Developments and Trends in Croatian Balance of Payments: From Mild Surplus to Significant Deficit

Abstract

The main aim of this paper is to present domestic and external factors which have a significant impact on the balance of payments developments in Croatia since 1993 (wage movements, repatriation of foreign exchange savings from abroad, sovereign rating, interest rates, external debt rescheduling, budget deficit, exchange rate, capital inflow, etc.), analysis of movements on current & capital and financial account as well as the composition of current account deficit financing. In 1993 and 1994 mild surplus is recorded on current account, but since 1995 current account switched to deficit, continued with sub-periods of substantial widening. There is no simple rule for determination when a current account deficit is sustainable or not. The main sources of deficit financing were privatization-related FDI inflows and further external borrowing (taking into account shift in debt instruments from loans to bonds). Due to the fact that the largest part of trade in goods and services took place with the EU countries and that about 70% of transactions are realizing in EUR, a process of accession to the EU is very important for Croatia and it is expected that further strenghtening of trade relations with the EU will probably help to reduce Croatian trade deficit, as well as the current account deficit.