bne IntelliNews -

Croatia launched a scheme on February 2 to write off around HKR2.1bn (€273mn) of debt owed by its poorest citizens, in a move the government hopes will bolster the country's stagnant economy ahead of elections at the end of the year.

Debts of up to HRK35,000 will be written off for social security recipients and low-income households earning less than HRK1,250 a month. Property owners and those with savings will not be eligible for the debt write-off. Around 60,000 Croatians are expected to benefit from the move, with creditors footing the bill.

"This is the first time that any [Croatian] government has tried to solve this difficult problem and we are proud of it," Prime Minister Zoran Milanovic said on January 15, when the government approved the programme.

Deputy Prime Minister and Social Welfare Minister Milanka Opacic added that eligible debtors would be “given a chance for a new start without a burden of debt".

The write-off applies to bank debts as well as to outstanding debts to state-utilities and state broadcaster HRT. Creditors including banks, utilities, telecoms companies and several municipal governments have signed agreements with the governments to write off money owed by Croatia’s poorest citizens. On January 28, the government also decided to include the tax administration in the write-off scheme.

The money to be written off with the “fresh start” is only a tiny proportion of the total debts of Croatian citizens, but the government is hopeful it will stimulate spending and benefit the economy. As of July 2014, around 317,000 Croatians had their bank accounts blocked because of unpaid bills - a substantial share of Croatia’s 4.4mn population.

The government will not compensate creditors for writing off the debts, in what appears to be part of a wider strategy of shifting the country’s heavy debt burden away from  taxpayers.

Lenders will also bear the cost of the exchange rate freeze for Swiss franc loans approved by the parliament on January 23. Under amendments to the Consumer Credit Act, the exchange rate used to calculate the Croatian kuna value of personal loans taken out in Swiss francs will be set at HRK6.39 for one year - the rate immediately before the Swiss central bank abandoned its peg to the euro on January 15.

Similarly, under a bill sent to parliament on January 15, Zagreb wants to shift the costs of bailing out credit institutions and investment societies on to owners, shareholders and creditors.

With elections approaching at the end of this year, both the debt write-off and the Swiss franc rate freeze appear to be an attempt to rally support for Milanovic’s ruling Social Democratic Party (SDP).

Tim Ash of Standard Bank described the move as a “classic case of populism”, given its timing. “Obviously the recent victory of an opposition politician in the presidential elections last month has concentrated the mind of PM Milanovic on the need to come up with some vote-winning policies this side of elections. Croatia is also grappling with the issue of CHF-mortgages, which is likely to provide yet another drag to growth and recovery,” Ash wrote in an analyst note.

The government has been under pressure because of Croatia’s extremely slow recovery from the international economic crisis, which has left it stuck in recession since 2009 while other economies in Southeast Europe have recovered. International institutions including the European Commission, the International Monetary Fund and the World Bank now forecast a very modest return to growth this year.

The SDP, the senior partner in the current ruling coalition, received a sharp warning from the electorate in the recent presidential elections. Incumbent president and SDP candidate Ivo Josipovic was narrowly defeated by the opposition HDZ’s Kolinda Grabar-Kitarovic in the second round run-off in January. While the presidency is a largely ceremonial position, the election was seen as an indicator of the country’s mood ahead of the more important parliamentary elections.

The Croatian debt write-off follows a similar move in Macedonia last year. In September, Macedonian banks and major companies, including state television broadcaster MRT and utilities, signed an agreement to write off debts of the country’s poorest citizens. Vulnerable citizens including the disabled, long-term unemployed and recent widows and widowers were eligible for the debt write-off.

However, there was less of an obvious populist motive for the Macedonian debt write-off, which was initiated shortly after victories for Prime Minister Nikola Gruevski’s VMRO–DPMNE in the April parliamentary and presidential elections. Skopje said the aim was to stimulate the economy.