Journal Issue
Share
Article

Republic of Croatia

Author(s):
International Monetary Fund
Published Date:
May 2008
Share
  • ShareShare
Show Summary Details

I. Background

1. Growth accelerated in 2007, but external imbalances continued to increase. On the back of strong domestic demand, real GDP growth reached 5.6 percent, albeit with some moderation in the second half of the year (Figure 1 and Table 1). Domestic demand pressures were also reflected in the current account deficit, which widened to 8.6 percent of GDP, with higher world energy prices contributing as well (Table 2). External debt reached nearly 88 percent of GDP at end-2007 (Figure 2).

Figure 1.Croatia: Macroeconomic Developments, 2001-07

(In percent of GDP, unless specified otherwise)

Sources: Croatian authorities; and Fund staff calculations.

1/ Based on oil prices in euros, converted from the simple average of three spot prices (Dated Brent, West Texas Intermediate, and the Dubai Fateh, US$ per barrel).

Table 1.Croatia: Key Macroeconomic Indicators, 2003-08
20032004200520062007

Prel.
2008

Proj.
Output, unemployment, and prices(Percentage change)
Real GDP
Unemployment (labor force survey, in percent)14.313.812.711.1
CPI inflation (average)
Saving and investment(In percent of GDP)
Domestic investment31.130.631.032.832.732.1
Of which: fixed capital formation28.628.128.129.830.029.4
Domestic saving25.025.624.724.924.223.1
Government
Nongovernment23.223.122.021.619.519.2
Government sector1/
General government revenue45.144.944.544.846.345.2
General government expenditure51.349.748.547.748.647.6
General government balance-6.1-4.8-4.0-3.0-2.3-2.3
General government financing requirement 2/-6.1-4.8-4.0-3.9-3.5-2.6
HBOR balance (net of budget transfers)-0.7-0.4-0.1-0.2-0.7-0.8
Cyclically adjusted primary balance, broader coverage 3/-5.0-3.2-1.9-1.9-2.5-1.7
General government debt40.943.343.841.037.937.0
Money and credit(End of period; change in percent)
Bank credit to the nongovernment sector14.614.017.423.115.0
Broad money11.010.518.018.3
Interest rates4/(Period average; in percent)
Average kuna deposit rate (unindexed)
Average kuna credit rate (unindexed)11.611.711.2
Average credit rate, foreign currency-indexed loans
Balance of payments(In millions of euros)
Current account balance-1,600-1,434-1,976-2,692-3,206-3,672
(In percent of GDP)-6.1-5.0-6.3-7.9-8.6-9.0
Capital and financial account3,6642,5273,8404,9964,8655,197
Overall balance1,235431,412
Debt and reserves(End of period; in millions of euros)
Gross official reserves6,5546,4367,4388,7259,30710,016
In months of following year’s imports of goods and NFS
External debt service to exports ratio (in percent)22.824.427.237.537.731.2
Total external debt (in percent of GDP)75.880.082.485.587.887.9
Net external debt 5/33.237.743.144.346.146.1
Sources: Croatian authorities, and Fund staff estimates.

Modified-accrual GFS methodology.

Includes “pensioners’ debt” repayments, equivalent to 1.0 percent of GDP in 2006, 1.2 percent in 2007, and 0.3 percent in 2008.

Includes off-budget and quasi-fiscal activities (outside the general government accounts), in particular repayments of “pensioners’ debt” and the balance of HBOR (net of budget transfers).

Weighted average, all maturities. Foreign currency-indexed loans are indexed mainly to euros.

Net of official reserves and commercial bank foreign assets.

Sources: Croatian authorities, and Fund staff estimates.

Modified-accrual GFS methodology.

Includes “pensioners’ debt” repayments, equivalent to 1.0 percent of GDP in 2006, 1.2 percent in 2007, and 0.3 percent in 2008.

Includes off-budget and quasi-fiscal activities (outside the general government accounts), in particular repayments of “pensioners’ debt” and the balance of HBOR (net of budget transfers).

Weighted average, all maturities. Foreign currency-indexed loans are indexed mainly to euros.

Net of official reserves and commercial bank foreign assets.

Table 2a.Croatia: Balance of Payments, 2003–13(In millions of euros, unless otherwise indicated)
200320042005200620072008

Proj.
2009

Proj.
2010

Proj.
2011

Proj.
2012

Proj.
2013

Proj.
Current account-1,600-1,434-1,976-2,692-3,206-3,672-3,801-3,776-3,804-3,761-3,818
Merchandise trade balance-6,971-6,724-7,518-8,344-9,434-9,970-10,483-10,955-11,536-12,119-12,748
Exports f.o.b.5,5756,6077,2208,4649,19310,25011,03112,05213,16614,41715,776
Imports f.o.b.-12,546-13,331-14,738-16,808-18,626-20,220-21,514-23,007-24,702-26,536-28,524
Services and income4,1274,0994,3584,5465,1835,2355,6016,0606,5727,1577,684
Transportation
Travel4,9774,8225,3955,7096,0346,5507,1297,7498,4459,1079,799
Other services-296-353-453-423-164-435-552-553-561-563-565
Compensation of employees
Interest and investment income-990-904-1,219-1,538-1,632-1,835-2,016-2,287-2,583-2,789-3,094
Current transfers1,2451,1921,1841,1061,0451,0631,0811,1191,1601,2021,246
Capital and financial account3,6642,5273,8404,9964,8655,1975,0395,4195,8886,2126,465
Capital account 1/3154-13434
Financial account 1/3,5622,4953,7865,1304,8305,0674,9095,2895,7586,0826,335
Direct investment1,3681,2762,5613,4192,1322,2052,4992,7763,0513,373
Portfolio investment-1,178-54730286742
Medium- and long-term loans2,3222,1411,6972,7172,6922,5482,6122,7162,3432,7152,671
Assets41-110-1323000000
Liabilities2,4062,1001,8062,8492,6892,5482,6122,7162,3432,7152,671
Disbursements4,6284,2884,5137,5787,6737,2217,5448,0849,25010,15010,100
Amortization-2,222-2,188-2,706-4,729-4,984-4,673-4,932-5,368-6,907-7,435-7,429
Currency and deposits-1,083571,516-1,681-549-140-154000
Short-term capital flows (net)-42100000
Trade credits-395-243-120
Net errors and omissions 2/-828-1,050-1,043-891-938-816-879-950-1,026-1,107-1,195
Overall balance1,235431,4121,0591,3441,452
Financing-1,235-822-1,412-721-709-359-693-1,059-1,344-1,452
Gross reserves (-= increase)-1,235-822-1,412-722-709-359-693-1,059-1,344-1,452
IMF (net purchases)00000000000
Exceptional financing00000000000
Memorandum items:
Current account (in percent of GDP)-6.1-5.0-6.3-7.9-8.6-9.0-8.7-7.9-7.4-6.8-6.4
Gross official reserves6,5546,4367,4388,7259,30710,01610,37511,06812,12713,47114,923
in months of following year’s imports of goods and NFS
Net foreign assets of the CNB6,1886,4347,4368,7239,30510,01410,37311,06612,12413,46914,921
in months of following year’s imports of goods and NFS
Outstanding debt19,88422,93325,74829,27432,92935,86438,56741,35744,34047,37050,333
External debt to GDP ratio75.879.982.385.587.887.987.887.086.585.684.2
External debt in percent of exports of goods and NFS151.3161.0168.6172.2179.5177.0176.2173.3170.3167.1163.2
Short-term debt by residual maturity (in percent of GIR)66.292.0119.8113.9103.9108.4103.6116.7102.192.083.1
External debt service-2,990-3,482-4,155-6,370-6,919-6,328-7,701-7,697-10,091-9,619-9,800
GDP (millions of euros)26,23228,68131,26334,22037,49640,81643,93147,51351,28755,36259,760
GDP (millions of kuna)198,422214,983231,349250,590275,078299,435322,286348,564376,254406,143438,407
Sources: Croatian National Bank; and Fund staff estimates.

In 2003, excludes debit entry of € 289 million in the item “investment income” in the current account, and an offsetting credit entry in the item “FDI-reinvested earnings” of the capital account, related to the “distribution” and “reinvestment” of paper income from the revaluation of a patent by a Croatian company (see IMF Country Report No. 03/358, Appendix IV).

Errors and omissions are explicitly projected to reflect persistent unrecorded capital outflows.

Sources: Croatian National Bank; and Fund staff estimates.

In 2003, excludes debit entry of € 289 million in the item “investment income” in the current account, and an offsetting credit entry in the item “FDI-reinvested earnings” of the capital account, related to the “distribution” and “reinvestment” of paper income from the revaluation of a patent by a Croatian company (see IMF Country Report No. 03/358, Appendix IV).

Errors and omissions are explicitly projected to reflect persistent unrecorded capital outflows.

Table 2b.Croatia: Balance of Payments, 2003–13(In percent of GDP)
200320042005200620072008

Proj.
2009

Proj.
2010

Proj.
2011

Proj.
2012

Proj.
2013

Proj.
Current account-6.1-5.0-6.3-7.9-8.6-9.0-8.7-7.9-7.4-6.8-6.4
Merchandise trade balance-26.6-23.4-24.0-24.4-25.2-24.4-23.9-23.1-22.5-21.9-21.3
Exports f.o.b.21.323.023.124.724.525.125.125.425.726.026.4
Imports f.o.b.-47.8-46.5-47.1-49.1-49.7-49.5-49.0-48.4-48.2-47.9-47.7
Services and income15.714.313.913.313.812.812.712.812.812.912.9
Transportation
Travel19.016.817.316.716.116.016.216.316.516.416.4
Other services-1.1-1.2-1.4-1.2-0.4-1.1-1.3-1.2-1.1-1.0-0.9
Compensation of employees
Interest and investment income-3.8-3.2-3.9-4.5-4.4-4.5-4.6-4.8-5.0-5.0-5.2
Current transfers
Credit
Debit-1.1-1.4-1.4-1.6-1.4-1.4-1.3-1.3-1.2-1.2-1.2
Capital and financial account14.012.314.613.012.711.511.411.511.210.8
Capital account 1/-0.4
Financial account13.612.115.012.912.411.211.111.211.010.6
Direct investment 1/
Portfolio investment-3.8-1.6-0.1
Medium- and long-term loans
Assets-0.3-0.4-0.4
Liabilities
Disbursements17.615.014.422.120.517.717.217.018.018.316.9
Amortization-8.5-7.6-8.7-13.8-13.3-11.4-11.2-11.3-13.5-13.4-12.4
Currency and deposits-4.1-4.5-1.3-0.3-0.3
Short-term capital flows (net)-1.5-0.1
Trade credits-1.5-0.8-0.4-0.1
Net errors and omissions 2/-3.2-3.7-3.3-2.6-2.5-2.0-2.0-2.0-2.0-2.0-2.0
Overall balance
Financing-4.7-0.2-2.6-4.1-1.9-1.7-0.8-1.5-2.1-2.4-2.4
Gross reserves (-= increase)-4.7-0.2-2.6-4.1-1.9-1.7-0.8-1.5-2.1-2.4-2.4
IMF (net purchases)
Exceptional financing
Memorandum items:
Gross external debt75.879.982.385.587.887.987.887.086.585.684.2
Net external debt33.237.743.144.346.146.146.145.344.743.842.5
Sources: Croatian National Bank; and Fund staff estimates.

