetary Fund's 2002 Financial Systems Stability Assessment judged the Croatian National Bank (CNB) to observe good monetary policy transparency practices. It recommended that the CNB make public its macroeconomic forecast and policy framework, and to issue press releases to explain its various policy decisions. In addition, the IMF recommended that the CNB post the schedule of its board meetings on the CNB website and disclose the procedures employed during internal audits. Since that report, the CNB has acted on some of these recommendations, in whole or in part, but has yet to post its meeting schedule or disclose internal audit procedures. Croatia subscribed to the International Monetary Fund's Special Data Dissemination Standard in 1996.

General Overview

In 2002, the International Monetary Fund (IMF) published the results of its Financial Systems Stability Assessment (FSSA), in which the Croatian National Bank (CNB) was judged to practice most monetary policy transparency practices, but still showed room for improvement. The FSSA recommended several steps that the CNB could take to improve its transparency, including the publication of its macroeconomic policy framework and forecasts for monetary policy going forward, and the more regular use of press releases to explain its policy decisions. In addition, the FSSA suggested that the CNB post its executive board meeting schedule on its website and disclose the procedures employed in the conduct of internal audits. By the time of the IMF's 2006 Article IV Consultation report (published in 2007), some of these recommendations had been wholly or partially implemented, but the CNB had still not made public its board meeting schedule nor elaborated on its internal audit procedure. This later IMF report added that the FSSA should be updated, and suggested that one be scheduled as early as 2007. Croatia has been a subscriber to the IMF's Special Data Dissemination Standard (SDDS) since 1996.

Writing in 2005 for the Bank for International Settlements (BIS), B.A. Simmons rated Croatia as having "good" monetary policy transparency (p. 41). The Simmons report is one of the BIS's 28 countries assessments in which monetary policy transparency is assessed on a five-point scale: "excellent," "good," "'some shortcomings," "'many shortcomings," and "poor."

The CNB is defined in law as the central bank of the Republic of Croatia, is independent, and is headquartered in Zagreb. The bank's liabilities are guaranteed by the Republic of Croatia, which is legally recognized as its owner. The CNB's Annual Report for 2005, which was published in 2006, stipulates that the bank's primary function is to maintain price stability. It reports directly to the parliament. The Croatian Constitution sets forth the CNB's roles and responsibilities, which include the formulation and implementation of monetary and foreign currency policy, the management of Croatia's international reserves, and the issuance of currency. The CNB is also responsible for licensing (and de-licensing) banks, banking supervision, the maintenance of bank accounts, the issuance of loans to other banks, the regulation and supervision of payment systems, and other tasks. The 2006 CNB report adds that Croatia applied for EU membership in 2003, which obligated Croatia to prepare a "pre-accession economic program" for the period 2005 through 2007. Through this exercise, Croatia aims to develop a medium-term monetary policy framework.

The IMF's 2007 report noted that the CNB maintains kuna-euro exchange-rate stability as its primary monetary policy objective, operationally speaking. In so doing, it has conducted itself pragmatically, permitting the rate to fluctuate moderately in order to accommodate variable market pressures. Since this policy has consistently delivered low rates of inflation, the IMF report deemed this to be advantageous to Croatia, given that the euro is in extensive use in the region, and that Croatia's import-to-GDP ratio is quite high (more than 50%). However, the IMF did suggest that limited flexibility with regard to the exchange rate might give rise to financial instability, and recommended greater banking supervision and regulations to compensate for this increased risk. The report further noted that current monetary policy put greater pressure on fiscal policy. Structural reforms were called for.

Overall, the IMF's 2007 report concluded that "the monetary policy framework remains suitable for Croatia, but needs support from other policies" (p. 19). It called for tight exchange-rate management, but warns that attention must be paid to improving Croatia's economic competitiveness, particularly if Croatia hopes to compete in the area of export growth. Finally, the report noted that "fiscal policy must address macroeconomic imbalances. (p. 19)

The Principles

Clarity of roles, responsibilities and objectives of central banks.

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The IMF's 2002 FSSA found that Croatia observed or broadly observed most of the practices that fall under this principle. The CNB pays careful attention to maintaining exchange rate stability against the euro. However, the report found that this tends to create ambiguity for the medium term. The CNB's status as Croatia's independent central bank is defined by law, which also establishes the Republic of Croatia as the CNB's ultimate owner. The government, by law, guarantees the CNB's liabilities. The CNB's Annual Report for 2005, which was published in 2006, stipulates that the bank's primary function is to maintain price stability. It reports directly to the parliament. The Croatian Constitution sets forth the CNB's roles and responsibilities, which include the formulation and implementation of monetary and foreign currency policy, the management of Croatia's international reserves, and the issuance of currency. The CNB is also responsible for licensing (and de-licensing) banks, banking supervision, the maintenance of bank accounts, the issuance of loans to other banks, the regulation and supervision of payment systems, and other tasks. The 2006 CNB report adds that Croatia applied for EU membership in 2003, which obligated Croatia to prepare a "pre-accession economic program" for the period 2005 through 2007. Through this exercise, Croatia aims to develop a medium-term monetary policy framework.

