Emerging Europe

This country has just canceled poor people's debt

Debt forgiveness for Croatia's poorest citizens
Debt forgiveness for Croatia's poorest citizens

Some of Croatia's poorest citizens will be offered a "fresh start" on Monday when the eastern European country's government cancels their debt in an attempt to kickstart the economy.

The large and unprecedented measure was endorsed by Croatia's left-wing government on January 15. Under the measure, citizens earning no more than 1,250 kuna ($184) a month, rent their property and are unable to pay off their debts will have liabilities worth up to 35,000 kuna ($5,146) wiped off. Power companies, banks, loan companies and telecom operators are included in the scheme.

Prime Minister Zoran Milanovic boasted that no previous government had taken such a measure. "We are doing all we can to make people's lives easier in this protracted and strenuous crisis and give them a chance for a fresh start," Milanovic said in a press conference last month.

Officials have stated that some 60,000 citizens will be covered by the plan, with the former-Yugoslav nation having an entire population of 4.4 million. An estimate from news agency Reuters said that the program could cost creditors as much as 2.1 billion kuna ($309 million).

The 1% where you live
The 1% where you live

The idea is to kick start the economy again and get consumers spending with their bank accounts unfrozen. Citizens are being invited into one of the country's Financial Agency's (FINA) 175 branches from February 2 to see if they are eligible for the debt cancellation.

Croatia - which is part of the European Union but not the euro zone - has been in a crippling recession for the last seven years. Like some of its neighbors, people have taken out loans and mortgages in the Swiss franc. But since the Swiss currency has surged following the Swiss National Bank's move last month, some Croatian debtors have been left with an even bigger mountain to climb.

The debt cancellation program has its critics, however. Timothy Ash, head of emerging markets at Standard Bank, believes Milanovic's measure is in response to the country's parliamentary elections later this year. Kolinda Grabar-Kitarovic, a leading member of the right-wing opposition Croatian Democratic Union (HDZ) Party, became the first female president of Croatia last month and this swing to the right might have "concentrated the mind" of Milanovic, Ash added.

"Classic case of populism," he told CNBC via email, regarding the debt cancellation program.

"This government has consistently spurned going to the IMF (International Monetary Fund) for a financing and policy backstop, unlike Serbia which is now finally signing on the dotted line. Let's see if Croatia can avoid a similar fate, but if its financing options narrow it may also be forced to take such a tack."