In 2003, excludes debit entry of 1.1 percent of GDP in the item “investment income” in the current account, and an offsetting credit entry in the item “FDI-reinvested earnings” of the capital account, related to the “distribution” and “reinvestment” of paper income from the revaluation of a patent by a Croatian company (see IMF Country Report No. 03/358, Appendix IV).

Errors and omissions are explicitly projected to reflect persistent unrecorded capital outflows.

Sources: Croatian National Bank; and Fund staff estimates.

In 2003, excludes debit entry of 1.1 percent of GDP in the item “investment income” in the current account, and an offsetting credit entry in the item “FDI-reinvested earnings” of the capital account, related to the “distribution” and “reinvestment” of paper income from the revaluation of a patent by a Croatian company (see IMF Country Report No. 03/358, Appendix IV).

Errors and omissions are explicitly projected to reflect persistent unrecorded capital outflows.

Figure 2.Croatia: External Debt, 2002-07

Sources: Croatian National Bank; and Fund staff calculations.

1/ Measured net debt equals gross debt less official reserves and commercial banks foreign assets. It may overestimate “true” net debt as there is evidence of unrecorded private sector foreign asset accumulation, described in Box 1 of IMF Country Report No. 06/346.

2. The exchange rate has been stable, but inflation picked up. Because of financial euroization (Figure 3) and balance-sheet exposures,1 the Croatian National Bank (CNB) has sought to maintain broad exchange rate stability, intervening periodically in the foreign exchange market (text chart). In 2007, although the volume of intervention declined, the kuna-euro exchange rate fluctuated within an increasingly narrow range.2 Until very recently, the stable exchange rate helped keep inflation between 2 and 4 percent, aided by moderate wage growth and limited pass-through of rising world oil prices to retail energy prices (Figure 4). Nevertheless, surging food and utility prices pushed year-on-year headline inflation above 6 percent in early 2008, the highest rate since the early 1990s. Year-on-year core inflation reached 5.3 percent in January 2008.

Figure 3.Croatia: Euroization and Credit Growth, 1999–2008

Sources: Croatian National Bank; the accompanying Financial Sector Stability Assessment Update; and Fund staff calculations.

1/ Total credit to households and nonfinancial enterprises (excluding public enterprises), including domestic credit by banks and leasing companies, and direct borrowing from abroad.

Figure 4.Croatia: Inflation, 2001-08

(Year-on-year percentage changes)

Sources: Croatian authorities; and Fund staff calculations.

1/ Based on oil prices in euros, converted from the simple average of three spot prices (Dated Brent, West Texas Intermediate, and the Dubai Fateh, US$ per barrel).

3. The headline fiscal deficit narrowed significantly in recent years, though a broader measure of fiscal policy shows an expansionary fiscal stance in 2007 as the economy boomed. The government reduced the general government deficit from 6.1 percent of GDP in 2003 to 3 percent in 2006, and to an estimated 2.3 percent in 2007.3 Taking into account off-budget and quasi-fiscal activities not included in the general government accounts,4 a broader measure of the fiscal deficit was little changed in 2006 and 2007 (Table 3). But with growth particularly rapid in 2007, cyclical adjustment implies that the overall fiscal stance was expansionary in that year.

Table 3.Croatia: Consolidated General Government Finances, 2003–13 1/(In percent of GDP; modified-accrual based on GFS 1986 unless otherwise indicated)
20032004 2/2005 2/20062007200820092010201120122013
BudgetRevised

budget
Prel.Proj.Proj.Proj.Proj.Proj.Proj.
Revenue45.144.944.544.844.846.046.345.245.144.944.744.243.8
Taxes27.226.226.226.626.426.626.926.926.827.027.026.726.6
Taxes on income, profits, and capital gains
Payable by individuals
Payable by corporations and other enterprises
Taxes on goods and services20.019.319.219.119.118.918.918.818.819.119.119.119.2
VAT14.213.913.913.914.013.913.913.914.014.314.314.214.3
Excises
Taxes on international trade and transactions
Social security contributions13.813.713.513.513.613.513.613.613.613.313.313.112.9
Other revenue and grants
Total expenditure3/51.349.748.547.747.648.648.647.646.445.444.743.743.1
Expense (current)45.244.343.743.243.143.143.443.142.541.741.040.139.5
Compensation of employees12.411.911.511.311.211.311.411.211.110.910.710.510.3
Use of goods and services
Interest
Subsidies
Grants
Social benefits19.219.118.417.917.617.917.717.317.317.316.916.716.9
Other expense
Acquisition of nonfinancial assets (investment) 4/
Net lending
Overall balance-6.1-4.8-4.0-3.0-2.8-2.6-2.3-2.3-1.4-0.5
Repayment of “pensioners’ debt”
Financing requirement-6.1-4.8-4.0-3.9-3.9-3.7-3.5-2.6-1.6-0.7-0.2
Financing-0.2-0.6
Privatization and disposal of fixed assets
External financing-1.9-1.4-0.8-0.1-0.5-0.6-0.6
Disbursements
Amortization-1.2-2.3-2.6-2.5-1.7-1.7-1.7-1.4-2.4-1.8-1.9-0.7-0.6
Domestic financing-0.5-0.1
Memorandum items:
Primary balance-4.1-2.7-1.8-0.8-0.7-0.6-0.2-0.3
HBOR balance (net of budget transfers)-0.7-0.4-0.1-0.2-0.6-0.4-0.7-0.8-0.8-0.8-0.8-0.8-0.8
Broader measure of fiscal balance 5/-6.8-5.2-4.1-4.1-4.2-3.5-2.5-1.5-1.1-0.6-0.2
Cyclically adjusted primary balance, broader definition 5/-5.0-3.2-1.9-1.9-2.6-2.4-2.5-1.7-0.6
General government debt40.943.343.841.039.137.937.035.934.032.029.727.3
General government guarantees and arrears11.5
Sources: Ministry of Finance; and Fund staff estimates.

Baseline projections are based on the authorities’ achieving their targets for the general government balance in 2008–10 and staff’s recommendation for 2011.

Deficit presented for 2004 includes in “other revenue” HRK 197 million secured in December 2004 from an auction of a GSM licence, but not received in cash until February 2005; this amount is not included in 2005 revenues.

Excluding “pensioners’ debt” repayments; including accumulation of arrears in “use of goods and services.”

The increase in investment in 2007 is mainly due to one-off spending on roads.

Includes repayments of “pensioners’ debt” and the balance of HBOR (net of budget transfers).

Sources: Ministry of Finance; and Fund staff estimates.

Baseline projections are based on the authorities’ achieving their targets for the general government balance in 2008–10 and staff’s recommendation for 2011.

Deficit presented for 2004 includes in “other revenue” HRK 197 million secured in December 2004 from an auction of a GSM licence, but not received in cash until February 2005; this amount is not included in 2005 revenues.

Excluding “pensioners’ debt” repayments; including accumulation of arrears in “use of goods and services.”

The increase in investment in 2007 is mainly due to one-off spending on roads.

Includes repayments of “pensioners’ debt” and the balance of HBOR (net of budget transfers).

4. External competitiveness appears adequate. Despite some gradual real exchange rate appreciation, indicators of price and cost competitiveness vis-à-vis central European peer countries remain benign (Figure 5). Market share of goods exports has been steady. Tourism receipts—which account for almost 40 percent of exports of goods and nonfactor services—have been strong.5 Staff estimates discussed in the policy issues section below indicate that the real exchange rate is broadly consistent with fundamentals.

Figure 5.Croatia and Selected European Countries: Competitiveness Indicators, 2000-07

Sources: Croatian authorities; IMF’s Direction of Trade database; INS; and Fund staff calculations.

Croatia: Nominal Exchange Rate and Foreign Exchange Intervention, 2003-08

Source: Croatian National Bank.

1/ Besides direct foreign exchange interventions, the exchange rate may have been influenced by other CNB actions, such as administrative measures (for example, the MRR; see Table 7) and regular (local-currency) reverse repo operations.

5. The financial sector is healthy, but risks associated with rapid credit growth have been a concern. Bank credit to the nongovernment sector increased by 23 percent in 2006 (Table 4, Figure 3), taking the stock above 70 percent of GDP and—in contrast to most other countries in the region—above “equilibrium” levels estimated by several studies.6 As discussed in the accompanying Financial Sector Stability Assessment (FSSA), banks’ capital adequacy and asset quality are at sufficiently comfortable levels to withstand a range of shocks (Tables 5 and 6). Though declining, profitability is still high. Nevertheless, significant external imbalances and rising asset prices (and volatility in the case of equities) accompanying credit growth expose banks to sudden shifts in market sentiment. Banks also face significant interest and exchange rate induced credit risks: the majority of their loans is at variable interest rates and linked to foreign currency; and adverse shocks would erode borrowers’ debt-servicing capacity in circumstances of high corporate and household debt. The CNB has taken a range of measures, whose aims include curbing banks’ borrowing from abroad and domestic credit expansion (Table 7); bank credit subsequently slowed.

Table 4.Croatia: Monetary Accounts, 2004-08(End-period; in millions of kuna unless otherwise stated)
2004200520062007

