Croatia PM speaks out to quash kuna devaluation proposals

ZAGREB, March 5 (Reuters) - Croatia should never consider devaluing the national kuna currency as such a move would hurt citizens and companies without improving business competitiveness, Prime Minister Zoran Milanovic said on Thursday.

German consultants for the biggest opposition party, the conservative HDZ, presented broad outlines of a reform plan in Zagreb this week and mentioned kuna devaluation as a possible measure.

This revived an old debate about whether the kuna, introduced two years after Croatia became independent in 1991, was too strong and was therefore stifling export-oriented businesses.

“The kuna exchange rate is something Croatia, its central bank, has been defending for 20 years, with relative ease. But the stakes are big and we should not play games with the kuna. We will never do that,” Milanovic told a cabinet session.

The Social Democrat prime minister faces an election in late 2015, with an economy that has been stuck in recession since 2009 and unemployment at around 20 percent.

The central bank keeps the kuna in a tightly managed float to the euro, intervening on the local foreign exchange market to smooth out stronger exchange rate swings.

Croatia, which joined the European Union in July 2013, is a highly euroised economy, with most loans indexed to the single currency.

“Devaluing the kuna would cause big problems for those who have loans in euros. The debt of citizens and companies would immediately increase, the price of imported products would go up and our purchasing power would shrink,” Milanovic said.

“I urge those who bring this up (devaluation) with such ease to consider the impact of their words on foreign investors, on Croatia’s credibility, monetary stability and the central bank’s ability to continue doing what it now does without problems”.

Croatia is obliged to adopt the euro eventually, but there is no deadline and analysts say it is unlikely to happen before 2020, given its high public debt of 80 percent of gross domestic product and a high budget deficit. (Reporting by Zoran Radosavljevic; Editing by Toby Chopra)