Opinion of the European Central Bank of 26 February 2024 on the competences of Hrvatska narodna banka related to Croatia’s membership of the International Monetary Fund (CON/2024/6)

OPINION OF THE EUROPEAN CENTRAL BANK of 26 February 2024 on the competences of Hrvatska narodna banka related to Croatia’s membership of the International Monetary Fund (CON/2024/6) Introduction and legal basis

On 19 January 2024, the European Central Bank (ECB) received a request from the Croatian Minister for Finance for an opinion on a draft decision on the manner of conducting operations and settling liabilities arising from the membership of the Republic of Croatia in the International Monetary Fund (hereinafter the ‘draft decision’). The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union and the third indent of Article 2(1) of Council Decision 98/415/EC , as the draft decision relates to Hrvatska narodna banka (HNB). In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

1. Purpose of the draft decision

1.1 The purpose of the draft decision is to amend the legal framework governing the relations between Croatia and the International Monetary Fund (IMF), which constitutes the Law on accepting membership of the Republic of Croatia of the International Monetary Fund and other international financial organisations on the basis of succession (hereinafter the ‘Law’) and the Decision on the manner of conducting operations and settling liabilities arising from the membership of the Republic of Croatia of the International Monetary Fund and other international financial organisations . The latter would be repealed in its entirety by the draft decision, which would be adopted by the Croatian government pursuant to its powers under Article 6 of the Law and Article 31(2) of the Law on the Government of the Republic of Croatia . 1.2 The draft decision regulates the manner of conducting operations and settling obligations arising from Croatia’s membership of the IMF, shifting certain responsibilities from the Ministry of Finance

to HNB. As noted in the explanatory memorandum to the draft decision, the draft decision aims to optimise the distribution of roles between the Ministry of Finance and HNB. As it is expected that Croatia will become a creditor member state of the IMF, this optimisation will be achieved by redefining the roles of the two institutions, authorising the Governor and Deputy Governor of HNB to represent Croatia at the IMF and ensuring compliance with the prohibition on monetary financing. Furthermore, the draft decision obliges Croatia to reimburse certain losses or transaction costs to HNB from the State budget. The purpose of the draft decision is to establish a new legal framework, given that Croatia adopted the euro on 1 January 2023, and it is anticipated that Croatia’s role as a member state of the IMF will include additional obligations and activities . 1.3 The draft decision: (1) authorises the Governor and Deputy Governor of HNB to represent Croatia in the Board of Governors of the IMF in the capacity of Governor and Alternate Governor of the IMF respectively, while in the event that both are temporarily prevented from representing Croatia in the Board of Governors, the Governor of HNB may authorise another person to do so in the capacity of Governor or Alternate Governor of the IMF ; (2) transfers the financial obligations related to Croatia’s quota, which includes past and future payments to the IMF and other obligations based on the quota, from the Ministry of Finance to HNB ; (3) provides that participation in the implementation of the IMF’s Financial Transactions Plan and in special drawing rights (SDRs) trading will now be carried out by HNB from its own resources on behalf of Croatia ; (4) regulates the powers and obligations related to the allocation of SDRs and stipulates that the SDRs allocated by the IMF to Croatia are part of the international reserves of Croatia managed by HNB in accordance with the Law on HNB ; (5) establishes that the Ministry of Finance covers liabilities under the first and second allocation of SDRs, as well as interest rate expenses on those liabilities, on the basis of succession of membership of the IMF following the dissolution of the former Yugoslavia ; (6) regulates the conclusion and implementation of agreements on voluntary trading of SDRs (voluntary trading arrangements) ; and (7) requires the Ministry of Finance and HNB to cooperate and coordinate Croatia’s positions towards the IMF and exchange information in relation to Croatia’s membership of the IMF . 1.4 As noted in the explanatory memorandum to the draft decision, the draft decision also specifies the distribution of roles and obligations in respect of Croatia’s participation in the IMF’s voluntary financial initiatives. This includes, for example, loans under new arrangements to borrow and bilateral borrowing agreements, and loans or donations to trusts managed by the IMF. The latter include the Poverty Reduction and Growth Trust and the Resilience and Sustainability Trust . In particular, the draft decision provides that Croatia may participate in the IMF’s voluntary financial