Q1
2007

Q2
2007

Q3
2007

Q4
2008

Feb
2004200520062007

Q1
2007

Q2
2007

Q3
2007

Q4
2008

Feb
Monetary Survey(Change in percent)
Net Foreign Assets31,74323,30427,61429,12431,86044,98249,44744,034-3.1-26.618.5124.4127.776.079.157.7
(In millions of euros)4,1383,1603,7603,9454,3626,1776,7506,051-3.4-23.619.0122.6126.278.479.559.2
Croatian National Bank49,35554,84464,06970,26466,95664,02968,16170,40911.116.818.6
(In millions of euros)6,4347,4368,7239,5189,1688,7939,3059,67515.617.317.7
Deposit money banks-17,613-31,540-36,455-41,140-35,096-19,047-18,714-26,37621.179.115.6-11.0-29.0-44.8-48.7-37.7
(In millions of euros)-2,296-4,276-4,963-5,573-4,806-2,616-2,555-3,62420.786.316.1-11.7-29.5-44.0-48.5-37.1
Net Domestic Assets108,205131,343154,844155,898162,586152,726166,376165,56912.621.417.910.9
Domestic credit (CNB definition) 1/141,278168,428200,329209,243215,740221,614226,076226,51911.819.218.917.214.514.512.912.0
Claims on government, net 2/13,16518,81116,51017,15015,46218,15514,11813,333-3.842.9-12.2-20.3-33.1-11.2-14.5-13.0
Claims on other domestic sectors 3/125,521147,401181,488189,680197,545200,266208,688209,89514.017.423.122.421.217.415.013.7
Other items (net)-33,073-37,084-45,485-53,345-53,154-68,888-59,701-60,95012.122.740.435.362.431.328.2
Broad Money139,948154,647182,459185,021194,446197,707215,822209,60310.518.020.519.211.918.314.7
Narrow Money34,56238,81748,52146,75351,56149,90957,87851,22512.325.022.422.113.319.312.8
Currency outside banks10,95612,16414,60914,38216,08015,61216,00715,23911.020.118.914.8
Demand deposits23,60626,65333,91232,37135,48134,29741,87135,98612.927.224.125.715.423.514.4
Quasi Money105,386115,830133,938138,268142,885147,798157,944158,37810.915.619.818.211.417.915.4
Kuna-denominated23,64329,06945,68147,56950,84448,11054,85454,52824.623.057.144.327.620.114.3
Foreign currency-denominated81,74386,76188,25790,70092,04299,688103,090103,8507.56.11.710.013.617.016.815.9
Balance Sheet of the Croatian National Bank
(Contribution to change in base money)
Net Foreign Assets49,35554,84464,06970,26466,95664,02968,16170,40912.317.120.0
Of which: Banks’ reserves in foreign currency10,76513,49616,57721,61618,71114,54714,25715,61410.9-1.8-0.5-3.7-8.9
Net International Reserves38,55541,33447,47948,61648,21949,44653,83054,75410.211.412.210.1
Net Domestic Assets-4,654-901-1,105-3,0151,503-1,951-5,660-0.4-1.3-1.9
Of which: Claims on government (net)-260-331-187-175-288-249-198-177-0.2-0.1
Claims on banks4,2163,9112,6405,6707,0914,178-1.5-0.6-1.0
Of which: open market operations4,2013,8972,6255,2836,2002,815-0.6-1.7-1.0
Claims on other domestic sectors8373646464686868
Other items (net)-4,886-4,859-4,893-5,543-5,216-5,407-5,999-6,088-0.7-0.1-1.8-2.1-0.5-1.8-1.3
(Change in percent)
Base Money44,70253,94362,96567,24967,18765,53166,21064,74919.920.716.722.014.4-1.6
Currency10,95612,16414,60914,38216,08015,61216,00715,23911.020.118.914.8
Deposits33,74641,77948,35552,86751,10749,92050,20249,51026.323.815.722.816.3-4.5
Of which: Settlement accounts6,4088,4118,5367,6527,7238,1307,5548,32114.131.333.324.128.7-11.523.0
Statutory reserves in kuna 4/14,67417,60520,47821,21221,60122,25624,26722,66016.420.016.322.216.214.418.5
Statutory reserves in foreign currency10,76513,49616,57721,61618,71114,54714,25715,61461.025.422.824.9-5.5-1.9-14.0-27.3
Reserve Money (CNB definition) 5/33,92440,39146,33145,56548,41650,94151,92449,09510.919.114.720.616.320.212.110.9
Memorandum items:
Nominal GDP (yearly total)214,983231,349250,590256,430262,992269,387275,078
Narrow money multiplier0.770.720.770.700.770.760.87
Broad money multiplier3.132.872.902.752.893.023.26
Broad money (in percent of GDP)65.166.872.872.273.973.478.5
Foreign currency in percent of broad money58.456.148.449.047.350.447.8
Credit to other domestic sectors: stock (in percent of GDP)58.463.772.474.075.174.375.9
Credit to other domestic sectors: 12-month flow (in percent of GDP)13.613.513.111.0
Sources: Croatian National Bank; and Fund staff estimates.

Comprises net claims on central government, gross claims on local government, and claims on other domestic sectors.

Comprises claims on central government and funds, and local government and funds, net of their deposits in the banking system. Central government funds include the Croatian Bank for Reconstruction and Development (HBOR).

Comprises claims on households, enterprises, other banking institutions (housing savings banks, savings and loan cooperatives, and investment funds), and other financial institutions.

From 2007, includes obligatory CNB bills.

Excludes statutory reserves in foreign currency.

Sources: Croatian National Bank; and Fund staff estimates.

Comprises net claims on central government, gross claims on local government, and claims on other domestic sectors.

Comprises claims on central government and funds, and local government and funds, net of their deposits in the banking system. Central government funds include the Croatian Bank for Reconstruction and Development (HBOR).

Comprises claims on households, enterprises, other banking institutions (housing savings banks, savings and loan cooperatives, and investment funds), and other financial institutions.

From 2007, includes obligatory CNB bills.

Excludes statutory reserves in foreign currency.

Table 5.Croatia: Financial Soundness Indicators, 2001-07(Banks, in percent, unless otherwise indicated)
2001200220032004200520062007 Q3
Core Set
Regulatory capital to risk-weighted assets18.517.416.516.015.213.616.1
Regulatory Tier I capital to risk-weighted assets16.915.214.113.713.512.515.7
Nonperforming loans net of loan-loss provisions to capital21.019.622.619.016.712.410.8
Nonperforming loans to total gross loans 1/13.810.28.97.56.25.24.9
Sectoral distribution of loans to total loans
Nonfinancial corporations47.945.041.039.538.540.037.6
Households42.544.547.849.949.749.449.4
Other sectors9.610.511.210.611.710.713.0
Return on assets0.91.61.61.71.61.51.6
Return on equity6.613.714.116.115.113.011.8
Net interest income to gross income59.056.358.956.657.958.357.2
Noninterest expenses to gross income84.472.972.768.066.767.865.9
Liquid assets to total assets 2/26.817.618.716.111.512.611.1
Liquid assets to short-term liabilities 2/90.357.866.862.042.147.043.9
Net open position in foreign exchange to capital24.718.27.42.62.7
Encouraged Set
Deposit Takers3/
Capital to assets9.29.58.98.69.010.312.0
Large exposures to capital224.8151.3128.4161.4122.683.760.3
Geographical distribution of loans to total loans
Residents99.599.599.699.899.799.599.4
Nonresidents0.50.50.40.20.30.50.6
Gross asset position in derivatives to capital0.80.60.91.1
Gross liability position in derivatives to capital1.21.00.70.8
Noninterest income to total income41.043.741.143.442.141.742.8
Personnel expenses to noninterest expenses30.533.932.532.734.133.825.2
Spread between domestic lending and deposit rates6.311.010.19.99.58.27.1
Spread between foreign exchange lending and deposit rates6.25.55.04.23.83.33.2
Noninterbank loans to noninterbank deposits63.680.987.092.2101.1107.9112.4
Foreign currency-denominated loans to total loans 4/78.475.870.976.778.569.660.8
Foreign currency-denominated liabilities to total liabilities 4/79.176.076.178.178.877.973.8
Net open position in equities to capital0.30.20.10.1
Other Financial Corporations (OFCs)
OFCs’ assets to total financial system assets12.515.016.618.621.323.726.3
OFCs’ assets to GDP12.316.119.523.929.937.041.0
Nonfinancial Corporations5/
Total debt to equity45.844.540.945.949.357.0
Return on equity1.13.61.82.74.45.1
Net foreign exchange exposure to equity7.38.910.010.912.413.2
Households
Household debt to GDP19.024.728.931.835.540.340.3
Household debt service and principal payments to income3.74.66.16.06.16.0
Real Estate Markets
Residential real estate loans to total loans13.913.015.016.817.919.519.8
Other Indicators
Loan-loss provisions to nonperforming loans71.468.060.662.360.061.558.9
Change in credit to GDP ratio8.313.58.36.911.314.010.8
Net interest income to average total assets3.63.33.43.02.92.72.7
Noninterest expenses to average total assets5.14.24.13.63.33.23.1
Loans to assets44.453.053.954.758.561.663.4
Liquid assets to total deposits38.024.626.623.817.418.917.5
Net claims on government to total assets18.616.813.69.911.65.55.4
Foreign currency deposits to total deposits77.474.473.174.273.164.661.3
Source: Croatian National Bank.

Assets include gross loans, interbank loans, investment portfolio of banks, total interest income, total off-balance sheet claims.

Liquid assets are on a net basis. They include deposits at banks and at the central bank, short-term government and central bank paper, and overnight loans extended; less required reserve funds, central bank loans received, and overnight loans received. The sharp decline in liquidity in 2005 coincided with the start of reverse repo operations by the CNB that gave banks market-based access to liquidity when needed.

Commercial banks only. End-year FSIs, based on audited annual financial statements, can differ slightly from quarterly data.

Includes kuna-denominated instruments linked to foreign currencies.

Based on unconsolidated audited financial statements following IAS; not in line with the IMF FSI Compilation Guide.

Source: Croatian National Bank.

Assets include gross loans, interbank loans, investment portfolio of banks, total interest income, total off-balance sheet claims.

Liquid assets are on a net basis. They include deposits at banks and at the central bank, short-term government and central bank paper, and overnight loans extended; less required reserve funds, central bank loans received, and overnight loans received. The sharp decline in liquidity in 2005 coincided with the start of reverse repo operations by the CNB that gave banks market-based access to liquidity when needed.

Commercial banks only. End-year FSIs, based on audited annual financial statements, can differ slightly from quarterly data.

Includes kuna-denominated instruments linked to foreign currencies.

Based on unconsolidated audited financial statements following IAS; not in line with the IMF FSI Compilation Guide.

