March 20 (SeeNews) - The Croatian central bank has slightly raised its GDP growth forecast for this year to reflect the country's stable economic development backed by the entry into the eurozone and Schengen, central bank governor Boris Vujcic said.
"We have revised a little our growth forecast for 2024, to 3.2%, but we are sticking to the inflation forecast of 3.5%," Vujcic told SeeNews last week on the sidelines of a meeting of governors of central banks from southeast Europe.
In November, the Croatian central bank, HNB, said it expects Croatia's economy to expand by 3.0% in 2024.
The Adriatic country's economic growth slowed down to 2.8% last year, from 6.3% in 2022.
For 2025, the central bank expects 2.8% GDP growth and an average inflation rate of 2.6%.
Measured by the EU-harmonised index of consumer prices (HICP), Croatia ended last year with average annual inflation rate of 8.4%, down from 10.7% in 2022.
Croatia adopted the euro currency and joined the Schengen visa-free travel area on January 1, 2023.
Even before the country officially joined the eurozone, risk premium and interest rates fell, which had a very beneficial impact on the economy, Vujcic noted. "And we are still seeing continued beneficial impact of the entry into the eurozone."
Cheaper loans for the government, the corporate sector and the households, lower transaction costs, particularly welcomed by the corporate sector, and access to the monetary policy instruments of the European Central Bank are among the benefits of the euro adoption which Vujcic mentioned.
"In a way, the central bank can for the first time act fully as a lender of last resort, and country has an access to the eurozone crisis facilities, the European Stability Mechanism in particular, which we hope we will never use," he added.
As of 2023, Croatia is also reaping the benefits of its Schengen entry - primarily in tourism, which is a key sector for the country, as well as in other sectors of the economy, he went on to say.
The main challenges for the Croatian central bank in the past few years have been primarily related to the preparation for the currency changeover, which went smoothly, Vujcic said.
Fears that the adoption of the euro would lead to a spike in inflation failed to materialise, according to Vujcic.
He quoted the findings of studies carried out by HNB and ECB in
February last year which showed that the currency switch added only 0.4 percentage points to inflation, in line with the experience of other countries upon the introduction of the euro.
A more comprehensive study by Eurostat published in October estimated the impact of Croatia's accession to the eurozone on the country's inflation at only 0.2 percentage points.
"However, this is not easy to communicate to the public because the introduction of the euro is widely perceived to have significantly contributed to the increase of prices, certainly also because it happened at the time when the inflation was elevated,” Vujcic commented.
According to the central bank governor, it is still too early to estimate the effect of the adoption of the euro on FDI inflow into Croatia. He, however, added that last year FDI increased in all sectors of the economy, except real estate, where demand among foreigners for house purchases in Croatia fell. The positive effect of the euro introduction will be felt in the years to come as it eliminated the foreign exchange risk for investors from the eurozone, the largest group of investors in the country, he stressed.
"The benefits of euro adoption are already here: the spread of Croatia’s government bonds versus Germany’s securities is below 100 percentage points and for the first ever interest rates on mortgage loans are lower in Croatia than in Germany," Vujcic concluded.