engleski

External Deficit, Exchange Rate, and Competitiveness in Croatia: Is There a Problem?

It is clear the present rapid widening of the Croatian current-account deficit (even after allowing for possible mismeasurement) needs to be reversed. That can be achieved through a combination of fiscal, income, and monetary (credit) tightening to control surging real demand that has been fueld primarily by the expansion of these same factors (some of the deficit due to one-time tariff exemptions will be automatically adjusted downward once the exemptions have been consumed). If such a policy mix comes into being, the Central bank will be able to stick to the nominal exchange rate as an anchor of the poststabilization macroeconomic policy. That certainly looks to be the best option for monetary authorities, given the above-mentioned informational role of the exchange rate. Substantial devaluation of the domestic currency would not be a good choice at this time. Short-run macroeconomic retrenchment, however, might not be enough. Analysis of the competitive position on the Croatian economiy, although preliminary, suggests that, compared to other transition economies, competitive stance of Croatian manufacturing sector seems to be worsening. Croatian exports are growing much slower than in comparator countries, and the share of exports to the EU is on a decline. On average, much slower growth on Croatian manufactures exports relative to the comparator group of transition countries is accompanied with slower trade specialization within the product groups ; therefore, it could be said that the differences in the level of specialization are capable of indicating the changes in external competitiveness in these product groups ; clearly, lower overall level of the Croatian IIT and lower rates of change of the IIT point toward the Croatian lagging behind the fast improvements in competitiveness of the comparator gropu economies. We mention here two important elements that were missing from the Croatian transition so far: foreign direct investments and European integrations. Both of them have, to a large extent, been exogenous to the economic policymakers. Had they been present, they might have significantly improved Croatian export performance as they did in most other central and East European transition countries.

stabilization, external deficit, cost of capital, real exchange rates, trade

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