Table 6.Croatia: Indicators of External and Financial Vulnerability, 2003-08(In percent, unless otherwise indicated)
20032004200520062007Latest
Prel.ValueDate
External indicators
Real effective exchange rate (using consumer prices) 1/, 2000=100105.4107.6109.7111.8112.9115.6Dec-07
Exports of goods and services (volumes, percentage change, yoy) 2/11.4Q4 -07
Imports of goods and services (volumes, percentage change, yoy) 2/12.1Q4 -07
Current account deficit (millions of euros) 3/-1,600-1,434-1,976-2,692-3,206-3,206Q4 -07
Current account deficit in percent of GDP 3/-6.1-5.0-6.3-7.9-8.6-8.6Q4 -07
Capital and financial account in percent of GDP 3/14.012.314.613.013.0Q4 -07
Gross official reserves (millions of euros)6,5546,4367,4388,7259,3079,677Feb-08
Gross official reserves in percent of broad money (M4)38.935.335.535.131.633.6Feb-08
Gross official reserves in percent of reserve money163.9145.5135.8138.3131.3143.4Feb-08
Gross official reserves in months of current year’s imports of goods and NFSFeb-08
Gross usable international reserves in percent of domestic FX deposits50.647.247.753.852.352.8Feb-08
CNB net international reserves (NIR; millions of euros)4,5465,0265,6046,4647,3487,524Feb-08
CNB NIR in months of current year’s import of goods and NFSFeb-08
Short-term debt (by residual maturity, in percent of NIR)95.4117.8158.5148.6127.7127.7Q4 -07
Short-term debt and current account deficit net of FDI (in percent of NIR)111.5130.7160.2146.0148.8148.8Q4 -07
Total external debt, percent of GDP75.880.082.485.587.887.8Dec-07
External debt service to export ratio 3/22.824.427.237.537.737.7Q4 -07
Financial indicators
General government debt in percent of GDP40.943.343.841.037.937.9Dec-07
Domestic in percent of GDP17.819.924.224.423.623.6Dec-07
Foreign in percent of GDP23.123.419.616.614.314.3Dec-07
Broad money (M4, percentage change, yoy)11.010.518.018.314.7Feb-08
Claims on other domestic sectors (change, yoy)14.614.017.423.115.013.7Feb-08
Short-term interest rate (in percent, e.o.p.)Feb-08
Stock market CROBEX index (1000 at July 1, 1997), e.o.p.1,1851,5651,9983,2115,2393,7974/2/08
Zagreb Stock Exchange, capitalization (stocks, percent of GDP)254050804/2/08
Bond yield spreads (EMBI Global, e.o.p.)96423640944/2/08
Debt ratings: Moody’s:
Government bonds, foreign currencyBaa3Baa3Baa3Baa3Baa3Baa3Apr-08
Government bonds, domestic currencyBaa1Baa1Baa1Baa1Baa1Baa1Apr-08
Foreign debt ratings
Fitch: Local currency LTBBB+BBB+BBB+BBB+BBB+BBB+Apr-08
Fitch: Foreign currency LTBBB-BBB-BBB-BBB-BBB-BBB-Apr-08
Standard and Poor’s: Local currency LTBBB+BBB+BBB+BBB+BBB+BBB+Apr-08
Standard and Poor’s: Foreign currency LTBBB-Apr-08
Banking system:
Regulatory capital to risk-weighted assets16.516.015.213.616.1Q3 -07
Nonperforming loans to total loansQ3 -07
Loan-loss provisions to non-performing loans60.662.360.061.558.9Q3 -07
Net open foreign exchange position to capital24.718.2Q3 -07
Foreign currency deposits to total deposits 4/73.174.273.164.661.3Q3 -07
Foreign currency loans to total loans 4/70.976.778.569.660.8Q3 -07
Sources: Croatian National Bank; Ministry of Finance; Central Bureau of Statistics; Bloomberg; MediaScan; and Fund staff estimates.

An increase in the index reflects an appreciation; annual averages through 2007.

National accounts concept.

Sum of four quarters to the latest observation.

Including foreign currency-linked deposits and loans.

Sources: Croatian National Bank; Ministry of Finance; Central Bureau of Statistics; Bloomberg; MediaScan; and Fund staff estimates.

An increase in the index reflects an appreciation; annual averages through 2007.

National accounts concept.

Sum of four quarters to the latest observation.

Including foreign currency-linked deposits and loans.

Table 7.The CNB’s Measures 1/
Prudential and supervisory
  • Higher reserve requirements for general banking risks for banks with asset growth above specific thresholds;
  • Introduction of capital charges for market risks;
  • Increased risk weights on unhedged foreign-currency loans;
  • Issuance of guidelines for banks for managing risks related to FX and household loans;
  • Intensified cross-border supervisory coordination;
  • Intoduction of link between minimum required capital and loan growth.
Administrative
  • Marginal reserve requirement (MRR) on banks’ new foreign borrowing: introduced in mid-2004 at a rate of 24 percent, subsequently increased in steps to 55 percent; loopholes in the base closed. A 55 percent special reserve requirement also applies to banks’ bond issuance (to close a loophole in the MRR).
  • Reintroduction of credit controls, effective at the start of 2007; previously used in 2003.In 2007, banks were required to purchase low-yielding CNB bills for 50 percent of the amount by which their credit growth exceeded the CNB ceiling, which is consistent with 12 percent credit growth for the full year.The CNB modified the current controls several times to close loopholes, and, in December 2007, confirmed the retention of the controls in 2008. In 2008, 1 percent monthly sublimits apply and other conditions were tightened: the purchase requirement for excess credit growth was increased to 75 percent; and the CNB bill yield was cut to 0.25 percent.
  • Foreign-currency liquid asset requirement, also known as the “32 percent rule.”The CNB broadened its base in late 2006 to include indexed instruments.
  • Banks are also subject to a high general reserve requirement (17 percent).
Source: adapted from the accompanying FSSA Update.

Outside the CNB’s remit, other relevant measures in 2006-07 include the launch of the credit registry; and the Leasing Act, which prohibits non-leasing credits by leasing companies.

Source: adapted from the accompanying FSSA Update.

Outside the CNB’s remit, other relevant measures in 2006-07 include the launch of the credit registry; and the Leasing Act, which prohibits non-leasing credits by leasing companies.

6. While Croatia had not been particularly hurt by the financial turbulence through 2007, cracks have appeared (Figure 6). In particular, stock prices surged in 200607 (increasing by 60 percent annually), taking market capitalization to 130 percent of GDP; but prices slumped by almost 30 percent in the first 3 months of 2008.7 A widening CDS spread suggests concerns with external vulnerabilities, though not to the same extent as for some other countries.

Figure 6.Croatia: Financial Market Conditions, 2000-08

(In basis points)

Sources: Croatian National Bank; Haver Analytics; and JP Morgan/Bloomberg.

II. Macroeconomic Outlook and Risks

7. The outlook for 2008 suggests macroeconomic imbalances will persist.

  • In staffs baseline (Table 8), which assumes the authorities achieve their targets for the general government deficit (discussed below), growth slows this year to within staff’s estimate of potential (4–4½ percent).8 This is in line with the moderation already under way since the second half of 2007, and mainly reflects slower consumption growth, with the bulk of the “pensioners’ debt” now repaid and lower consumer confidence in the wake of stock market weakness, and the unwinding of last year’s jump in government investment. Nevertheless, inflation, while projected to ease from its current rate, remains higher than in recent years. The current account deficit and external debt stay modestly above their levels in 2007. There was broad agreement on the macroeconomic setting, with only minor differences with the authorities’ forecasts.
  • Downside risks to the baseline predominate. Inflation could be worse than expected if there are second-round effects from higher food and utility prices—for example, if wage moderation were not maintained. A deeper slowdown in trading partners’ growth—for example, if the financial and external risks flagged in the April 2008 WEO were to materialize—would widen the current account deficit and likely cause less favorable external debt dynamics. While Croatia has so far felt little impact from the turmoil in global financial markets, the ongoing global repricing of credit risks could eventually push up external costs for Croatian borrowers and result in higher local bank lending rates. The potential for shocks in southeastern Europe represents an additional downside risk.
Table 8.Croatia: Staff Medium-Term Baseline Scenario, 2003–13
20032004200520062007200820092010201120122013
Prel.Proj.Proj.Proj.Proj.Proj.Proj.
Real sector(Percentage changes)
Real GDP 1/
Consumption, total
Of which: private
Gross fixed capital formation, total24.710.9
Of which: private24.014.4
General government finances2/(In percent of GDP)
Revenue45.144.944.544.846.345.245.144.944.744.243.8
Expenditure 3/51.349.748.547.748.647.646.445.444.743.743.1
Balance 3/-6.1-4.8-4.0-3.0-2.3-2.3-1.4-0.5
Privatization receipts 4/
Domestic financing-0.2-0.1
Foreign financing-1.9-1.4-0.1-0.5-0.6-0.6
Debt40.943.343.841.037.937.035.934.032.029.727.3
Balance of payments(In percent of GDP)
Current account balance-6.1-5.0-6.3-7.9-8.6-9.0-8.7-7.9-7.4-6.8-6.4
Exports f.o.b.21.323.023.124.724.525.125.125.425.726.026.4
Imports f.o.b.-47.8-46.5-47.1-49.1-49.7-49.5-49.0-48.4-48.2-47.9-47.7
Merchandise trade balance-26.6-23.4-24.0-24.4-25.2-24.4-23.9-23.1-22.5-21.9-21.3
Services and income, net15.714.313.913.313.812.812.712.812.812.912.9
Of which: travel receipts (credits)21.219.219.218.418.018.018.118.218.418.418.3
Capital and financial account14.012.314.613.012.711.511.411.511.210.8
Of which: FDI
Gross external debt75.880.082.485.587.887.987.887.086.585.684.2
Net external debt33.237.743.144.346.146.146.145.344.743.842.5
Nominal GDP (in millions of kuna)198,422214,983231,349250,590275,078299,435322,286348,564376,254406,143438,407
Nominal GDP (in millions of euros)26,23228,68131,26334,22037,49640,81643,93147,51351,28755,36259,760
Sources: Central Statistics Bureau; Croatian National Bank; Ministry of Finance; and Fund staff estimates.

Assumes an increase in total factor productivity and potential growth as EU accession approaches.

Modified accrual basis based on GFS 1986 methodology.

Excludes repayments of “pensioners’ debt.”

Excludes privatization receipts used to repay “pensioners’ debt.”

Sources: Central Statistics Bureau; Croatian National Bank; Ministry of Finance; and Fund staff estimates.

Assumes an increase in total factor productivity and potential growth as EU accession approaches.

Modified accrual basis based on GFS 1986 methodology.

Excludes repayments of “pensioners’ debt.”

Excludes privatization receipts used to repay “pensioners’ debt.”

8. From a medium-term perspective, the baseline envisages progress toward external stability. The current account deficit steadily narrows in relation to GDP. The external-debt-to-GDP ratio falls during the government’s term.

9. Tensions from heavy capital inflows, if they were to persist, could strain the macroeconomic framework in an environment combining a number of underlying difficulties. These include heavy state presence in the economy, lackluster growth in goods exports, and extensive euroization. Tensions could be particularly acute in the absence of continued structural reforms conducive to higher greenfield FDI and other capital flows that would add to productive capacity, especially in the tradables sector.9

10. Two alternative scenarios—one assuming more vigorous structural reforms and the other a worse external environment—illustrate the potential benefits of greater ambition but the risks from policy inaction. Table 9 illustrates a higher sustainable growth path assuming early resolution of problems in the shipyards and substantial reform of the business environment. Table 10 presents a scenario based on a more severely deteriorating external environment. The resulting weaker export performance, higher current account deficits, and lower-than-baseline FDI imply a continuing buildup of external debt over the projection period—and heightened vulnerabilities to shocks.10 Slow structural reform implementation and a failure to attract more greenfield FDI would increase the risk of external instability.