The IMF's 2002 FSSA reported that the CNB's governing body is the Council of the Croatian National Bank, which comprises a governor and his/her deputy, vice governors, and a maximum of 8 external members, all of whom are appointed by parliament and serve 6-year terms. The CNB reports directly to parliament, to which it submits its Annual report. This report must include a statement of monetary, banking supervision, and payment system policy and activity. Parliament is empowered to require additional reports or testimony from the CNB as it deems necessary.

Open process for formulating and reporting monetary policy decisions.

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According to the IMF's 2002 FSSA, Croatia observes or broadly observes most of the practices encompassed in this principle. The CNB makes available to the public information regarding its monetary policy decisions as soon as they are made, but the FSSA found that these announcements could offer more details on the rationale according to which decisions are taken. The FSSA also decried the lack of any official, published statement of the monetary policy framework, or of advance notification of the executive board's meetings. The FSSA did note that circulars are provided to the media and all Croatian financial institutions that outline the CNB's operating procedures, and approved of the CNB's practice of soliciting public input when contemplating technical adjustments. Although the CNB offers no single, detailed statement of its policy framework, it does describe some macroeconomic developments in its various publications, such as the Monthly Bulletin, the Quarterly Report and the Annual Report, but that these presentations fail to offer any information regarding the medium- or long-term prospects. In 2007, the IMF reported that some of these recommendations had been addressed, but that the CNB still did not publish an advance calendar of scheduled board meetings.

Public availability of information on monetary policy.

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In its 2002 FSSA, the IMF judged that Croatia observed most practices encompassed by this principle. The report did note, however, that the impact of current monetary policy on the achievement of longer-term objectives is not adequately assessed and provided to the public. Among its recommendations, the FSSA urged that the CNB regularly publish its macroeconomic outlook, "with special attention to inflation, exchange rate, interest rates, balance of payments and liquidity" (p. 51); the creation of an explanatory publication or webpage that deals with the framework, objectives, and instruments implicated in monetary policy; the advance reporting of regularly scheduled board meetings; the disclosure of internal audit procedures, and the publication of the CNB's Code of Ethics. In its 2007 report, the IMF noted that many of these recommendations had been wholly or partially implemented, but that the CNB still had not published the board meeting schedule or its Code of Ethics.

The CNB's Annual Report, Quarterly Reports, and Monthly Bulletin include a description of general macroeconomic developments. According to the 2002 IMF FSSA, these publications also offer a statement of major economic developments dealing with a variety of issues, including public finance, the exchange rate, monetary aggregates, employment, wages, and the balance of payments. In addition, the Annual Report offers details on GDP growth and inflation. However, the IMF found that there was insufficient discussion of the implications of current policy decisions on longer-term objectives. After meetings of the CNB board, press releases offer some information on the issues under discussion, and these are posted on the CNB website. Since its subscription to the IMF's SDDS, the website has shown that monetary policy data are regularly posted and updated.

The CNB's 2006 report discloses that bank policy includes a commitment to informing and educating the public on its goals, monetary policy measures, and other activities. To achieve this end, the CNB uses its website, media broadcasts, and paper documents. Beginning in 2005, the CNB began publishing a semiannual Macroprudential Analysis, which focused on explaining the relationship between the financial system and the broader context of the economy, the public sector, and the international environment.

Accountability and assurances of integrity by the central bank.

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The IMF's 2002 FSSA reported that Croatia observes most of the practices that underlie this principle, except for the expectation that internal audit procedures be made public. The CNB is required to submit its financial statement for independent external audit, as required by the International Standards of Auditing. In addition, Croatian law requires the CNB to submit a statement of its financial condition to the parliament within the 5 months following the close of the fiscal year. The CNB's annual report includes a summary of the bank's audited balance sheet. However, the 2007 IMF report notes that the CNB still has not made publicly available any disclosure of its internal audit procedures.

The CNB's Governor is required by law to appear to testify before the parliament at the parliament's request. Other senior CNB officials may also participate in hearings or seminars, as the parliament deems necessary. The 2001 Law on the Croatian National Bank includes a set of standards governing the conduct of board members' financial activities, and the CNB has a more extensive Code of Ethics and internal governance procedures, neither of which is available to the public. While at the time of the IMF's 2002 FSSA there were no formal provisions in law to protect CNB staff during the performance of their duties, the report noted that such provisions might be included in the reformed Banking Law that was then under discussion.