initiatives, including loans and grants to the IMF and to the trusts managed by the IMF. When the resources for Croatia’s participation in an IMF voluntary financial initiative in the form of a loan are provided by HNB, the decision on participation in such an initiative is to be adopted by HNB with the prior consent of the Ministry of Finance. When the resources for Croatia’s participation in an IMF voluntary financial initiative are provided from the State budget, the decision on participation is to be adopted by the Croatian government. If participation in an IMF voluntary financial initiative is the subject of an international agreement, the decision on participation is to be adopted in accordance with the Law regulating the entry into and execution of international agreements . The explanatory memorandum to the draft decision notes that, on account of the prohibition on monetary financing, Union national central banks (NCBs), including HNB, are only allowed to grant loans to the IMF and its trusts provided the resulting claims have all the characteristics of reserve assets. Donations or grants can only be financed from budgetary funds. Prior approval of the Ministry of Finance is required for a decision on Croatia’s participation in IMF voluntary financial initiatives for which funds are provided by HNB. The reasons for this are that these contributions can be characterised as development assistance given by Croatia, and that the State undertakes to reimburse possible losses in the event of credit and interest risk materialising in respect of these loans and to reimburse transaction costs in relation to them. 1.5 The draft decision provides that any principal and interest losses, as well as transaction costs, arising from Croatia’s participation in the implementation of the IMF’s Financial Transactions Plan and in the IMF’s voluntary financial initiatives for which the resources are provided by HNB, are to be paid to HNB from the State budget . 1.6 Finally, the draft decision authorises the Ministry of Finance to enter into an agreement with HNB, which is to be concluded within 30 days of the entry into force of the draft decision and which is to detail the manner of conducting operations and settling liabilities to be followed . The draft decision further provides that HNB must, within 30 days of the entry into force of the draft decision, transfer the funds that the Ministry of Finance has paid up to that date for Croatia’s quota in the IMF, at the date of entry into force of the draft decision recorded in HNB’s balance sheet as liabilities towards the Ministry of Finance in relation to membership of the IMF. The funds are to be deposited in a special deposit account of the Ministry with HNB .

2. Monetary financing prohibition

2.1 When carrying out its tasks under the draft decision HNB must comply with Article 123(1) of the Treaty, which prohibits overdraft facilities or any other type of credit facility with the NCBs in favour of central governments. This prohibition is subject to certain exemptions contained in Council

Regulation (EC) No 3603/93 . In particular, Article 7 of Regulation (EC) No 3603/93 provides that the financing by NCBs of obligations falling upon the public sector vis-à-vis the IMF is not regarded as a credit facility within the meaning of Article 123 of the Treaty. The fourteenth recital of Regulation (EC) No 3603/93 clarifies the rationale behind this exemption, stating that it is appropriate to authorise the financing by the NCBs of obligations falling upon the public sector visà-vis the IMF because such financing ‘results in foreign claims which have all the characteristics of reserve assets’. Therefore, the exemption in Article 7 of Regulation (EC) No 3603/93 must be interpreted in line with this rationale . 2.2 Against this backdrop, the ECB welcomes that HNB’s financing obligations under the draft decision, read in line with the explanatory memorandum, including as concerns Croatia’s participation in the IMF’s voluntary financial initiatives, are compatible with the limitations imposed by the monetary financing prohibition as specified in Regulation (EC) No 3603/93. Concretely, under the draft decision, HNB may provide loans to the IMF and any IMF-administered trusts that result in foreign claims having all the characteristics of reserve assets, and any donations or grants to the IMF or any IMF-administered trusts may only be financed out of the State’s budgetary funds. 2.3 In addition, the ECB considers that the transfer to the Ministry of Finance’s special deposit account with HNB of the funds paid by the former for Croatia’s quota at the IMF, as referred to in paragraph 1.6, falls within the scope of the exemption in Article 7 of Regulation (EC) No 3603/93 and therefore does not infringe the monetary financing prohibition .

3. Central bank independence

3.1 Under the draft decision HNB is responsible for paying any future increases in Croatia’s IMF quota, for carrying out SDR trading in the implementation of the IMF’s Financial Transactions Plan from its own resources, and for fulfilling most of Croatia’s financial obligations vis-à-vis the IMF. HNB may also be responsible for the provision of resources in the form of a loan for Croatia’s participation in an IMF voluntary financial initiative. This is consistent with HNB’s overall responsibility to manage Croatia’s international reserves , as HNB’s financing results in foreign claims that have all the characteristics of reserve assets. The ECB understands that in this context and in line with the principle of central bank independence enshrined in Article 130 of the Treaty, HNB should take decisions regarding the management of HNB’s IMF-related international reserves in a fully independent manner. 3.2 From a financial independence perspective, pursuant to which Member States may not put their NCBs in a position where they have insufficient financial resources to carry out their ESCB or Eurosystem-related tasks, the ECB welcomes that any principal and interest losses, as well as transaction costs, arising from Croatia’s participation in the implementation of the IMF’s Financial

Transactions Plan and the IMF’s voluntary financial initiatives for which the resources are provided by HNB, are to be paid to HNB from the State budget. However, the ECB notes that currently this reimbursement arrangement under the draft decision does not explicitly cover exchange rate risk on moneys advanced by HNB. This opinion will be published on EUR-Lex. Done in Frankfurt am Main, 26 February 2024. [signed]

The President of the ECB

Christine LAGARDE