Table 9.Croatia: Staff Medium-Term Alternative (Reform) Scenario, 2003–13 1/
20032004200520062007200820092010201120122013
Prel.Proj.Proj.Proj.Proj.Proj.Proj.
Real sector(Percentage changes)
Real GDP 1/
Consumption, total
Of which: private
Gross fixed capital formation, total24.710.9
Of which: private24.014.4
General government finances2/(In percent of GDP)
Revenue45.144.944.544.846.345.245.245.245.144.644.3
Expenditure 3/51.349.748.547.748.647.646.445.444.843.742.8
Balance 3/-6.1-4.8-4.0-3.0-2.3-2.3-1.2-0.2
Privatization receipts 4/
Domestic financing-0.2-0.2-0.9
Foreign financing-1.9-1.4-0.1-0.5-0.6-0.5
Debt40.943.343.841.037.937.035.432.830.026.723.3
Balance of payments(In percent of GDP)
Current account balance-6.1-4.9-6.2-7.9-8.6-9.0-8.9-8.4-7.5-6.9-6.4
Exports f.o.b.21.323.023.124.724.525.125.125.426.026.526.8
Imports f.o.b.-47.8-46.5-47.1-49.1-49.7-49.5-48.9-48.3-48.1-48.0-48.0
Merchandise trade balance-26.6-23.4-24.0-24.4-25.2-24.4-23.8-22.9-22.2-21.5-21.1
Services and income, net15.714.313.913.313.812.812.512.212.612.612.8
Of which: travel receipts (credits)21.219.219.218.418.518.018.318.418.818.919.1
Capital and financial account14.012.314.613.012.712.612.711.711.611.2
Of which: FDI
Gross external debt75.880.082.485.587.887.987.986.884.581.678.4
Net external debt33.237.743.144.346.146.146.145.142.739.836.6
Nominal GDP (in millions of kuna)198,422214,983231,349250,590275,078299,435324,843356,190390,723430,616474,582
Nominal GDP (in millions of euros)26,23228,68131,26334,22037,49640,81644,28048,55353,26058,69864,691
Sources: Central Statistics Bureau; Croatian National Bank; Ministry of Finance; and Fund staff estimates.

Assumes substantial reform of the business environment that resolves land ownership uncertainties, reduces corruption and the regulatory burden, and transparently completes privatization. This results in higher greenfield FDI inflows and faster growth in total factor productivity (about double the baseline pace) from 2009. Increased competitiveness is reflected in both higher goods exports and in higher tourism investment and receipts.

Modified accrual basis based on GFS 1986 methodology.

Excludes repayments of “pensioners’ debt.”

Excludes privatization receipts used to repay “pensioners’ debt.”

Sources: Central Statistics Bureau; Croatian National Bank; Ministry of Finance; and Fund staff estimates.

Assumes substantial reform of the business environment that resolves land ownership uncertainties, reduces corruption and the regulatory burden, and transparently completes privatization. This results in higher greenfield FDI inflows and faster growth in total factor productivity (about double the baseline pace) from 2009. Increased competitiveness is reflected in both higher goods exports and in higher tourism investment and receipts.

Modified accrual basis based on GFS 1986 methodology.

Excludes repayments of “pensioners’ debt.”

Excludes privatization receipts used to repay “pensioners’ debt.”

Table 10.Croatia: Staff Medium-Term Alternative (Worse External Environment) Scenario, 2003–13 1/
20032004200520062007200820092010201120122013
Prel.Proj.Proj.Proj.Proj.Proj.Proj.
Real sector(Percentage changes)
Real GDP 1/
Consumption, total
Of which: private
Gross fixed capital formation, total24.710.9
Of which: private24.014.4
General government finances2/(In percent of GDP)
Revenue45.144.944.544.846.345.245.145.144.944.544.2
Expenditure 3/51.349.748.547.748.647.646.745.945.444.744.3
Balance 3/-6.1-4.8-4.0-3.0-2.3-2.4-1.5-0.8-0.4-0.1
Privatization receipts 4/
Domestic financing
Foreign financing-1.9-1.4-0.1-0.5-0.6-0.6
Debt40.943.343.841.037.937.336.535.033.531.830.1
Balance of payments(In percent of GDP)
Current account balance-6.1-5.0-6.3-7.9-8.6-9.2-9.1-8.8-8.5-8.1-7.8
Exports f.o.b.21.323.023.124.724.525.024.925.025.325.626.0
Imports f.o.b.-47.8-46.5-47.1-49.1-49.7-49.6-49.1-48.6-48.4-48.2-48.0
Merchandise trade balance-26.6-23.4-24.0-24.4-25.2-24.6-24.3-23.5-23.1-22.5-22.0
Services and income, net15.714.313.913.313.812.812.612.412.212.112.1
Of which: travel receipts (credits)21.219.219.218.418.517.818.018.018.118.118.1
Capital and financial account14.012.314.613.012.711.011.311.511.511.5
Of which: FDI
Gross external debt75.880.082.485.587.888.588.989.389.990.691.1
Net external debt33.237.743.144.346.146.847.247.548.248.849.4
Nominal GDP (in millions of kuna)198,422214,983231,349250,590275,078298,683320,041344,485370,076397,569427,105
Nominal GDP (in millions of euros)26,23228,68131,26334,22037,49640,71443,62546,95750,44554,19358,219
Sources: Central Statistics Bureau; Croatian National Bank; Ministry of Finance; and Fund staff estimates.

Assumes a less favorable external environment (lower-than-baseline import demand for Croatia’s goods and services and higher external borrowing costs). This results in real GDP growth and new FDI inflows modestly lower than in the baseline, wider-than-baseline current account deficits, and a continuing increase in the external debt-to-GDP ratio through the projection period.

Modified accrual basis based on GFS 1986 methodology.

Excludes repayments of “pensioners’ debt.”

Excludes privatization receipts used to repay “pensioners’ debt.”

Sources: Central Statistics Bureau; Croatian National Bank; Ministry of Finance; and Fund staff estimates.

Assumes a less favorable external environment (lower-than-baseline import demand for Croatia’s goods and services and higher external borrowing costs). This results in real GDP growth and new FDI inflows modestly lower than in the baseline, wider-than-baseline current account deficits, and a continuing increase in the external debt-to-GDP ratio through the projection period.

Modified accrual basis based on GFS 1986 methodology.

Excludes repayments of “pensioners’ debt.”

Excludes privatization receipts used to repay “pensioners’ debt.”

III. Policy Issues

11. In light of the outlook, the discussions focused on measures to jointly attain the goals of reducing vulnerabilities, ensuring that higher inflation does not become entrenched in expectations, and raising potential growth. Specifically, the discussions centered on the benefits of a significant reduction in the size of government, including by a frontloaded expenditure-led contraction in the general government deficit. They also focused on the critical importance of maintaining and rigorously applying high prudential standards in the financial sector. Finally, the merits of accelerating structural reforms—also to bolster confidence in the prospects for acceding to the EU and thereby confidence in economic stability—were also discussed. To inform the discussions, staff prepared, and gave seminars on, two accompanying selected issues papers on assessing external stability and analyzing the efficiency of government expenditure. Table 11 summarizes the authorities’ responses to past Fund recommendations.

Table 11.Croatia: Past Fund Policy Recommendations and Implementation
Policy areaDirectors’ recommendations (2006 Article IV consultation)Implementation
Fiscal policyMore ambitious fiscal consolidation than envisaged in the authorities’ (2006) medium-term plans.Significant tightening of medium-term fiscal targets in the July 2007 revision of the Economic and Fiscal Policy Guidelines.
Resist spending pressures in the run-up to elections in late 2007, and ensure a fiscal deficit in 2007 no larger than the budget target.With revenues overperforming in mid-2007, a supplementary budget provided for higher spending but a lower deficit. The general government deficit outcome (2.3 percent of GDP) was significantly below the original budget target (3.0 percent). Taking into account off-budget and quasi-fiscal activities, cyclical adjustment implies that the overall fiscal stance was expansionary in 2007.
Central bank policiesSupport for the tightly managed exchange rate, but emphasized the importance of supporting policies (fiscal, structural, financial).The CNB continues to tightly manage the exchange rate.
Reservations about the reintroduction of credit controls, whose impact and side effects would need close monitoring, while sharing concerns about the prudential and macroeconomic risks of ongoing rapid credit growth.The CNB closed loopholes in the credit controls in 2007 and maintained the controls in 2008.
Consider tighter prudential measures that would raise credit quality and reduce vulnerabilities.Other prudential and supervisory measures recently implemented, including a further increase in risk weights on unhedged foreign-currency loans, and the introduction of a link between minimum required capital and loan growth (see Table 7).
Structural policiesSignificantly improve the business environment: reduce the administrative burden, legal uncertainties, and corruption.Some progress (see para. 28), but Croatia still lags most peer countries on business environment indicators.
Restructure the loss-making shipyards, reform the remaining public enterprises, and remove impediments to privatization.Shipyard reform was delayed through 2007. In March 2008, the authorities announced plans to start the sale of two shipyards at end-2008.
Mixed progress on privatization. A new head of the privatization fund was appointed in February 2008.

12. With monetary policy constrained by the tightly managed exchange rate, there was broad agreement that maintaining stability required strong support from financial, fiscal, and structural policies.

  • Because a stable exchange rate tends to reduce perceptions of exchange rate risk and is therefore conducive to unhedged foreign-currency borrowing, strong prudential policies and bank supervision are needed to ensure adequate risk management.
  • The tightly managed exchange rate also limits the ability of monetary policy to respond to domestic demand pressures, implying that support from fiscal policy is essential to help contain higher inflation and external imbalances. Fiscal policy could, however, face a trade-off between these objectives if growth were to slow substantially below potential. In such a case, consideration would need to be given to allowing automatic stabilizers to play, taking into account the extent of external imbalances at the time.
  • Finally, a gradual narrowing of external imbalances and orderly real convergence with the EU can only be achieved through improvement in the competitiveness of Croatia’s economy brought about by wage moderation and structural reforms. There was broad recognition that the impact on competitiveness of any attempt to weaken the exchange rate would likely be offset by higher inflation and adverse balance-sheet effects.

A. Monetary, Exchange Rate, and Financial Sector Policies

13. The advantages of the CNB’s policy of tightly managing the exchange rate were well recognized. A stable exchange rate has been a key element of Croatia’s successes, including by acting as a powerful anchor for inflationary expectations after Croatia’s experience with hyperinflation. And given persistently high levels of financial euroization, maintaining broad exchange rate stability has mitigated significant balance sheet risks.

14. Staff discussed its external stability assessment of Croatia.11 Reassuringly, staff calculations using the CGER methodologies, based on the baseline, imply that the real exchange rate is broadly in line with fundamentals (text table). However, all recognized that the risk of instability is accentuated by the high level of external debt-to-GDP ratio and the further widening of the current account deficit.

15. In view of persistent external imbalances and rising demand, the CNB introduced additional credit measures in 2007. These measures were taken against a background of concerns about a loosening fiscal stance: elections were coming up in the fall and known off-budget fiscal spending was slated to increase (notably because of “pensioners’ debt” repayments of 1.2 percent of GDP). In addition, options to curtail rapidly growing credit were judged to be limited. In these circumstances, the CNB introduced credit controls in 2007, while recognizing their potentially negative side effects—including on credit to smaller enterprises and bank competition. The CNB has extended the controls to 2008. The controls have contributed to a significant slowdown in bank credit, as intended by the CNB; available data suggests that total credit growth to the private sector (from external sources and domestic banks and nonbanks) slowed modestly (Figure 3). Arguably, the effects of the controls were more significant from a counterfactual point of view, to the extent that credit growth would have been higher without the controls.

