Croatia's central bank HNB said on Wednesday that it agreed a currency swap line with the European Central Bank (ECB) which would allow HNB to buy up to €2 billion from the ECB in exchange for Croatia's kuna currency.

HNB said in a press release that the arrangement would only be activated “if needed,” and added that it would allow HNB to provide “additional euro-denominated liquidity to Croatia’s financial institutions, should they need it,” without dipping into central bank’s own foreign currency reserves.

In March, the central bank’s foreign currency reserves stood at €17 billion.

The currency swap line agreement with the ECB will remain in place until 31 December, 2020, and could be extended if deemed necessary, HNB said.

Although Croatia had joined the European Union in 2013, it is one of the bloc’s eight member countries which have not yet replaced its currency with the euro, and is currently preparing to join the Exchange Rate Mechanism (ERM) , the first step in that process.

Provided that the nation’s public-debt-to-GDP ration drops below 60 percent – which stood at 73.2 percent at the end of 2019 – local analysts hope that Croatia might join the euro zone by 2024. It remains to be seen how the coronavirus crisis, expected to push the country’s economy into a deep recession in 2020, will affect these plans.

World Bank said in its forecast last week said that Croatia’s GDP, heavily reliant on tourism and hospitality revenues, might shrink by 6.2 percent in 2020 due to sweeping travel restrictions and bans across Europe. On Tuesday, the International Monetary Fund released its own projections which predict a 9 percent GDP contraction in 2020, before rebounding 4.9 percent in 2021.

Meanwhile, the central bank continues to maintain the kuna exchange rate within a narrow fluctuation band, set between approximately 7.4 and 7.6 to the euro.

In recent months, the kuna began to lose ground, and in March HNB intervened five times on the money market to maintain the stability of the exchange rate of the local currency. It spend a total of €2.25 billion to buy back kuna from local lenders to keep the kuna exchange rate under 7.60 for 1 euro.

(€1 = 7.61 kuna)

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