Croats increasingly pull money from bank savings to avoid tax

Croatians are keeping their money in current accounts or even their mattresses more and more. [Photo: Shutterstock]

Croatian citizens and entrepreneurs that keep their money in current and giro accounts, rather than in savings, are growing in number at historically high rates. Bundles of banknotes are more and more common in house vaults, socks and mattresses. EURACTIV Croatia reports.

Interest rates on deposit savings are at historic lows and even such low earnings are still subject to income tax. That is why money is moving from fixed-term savings to current accounts, where no tax is paid if interest does not exceed 0% per year.

The average interest rate on Croatian kuna savings is 0.06% and on foreign currency 0.04%. As long as the money is in the bank, no matter what kind of account and interest, it is safe because all amounts up to €100,000 euros are guaranteed for.

Some do not keep money in banks but in their own vaults, highlighting a real trust issue.

Despite sluggish interest rates, regular savings are the most sought-after commodities in banks, although interest paid by depositors in ten years have fallen to European levels: from 10.24% of average interest rates on kuna deposits without a fixed term to today’s 0.75% and from 4.16 to 0.55% on foreign currency, according to the latest data from the Croatian National Bank.

At the end of last year, banks had 162 billion kuna worth of total foreign currency savings, which was 2 billion kuna less than at the end of 2017, though still 33.5 billion kuna more than a decade ago.

Savings in kuna dropped by 600 million last year, and by 10 billion over the last decade to reach the current 34.6 billion.

Part of this money went to deposits, giro, current and a vista accounts, which, according to central bank data increased by 17.9 billion kuna last year to 91.8 billion kuna. From the end of 2008 to date, this growth amounted to 53.6 billion kuna.

Deposits remain the dominant form of savings. The fall in interest rates on deposits was further boosted by the taxation of interest income. This prompted citizens to switch from fixed-term deposits to a vista deposits, which largely remain in banks because there are few significant investment opportunities on the domestic capital market, while a part was invested in real estate market.

None of this will have a major macroeconomic impact. There is no danger, liquidity is high, citizens are more interested in a kuna that has been strengthening against the euro since 2015.

According to current expectations, the European Central Bank could start raising interest rates early next year.

When this spills over to Croatia,  and when the country begins its eurozone accession process, the tendency towards foreign currency deposits will increase, said Zdeslav Šantić, chief economist at OTP bank.

Croatia joined the European Union in 2013 and is one of its poorest members but officials have said adopting the single currency remains a strategic medium-term goal.

Šantić also said the seasonal effect on the kuna of tourism, which generates a considerable part of Croatia’s GDP, is quite visible. 

“Before the start of the season, deposits are under pressure because people are using them for investments, but at the end of the summer, growth begins and lasts until the end of the year. The average level of deposits is higher in Adriatic Croatia than in the continental part of country, which shows the importance of this sector,” said Šantić.

Analysts at Raiffeisenbank argue that the contribution to the growth in money stock on an annual basis, albeit slower, came from the rise of cash outside credit institutions, which amounted to 28.1 billion kuna at the end of December – 2.6 billion kuna or 10% more compared to the end of 2017.

The narrowest money M1 (money stock), which includes cash outside credit institutions, deposits of other financial institutions with the Croatian National Bank and deposit money with credit institutions, rose 20.7% to amount to nearly 120 billion kuna at the end of 2018, its highest level ever.

Analysts explain that the noticeable rise in the amount of deposit money reflects a greater tendency to hold on to liquid assets, which is certainly motivated by historically low interest rates on savings.

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