Assessing the Real Exchange Rate Using CGER Methodologies(In percent of GDP, unless otherwise indicated)
Macroeconomic balance

approach
External sustainability

approach
Norm _CANorm _NFACA balance stabilizing NFA at its:
end-2007 level

(-69 percent)
2003-07 average

(-60 percent)
Current account norm 1/-3.8-4.2-5.0-4.3
Underlying current account balance 2/-4.9-4.9-4.9-4.9
Current account elasticity to REER 3/-0.39-0.39-0.39-0.39
Implied REER adjustment (in percent, “+” appreciation) 4/-2.8-1.80.1-1.6

Current account norm corresponds to a CA level that is consistent with a specific set of economic fundamentals; “Norm_CA” and “Norm_NFA” are computed using the panel regression estimates for two model specifications, with lagged current account balance and initial NFA position, respectively. The external sustainability approach assumes the medium/long-run real GDP growth rate of 4.8 percent and inflation rate of 3 percent (in euros). The benchmark NFA position is based on the latest official data, with the exception of the inward FDI position, which is estimated as cumulative FDI flows from 1998 onward. The rest of the data comes from the latest WEO (April, 2008). For more details on the CGER methodologies, see Methodology for CGER Exchange Rate Assessments (2006).

Underlying current account balance assumes that both domestic and foreign output gaps are closed and is adjusted for the projected REER movement during 2008–13.

Current account elasticity to REER is computed using the standard long-run real exchange rate elasticities for imports (0.92) and exports (-0.71), as well as the values of Croatia’s exports and imports of goods and services (in percent of GDP) over the period of 2003-07.

Given forecast standard errors, an estimated misalignment is considered significant if its magnitude exceeds +/- 10 percent.

Current account norm corresponds to a CA level that is consistent with a specific set of economic fundamentals; “Norm_CA” and “Norm_NFA” are computed using the panel regression estimates for two model specifications, with lagged current account balance and initial NFA position, respectively. The external sustainability approach assumes the medium/long-run real GDP growth rate of 4.8 percent and inflation rate of 3 percent (in euros). The benchmark NFA position is based on the latest official data, with the exception of the inward FDI position, which is estimated as cumulative FDI flows from 1998 onward. The rest of the data comes from the latest WEO (April, 2008). For more details on the CGER methodologies, see Methodology for CGER Exchange Rate Assessments (2006).

Underlying current account balance assumes that both domestic and foreign output gaps are closed and is adjusted for the projected REER movement during 2008–13.

Current account elasticity to REER is computed using the standard long-run real exchange rate elasticities for imports (0.92) and exports (-0.71), as well as the values of Croatia’s exports and imports of goods and services (in percent of GDP) over the period of 2003-07.

Given forecast standard errors, an estimated misalignment is considered significant if its magnitude exceeds +/- 10 percent.

16. The CNB has taken a number of prudential and supervisory measures to limit macro-financial vulnerabilities. The prudential measures (listed in Table 7) have contributed to a fall in the share of foreign currency-linked loans since 2006. In addition, banks seem to be more aware of risks related to such lending, have reduced their foreign borrowing, and intensified efforts to attract deposits and capital. There are also recent signs of a tightening of lending standards, including through increased lending rates and tighter conditions in granting loans.

17. The CNB has worked to improve communications with banks in Croatia and cooperation with the supervisory authorities of their parent banks abroad. The recent update of the IMF-World Bank Financial Sector Assessment Program (FSAP) viewed these actions as crucial (Table 12). Interactions with banks (e.g., through workshops and consultations) have contributed to a better understanding of CNB measures, improved their acceptability, and raised risk awareness, thus helping better align the incentives of the financial institutions with those of the CNB. With foreign banks owning more than 90 percent of the banking system, the CNB was actively seeking to upgrade home-host supervisory coordination.

Table 12.Croatia: Key Recommendations of the FSAP Update
MeasuresTimingPriorityStatus
Financial sector stability
Carefully plan the transition away from administrative measures, with the objective of eliminating negative side effects while maintaining financial stability*STHighPending; discussions ongoing
Continue to monitor closely and frequently banks’ risk management practices and lending standards and take appropriate measures to address emerging risksSTHighOngoing
Strengthen stress testing analyses and regularly use in monitoring risks and assessing financial stability*STHigh/MedOngoing
Reduce incentives that stimulate particular types of bank loansMTHighPending
Continue efforts to raise risk awareness of banks, borrowers, and stock market investorsMTHighOngoing
Expand the coverage of the credit registry to include non-banking institutionsMTHigh/MedPending
Contingency planning
Establish formal communications with monetary and supervisory authorities of the parent banks on issues of crisis managementSTHighInitiated; waiting for response
Adopt the law on deposit insurance consistent with the EU framework and design of an effective bank resolution mechanism, with clarity as to the legal framework and roles and responsibilities of all the parties involved in bank resolution and restructuring process*MTHigh/MedOngoing; discussions took place to clarify the roles
Liquidity and risk management
Broaden the range of eligible collateral for interbank securitized lending to help reduce segmentation in the interbank money market*MTHighPending
Develop hedging markets/instruments to facilitate management of interest and FX risks*MTHighPending
Nonbank financial sector and cross-sector risks
Build comprehensive data and monitoring processes (investor composition, trading trends and composition, automated early warning system for suspicious trades, including through OMX), and map ownership structures of conglomerates, and clarify the roles for their supervision*STHigh/MedInitiated, efforts ongoing
Improve regulatory capacity to monitor and enforce financial accounting standards and market disclosureSTMediumPending
Increase pension funds’ permissible investments in foreign securitiesMTMediumPending
Pursue plans to increase the level of contribution and further privatize the pension fund systemMTMediumPending
Enhance supervisory capacity to migrate to Solvency II risk based standards for insurance companiesMTMediumPending
Source: accompanying FSSA Update.

Possible areas for technical cooperation.

Source: accompanying FSSA Update.

Possible areas for technical cooperation.

18. Preparations for Basel II—to become effective in January 2009—appear on track. According to the FSSA, while the framework for risk-focused supervision is still evolving, the current supervisory techniques and risk management processes do not appear to pose risks for successful implementation of Basel II. In addition, consultations between the CNB and banks have been useful in enhancing preparations for Basel II.

19. Supervision and regulation of the nonbank financial sector has continued to improve. The inclusion of previously unregulated leasing companies under the oversight of the nonbank supervisor, HANFA, has helped in closing a channel for circumvention of the credit measures on banks. Coordination efforts have also been stepped up between the CNB and HANFA on information sharing, the intention to jointly inspect banking groups, and the plans to map cross-sector risk exposures and ownership linkages between banks and nonbanks.

20. The authorities nevertheless recognize the need for vigilance, including by stepping up contingency planning efforts. It was therefore recognized that further prudential measures may need to be considered to contain any emerging risks, especially from abroad, including contagion risks from global financial turbulence via mature-market European banks (as illustrated by the worst-case stress tests in the FSSA). The CNB also plans to produce a forward-looking financial stability report, expanding the stress testing analyses to a variety of possible shocks, and has initiated formal communications with foreign supervisory authorities concerning contingency planning for possible external shocks. The authorities are also working to clarify the roles of different agencies in bank resolution and deposit insurance.

B. Fiscal Policy

21. The government envisages a further narrowing of the general government deficit. Its current plans target a deficit of ½ percent of GDP (on a modified GFS basis) by 2010. The path to this target represents a considerable tightening compared with the plans during the previous Article IV consultation (Table 11).

22. Staff recognized that the targeted adjustment was significant, but recommended maintaining momentum by aiming for balance by 2011 (the end of the government’s term) while significantly frontloading adjustment. More frontloaded adjustment would have a more immediate impact in dealing with the current challenges of bringing down inflation (and inflation expectations) and reducing external imbalances. More frontloading would also raise the likelihood of meeting the targets for the general government balance, as politics will make reforms increasingly difficult in the latter part of the government’s term. Reducing the government’s size would also raise the private sector’s share of economic activity, thereby enhancing overall productivity and the rate of potential growth.

23. The discussions focused on achieving an expenditure-led reduction in the fiscal deficit. Some progress on reform is in train, including discussions on containing health care spending and designing an approach to compiling a database on various social assistance benefits paid. However, the authorities and staff agreed that more needs to be done to develop specific measures. Staff noted the potential for significant budgetary savings with reforms in other areas, including the civil service, education, and state aid (subsidies). Given the significant room for improvement in the efficiency of public spending, a substantial expenditure reduction can be achieved without unduly compromising the delivery of public services.12

24. The discussions also noted some favorable aspects of the 2008 budget.

  • The budget targets a general government deficit of 2.3 percent of GDP, equal to the 2007 preliminary outturn, but lower than the original target of 2.8 percent for the 2007 budget. Taking into account the formation of a coalition government and the associated spending pressures, staff recognized the accomplishment this would represent.
  • The government intends to limit government wage increases to 6 percent. Because the government is a very large employer, there was agreement that this could send a helpful signal to keep other wage increases moderate. Revenues are also estimated conservatively, leaving potential room for further deficit reduction.
  • A broad measure of the fiscal deficit that takes into account off-budget and quasi-fiscal activities (outside the general government accounts) shows that the overall fiscal stance will considerably tighten in 2008, though this mainly reflects the one-off effects of repaying the bulk of pensioners’ debt in the preceding year rather than specific new policy measures.

25. Reflecting the benefits of frontloading, but with the budget already approved, staff recommended that the authorities take any opportunity available to further reduce the 2008 fiscal deficit. This would provide some insurance against downside risks requiring fiscal action. Staff urged the authorities to save any revenue overperformance, while keeping to or below budgeted expenditures, taking advantage of any buffers.

26. Frontloading also implies that 2009 is the time to undertake the lion’s share of fiscal adjustment. Thus, staff recommended a fiscal deficit in 2009 no larger and preferably smaller than 1 percent of GDP. This is smaller than the authorities’ target of a deficit of 1.4 percent of GDP. Any expansion in the deficits of off-budget entities should be offset by general government adjustment. In addition, there was widespread recognition of the benefits of starting preparatory work soon because of the need to take underlying measures in several spending areas. Staff also emphasized that avoiding a ratcheting up of spending when revenues overperform would facilitate adjustment in later years.

27. Ways to enhance fiscal flexibility and thereby improve the readiness of fiscal policy to respond to unanticipated shocks were an additional point of emphasis. In this regard, staff recommended a gradual increase in the general contingency reserve and having contingent spending measures at the ready. Staff—working with the authorities—has identified a menu of options for expenditure reduction that would be more than sufficient to achieve the recommended fiscal adjustment. The authorities noted that with about three-quarters of spending already pre-determined (notably on wages, social protection, and health care), budget flexibility was constrained.

C. Structural Issues

28. Discussions with representatives of the public and private sector continued to underscore the urgency of improving the business environment and addressing corruption. This includes improvements in the efficiency and transparency of all levels of public administration. There was broad recognition that enhancing Croatia’s attractiveness as a destination for “greenfield” foreign direct investment is key to sustainably increasing the growth of total factor productivity (estimated by staff at only 1.3 percent)13 and thereby Croatia’s overall growth potential. In this context, judicial reform was seen as essential, both to underpin the rule of law needed for a better business environment, and as part of the EU accession process. Indeed, while the World Bank’s 2008 Doing Business survey ranks Croatia as the second-top reformer last year in terms of improvements in country scores, Croatia still lags behind most other peer countries on business environment indicators (Figure 7), possibly explaining its comparatively lackluster goods export performance (Figure 5).

