Preserving economic and financial stability in an emerging market country during the pandemic crisis: Croatia’s experience

Abstract

The Croatian authorities’ response to the pandemic crisis was considerably greater in size and scope than their reaction to the 2008-09 global financial crisis. This paper aims to identify the main factors that allowed the authorities to respond so ambitiously this time. In particular, the paper explains how solid macroeconomic fundamentals backed by a steady inflow of EU funds enabled the Croatian government and the Croatian National Bank to take bold steps to restore stability in key financial markets and provide liquidity support to the economy without compromising currency stability and fiscal sustainability. In addition, as an EU member state, Croatia was in a position to benefit from a currency swap line with the ECB, as well as from the EU’s common recovery facility, which reduced concerns about the pandemic- induced rise in government debt. Finally, the paper identifies some positive external factors that were beneficial for all emerging market economies.