Figure 7.Croatia and Selected European Countries: Business Environment, 2005-08

Sources: World Bank; World Economic Forum; Heritage Foundation.

1/ No ranking available for Luxembourg.

29. The authorities indicated their intention to move forward with privatization. The government, in previous years, launched IPOs for the oil and telecom companies. While the broader privatization process slowed last year, new management for the privatization fund was recently appointed. The authorities also announced plans to start the sale of two shipyards at end-2008. In addition, the authorities are considering setting up “closed-end” investment funds, consisting of shares in the remaining state-owned enterprises. These fund shares would be sold by public offering, with a view to accelerating privatization.

IV. Staff Appraisal

30. Croatia has experienced recent successes. Strong economic growth has generated increasing employment. Policies have improved in recent years: the general government deficit has been significantly reduced and financial supervision has been strengthened. A broadly stable exchange rate has helped anchor inflation expectations and, along with wage moderation, delivered, until recently, low inflation.

31. But worrying macroeconomic imbalances are present. Inflation is up and the current account deficit and external debt have continued to increase. Moreover, the outlook for this year suggests that imbalances will persist: inflation, while falling, remains higher than in recent years, and the current account and external debt are modestly above last year’s levels.

32. In these circumstances, there are a number of key goals for policy. These include reducing external and financial vulnerabilities. In light of Croatia’s past experience with hyperinflation, it is also important to ensure that higher inflation does not become entrenched in expectations, not least by avoiding second-round effects from higher food and utility prices. Accelerating structural reforms would support orderly convergence with the EU and lessen external imbalances.

33. While the monetary policy framework continues to be appropriate for Croatia, support from other policies is essential. In light of the high degree of euroization, sensitivities to balance-sheet mismatches, adequate external competitiveness, and the strong anchor provided historically, maintaining a stable exchange rate is a sensible policy. But this policy puts considerable onus on fiscal policy to manage demand and address macroeconomic imbalances. Since a stable exchange rate is conducive to unhedged foreign-currency borrowing, strong prudential policies and financial sector supervision are needed to ensure adequate risk management. Wage moderation and faster and deeper structural reforms are the only ways to strengthen competitiveness, helping also to both raise potential growth and narrow the current account deficit.

34. The authorities’ medium-term target for the general government deficit moves fiscal policy in the right direction. Achieving their target of a ½ percent of GDP deficit by 2010 would represent a significant adjustment. Aiming for fiscal balance by 2011 would maintain momentum and signal the authorities’ intention to continue with fiscal consolidation.

35. Frontloading adjustment would be well advised. Bringing down inflation and reducing external imbalances are immediate concerns, and greater frontloading would provide more immediate help from fiscal policy. Because politics will increasingly make reforms difficult, especially in the latter part of the government’s term, frontloading also raises the likelihood of meeting the recommended 2011 target. Thus, with the 2008 budget already passed, saving any revenue overperformance while keeping at or below budgeted expenditure would be beneficial. The benefits of frontloading also suggest aiming for a more ambitious target than the authorities’ 1.4 percent of GDP in 2009. Aiming for 1 percent of GDP or less would have considerable merit. Finally, stronger-than-recommended fiscal adjustment may be needed if external imbalances or inflation were to turn out worse than expected. Thus, the authorities would be well advised to identify contingency measures without delay.

36. There is ample room to lower the government deficit by spending reform. This is important because large fiscal adjustments are more successful, durable, and friendly to growth when they rely on reducing current expenditure. Moreover, inefficiencies in public spending suggest that expenditure cuts can be achieved without unduly compromising the delivery of public services. Key areas for reform, some already under active discussion, are health care, education, social security, social assistance and social benefits, subsidies, and civil service employment. But specificity is needed soon to ensure timely adjustment. Near-term wage moderation is also crucial, in light of the importance of avoiding secondary price effects. In addition to keeping government wage growth moderate, state-owned enterprises must follow suit, an intention the government could usefully reiterate. Policies should also seek to ensure the sustainability of the pension system, including by avoiding further backtracking on earlier reforms.

37. The financial sector is healthy and much progress has been made in strengthening its supervision. The CNB’s increases in required capital cushions and risk weights to limit macro-financial vulnerabilities, improved communications, and efforts to strengthen home-host supervisory coordination are welcome improvements. The continued strengthening in supervision of the nonbank sector is also encouraging. To support Basel II preparations, further dialog between the CNB and banks, through consultative papers on Pillars 2 and 3, would be helpful.

38. Other challenges lie ahead. While the impact on Croatia has been limited, continued turbulence in global markets underscores the need to be vigilant in maintaining high prudential standards and closely monitoring banks’ risk management and lending practices. Plans to produce a forward-looking financial stability report are welcome. And timely responses from foreign authorities on formal communications concerning contingency planning for possible external shocks would be helpful. That said, stress tests suggest that higher buffers may be needed in certain worst-case, but plausible scenarios. Further prudential measures may also need to be considered to contain any emerging but unforeseen risks. Although the CNB’s rationale for introducing credit and other administrative measures is understandable, they are not sustainable. As also highlighted in the FSSA, they have negative side effects. Thus, transitioning away from administrative measures is another important task ahead, but one that requires careful planning to maintain stability.

39. Faster structural reforms will be needed for Croatia to realize its goals of sustainably raising living standards and successfully concluding EU accession negotiations. Absent reforms, Croatia will have difficulty substantially boosting export growth, thereby lessening external vulnerabilities, and raising economic growth on a sustainable basis. Reform of the heavily indebted shipyards is urgent for advancing accession negotiations and containing the substantial drain on the public resources. Difficult decisions to rationalize capacity and employment are inevitable. More generally, privatization needs to be completed, with strategic investors playing an important role to ensure appropriate restructuring and corporate governance. Notwithstanding recent efforts, improving the business environment requires improvements in several areas, including reducing the administrative burden, legal uncertainties, and corruption. This is critical to enhance Croatia’s attractiveness as a destination for greenfield foreign direct investment, rightly recognized in the authorities’ Strategic Plan for the Economic Development of Croatia as key to sustainably increasing total factor productivity and potential growth.

40. It is expected that the next Article IV consultation with Croatia will be on the 12-month cycle.

1Balance-sheet exposures were analyzed in IMF Country Report No. 07/82.
2In February 2008, the CNB announced that it would resist depreciation beyond 7.35 kuna per euro; it would be “concerned” by—but did not commit to resisting—appreciation beyond 7.25 kuna per euro.
3On a modified GFS basis, used in the 2004-06 stand-by arrangement.
4This includes “pensioners’ debt” repayments of 1.2 percent of GDP. IMF Country Report No. 06/128 explains these payments and their treatment in the fiscal accounts.
5See IMF Country Report No. 07/81 for discussion of Croatia’s tourism competitiveness indicators.
6See ECB Working Paper No. 687 (2006) and IMF Working Paper WP/07/236.
7Real estate price increases averaged 9–10 percent annually in recent years.
8See “Economic Growth in Croatia: Potential and Constraints,” IMF Country Report No. 07/82, forthcoming in Financial Theory and Practice.
9See IMF Working Paper WP/07/244.
10A large depreciation could push external debt well over 120 percent of GDP (Appendix I).
11Details are provided in the accompanying selected issues paper on assessing external stability, which also provides more specifics on staff’s assessment of competitiveness and the exchange rate.
12This was a key message of the accompanying selected issues paper on the efficiency of government spending. The paper was accepted for presentation in April 2008 at a Zagreb conference (Welfare Performance and Design) sponsored by the Croatian Institute of Public Finance.
13See IMF Country Report No. 07/82.
Appendix I. Croatia: Debt Sustainability Analysis

A. Fiscal Sustainability

1. Fiscal consolidation would keep public debt on its downward trend. Under the baseline scenario, public debt would fall from 38 percent of GDP in 2007 to 27 percent of GDP by 2013. Stress-testing suggests that most shocks leave public debt either declining or unchanged (Table 13, Figure 8). The one notable exception is the scenario keeping key variables at their historical averages, under which the debt ratio increases by 13 percentage points of GDP between 2007 and 2013. This is because the historical primary deficit does not yet fully account for the significant fiscal consolidation in 2004-06—with consolidation continuing in the medium term baseline—while the historical growth rate is unduly affected by a recession in 1999. Assuming no policy change beyond 2007, the debt ratio would stay roughly constant over the forecast horizon, as it also would in the case of a large and sustained drop in economic activity. The dynamics of the debt ratio would continue to be resilient under the assumptions behind scenarios including a policy-induced widening of the primary deficit, and also a combination of a policy-induced widening of the primary deficit, a slowdown in growth, and an interest rate hike. Under the two one-time shock scenarios, the debt ratio resumes a downward trend following the initial shock. The inclusion of the stock of state guarantees and arrears (about 10 percent of GDP) in the above analysis does not materially change the described responses to shocks.

Table 13.Croatia: Public Sector Debt Sustainability Framework, 2003–13(In percent of GDP, unless otherwise indicated)
ActualPreliminaryProjectionsDebt-stabilizing

primary

balance 9/
20032004200520062007200820092010201120122013
1Baseline: Public sector debt 1/40.943.343.841.037.937.035.934.032.029.727.30.0
o/w foreign-currency denominated32.736.835.933.130.229.727.625.423.020.718.6
2Change in public sector debt-2.8-3.1-0.9-1.1-1.9-2.1-2.3-2.3
3Identified debt-creating flows (4+7+12)-0.5-1.7-2.0-0.9-1.1-1.9-2.1-2.3-2.3
4Primary deficit-0.7-1.5-1.9-2.2-2.3
5Revenue and grants45.144.944.544.846.345.245.144.944.744.243.8
6Primary (noninterest) expenditure49.247.646.345.646.545.544.443.442.842.041.4
7Automatic debt dynamics 2/-0.6-0.9-2.2-1.3-1.6-1.0-0.6-0.7-0.6-0.6-0.5
8Contribution from interest rate/growth differential 3/-1.4-1.0-0.9-1.2-1.6-1.0-0.6-0.7-0.6-0.6-0.5
9Of which contribution from real interest rate
10Of which contribution from real GDP growth-2.0-1.6-1.7-1.9-2.1-1.5-1.4-1.6-1.5-1.4-1.3
11Contribution from exchange rate depreciation 4/-1.4-0.1
12Other identified debt-creating flows-2.1-0.1-1.1-0.6-0.1
13Privatization receipts (negative)-2.1-0.6-0.6-1.6-1.1-0.8-0.4-0.2-0.1-0.1-0.1
14Recognition of implicit or contingent liabilities
15Other (specify, e.g. bank recapitalization)
16Residual, including asset changes (2–3) 5/-0.5-1.2-1.1
Public sector debt-to-revenue ratio 1/90.796.398.691.581.981.879.775.771.667.262.4
Gross financing need 6/12.315.014.112.110.8
in billions of euros
Scenario with key variables at their historical averages 7/37.939.842.044.246.548.851.0-0.9
Scenario with no policy change (constant primary balance) in 2008–1337.937.036.836.636.636.636.7-0.1
Key Macroeconomic and Fiscal Assumptions Underlying Baseline
Real GDP growth (in percent)
Average nominal interest rate on public debt (in percent) 8/
Average real interest rate (nominal rate minus change in GDP deflator, in percent)
Nominal appreciation (increase in US dollar value of local currency, in percent)-2.7-0.3
Inflation rate (GDP deflator, in percent)
Growth of real primary spending (deflated by GDP deflator, in percent)
Primary deficit-0.7-1.5-1.9-2.2-2.3

Gross direct debt of the general government.

Derived as [(r - π(1+g) - g + αε(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of the euro).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π(1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as αε(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Gross direct debt of the general government.

Derived as [(r - π(1+g) - g + αε(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of the euro).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π(1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as αε(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Figure 8.Croatia: Public Debt Sustainability: Bound Tests 1/

(Public debt in percent of GDP)

Sources: Croatian authorities; and Fund staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance.

3/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2008, with real depreciation defined as nominal depreciation (measured by percentage fall in euro value of local currency) minus domestic inflation (based on GDP deflator).

B. External Sustainability

2. External debt rose by over 26 percentage points of GDP (in euro terms) between 2002 and 2007, on the back of strong private sector borrowing and notwithstanding efforts at fiscal consolidation, a shift by the public sector towards domestic financing, and measures by the central bank to discourage bank external borrowing. In the baseline projection—which incorporates a deterioration of the external current account balance relative to GDP in 2008 followed by a gradual improvement in subsequent years—the debt-to-GDP ratio continues to hover around 88 percent in 2008-09 and then gradually declines towards 84 percent by 2013 (Table 14). Alternative scenarios demonstrate the sensitivity of external debt to several factors, highlighting the need for vigilance in economic management to forestall unsustainable debt dynamics (Figure 9). In the scenario keeping key variables at their historical averages, the external debt ratio eases slightly. In scenarios with lower growth or a worsening current account, the debt-to-GDP ratio rises to around 90 percent. The small effect of the interest rate shock partly reflects the low historical standard deviation of interest rates (with one-half standard deviation equivalent to about 70 basis points); doubling the size of the interest rate shock would push the debt/GDP ratio to over 90 percent. A large real depreciation has significant adverse effects, with the debt-to-GDP ratio possibly averaging over 120 percent between 2009 and 2013.

Table 14.Croatia: External Debt Sustainability Framework, 2003–13(In percent of GDP, unless otherwise indicated)
ActualProjections
20032004200520062007200820092010201120122013Debt-stabilizing

non-interest

current account 6/
1Baseline: External debt75.880.082.485.587.887.987.887.086.585.684.2-8.4
2Change in external debt13.9-0.1-0.7-0.6-0.9-1.3
3Identified external debt-creating flows (4+8+9)-3.3-3.8-4.4-3.2-4.9-1.2-1.9-2.6-3.1
4Current account deficit, excluding interest payments
5Deficit in balance of goods and services
6Exports50.149.748.949.748.949.649.850.250.851.251.6
7Imports57.956.555.957.458.057.857.456.856.556.256.0
8Net non-debt creating capital inflows (negative)-5.2-2.3-4.1-7.5-9.1-5.2-5.0-5.3-5.4-5.5-5.6
9Automatic debt dynamics 1/-1.6-3.8-3.9-0.6-0.6-0.1-0.4-0.2-0.3-0.3
10Contribution from nominal interest rate
11Contribution from real GDP growth-3.1-3.0-3.2-3.6-4.3-3.4-3.3-3.9-3.9-3.8-3.8
12Contribution from price and exchange rate changes 2/-1.1-3.5-3.5
13Residual, including change in gross foreign assets (2–3) 3/17.2-0.3-0.5
External debt-to-exports ratio (in percent)151.3161.0168.6172.2179.5177.0176.2173.3170.3167.1163.2
Gross external financing need (in billions of euros) 4/11.613.113.314.714.516.716.116.2
in percent of GDP17.220.125.233.935.132.733.430.632.629.127.1
Scenario with key variables at their historical averages 5/87.586.285.685.685.986.1-8.5
Key Macroeconomic Assumptions Underlying Baseline
Real GDP growth (in percent)
GDP deflator in euros (change in percent)
Nominal external interest rate (in percent)
Growth of exports (euro terms, in percent)18.111.310.4
Growth of imports (euro terms, in percent)10.012.410.7
Current account balance, excluding interest payments-3.6-2.3-3.6-4.8-4.8-5.6-5.1-4.5-3.8-3.3-2.9
Net non-debt creating capital inflows

Derived as [r - g - ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock, with r = nominal effective interest rate on external debt; ρ = change in domestic GDP deflator in euro terms, g = real GDP growth rate, ε = nominal appreciation (increase in euro value of domestic currency), and α = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock, ρ increases with an appreciating domestic currency (ε > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; euro deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, euro deflator growth, and net non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Derived as [r - g - ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock, with r = nominal effective interest rate on external debt; ρ = change in domestic GDP deflator in euro terms, g = real GDP growth rate, ε = nominal appreciation (increase in euro value of domestic currency), and α = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock, ρ increases with an appreciating domestic currency (ε > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; euro deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, euro deflator growth, and net non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Figure 9.Croatia: External Debt Sustainability: Bound Tests 1/

(External debt in percent of GDP)

Sources: Croatian authorities; and Fund staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.

3/ One-time real depreciation of 30 percent.

Appendix II. Croatia: Fund Relations

(as of February 29, 2008)

I. Membership Status: Joined December 14, 1992; Article VIII.

II. General Resources Account:

SDR million% Quota
Quota365.10100.00
Fund holdings of currency364.9499.96
Reserve position in Fund0.160.04

III. SDR Department:

SDR million% Allocation
Net cumulative allocation44.21100.0
Holdings0.050.11

IV. Outstanding Purchases and Loans: None

V. Financial Arrangements:

TypeApproval

Date
Expiration

Date
Amount

Approved

(SDR million)
Amount

Drawn

(SDR million)
Stand-By8/04/200411/15/200699.000.00
Stand-By2/03/20034/02/2004105.880.00
Stand-By3/19/20015/18/2002200.000.00
EFF3/12/19973/11/2000353.1628.78

VI. Projected Obligations to Fund (SDR million; based on present holdings of SDRs):1

Forthcoming
20082009201020112012
Principal

Charges/Interest
1.011.351.351.351.35
Total1.011.351.351.351.35

VII. Exchange Rate Arrangement:

In December 1991, Croatia left the Yugoslav dinar area and adopted the Croatian dinar as its sole legal tender. The Croatian dinar was replaced by the Croatian kuna on May 30, 1994. The exchange rate of the kuna is determined by supply and demand in the interbank market, with tight management by the CNB. Staff has proposed to reclassify Croatia’s de facto exchange rate arrangement from “managed floating with no pre-announced path for the exchange rate” to “conventional pegged arrangement” as from September 1, 2006. The authorities’ response is pending. The CNB transacts only in euros, U.S. dollars, and SDRs. On April 3, 2008, the official exchange rate was kuna 7.270397 per euro (middle rate).

VIII. Exchange Restrictions:

Croatia has accepted the obligations of Article VIII, Section 2–4 and maintains an exchange system that is free of restrictions on payments and transfers for current international transactions, except for restrictions that Croatia maintains solely for the preservation of national or international security that have been notified to the Fund pursuant to Executive Board Decision 144(52/51).

IX. Article IV Consultation:

The previous Article IV consultation with Croatia was concluded on February 16, 2007 (IMF Country Reports Nos. 07/81 and 07/82, available at: http://www.imf.org/external/country/hrv/index.htm). Croatia is on the 12-month consultation cycle.

X. FSAP:

An FSAP Update mission took place in October-November 2007. An FSSA Update accompanies this report.

The original FSAP was concluded with the completion of the 2002 Article IV consultation on August 5, 2002 on the basis of missions that took place in April 2001 and September 2001. The FSSA was published (IMF Country Report No. 02/180)

XI. Technical Assistance 2000-08:2

DepartmentTimingPurpose
FADApril 2000Implementation of Single Treasury Account
May 2000Tax Policy
September 2001Fiscal Decentralization
March 2002Accounting and Budgetary Classification (with STA)
September 2003-March 2004A Resident Advisor on Fiscal Reporting
May 2004Fiscal ROSC
April 2005Review of Indirect Tax Performance and Tax Administration
February-March 2007Revenue Administration (with World Bank)
April 2007Public-Private Partnerships
January-February 2008Short-Term Expenditure Rationalization
STAMarch 2000Quarterly National Accounts
September 2000Balance of Payments
October 2000Quarterly National Accounts
April 2001Monetary Statistics
March 2002Accounting and Budgetary Classification (with FAD)
October 2002Government Finance Statistics
September 2006Monetary and Financial Statistics
MCMMay-June 2000Coordination between CNB and the Ministry of Finance, Central Bank Law, Banking Law, and Money and Securities Markets
March-April 2001Central Bank Accounting
December 2001Monetary Policy Instruments
April 2003Stress Testing and Foreign Exchange Reserve Management
February 2004Monetary Policy Instruments
January 2007Macroeconomic Modeling and Forecasting

XII. Resident Representative:

The post closed in June 2007.

Appendix III. Croatia: Statistical Issues

1. Data provision is broadly adequate for effective surveillance, though some improvements would be desirable. While remedial action has been taken to improve data coverage and reliability in most cases, progress in some instances has been impeded by insufficient resources and issues regarding coordination among government agencies. Croatia subscribes to the Special Data Dissemination Standard.

A. National Accounts

2. The national accounts have undergone substantial improvements in the last few years. The Central Bureau of Statistics (CBS) publishes constant and current price data compiled in accordance with the 1995 ESA. Quarterly GDP estimates are disseminated at current prices and at constant (1997) prices for the main categories of expenditure and main industry groupings. Nonetheless, shortcomings remain. Significant discrepancies exist between expenditure-based and value-added-based GDP data, stemming from: (i) problems of coordination between the CBS and the Croatian National Bank (CNB) in reconciling tourism receipts estimates; (ii) incomplete coverage of unincorporated businesses and the self-employed (farmers, traders, and craftsmen); (iii) inadequate data for measuring changes in inventories; (iv) incomplete coverage of the informal sector; and (v) a lack of quarterly data for the seasonally volatile agricultural sector. Other shortcomings include: (i) inadequate conversion of government finance statistics from a cash to an accrual basis; (ii) inadequate price deflators; and (iii) late publication of annual data, which show large differences with quarterly data.

B. prices

3. The CBS produces a monthly consumer price index, with expenditure weights (updated every five years) derived from a 2005 Household Budget Survey. Between rebasing, the weights are price-updated annually to December of the previous year. Data are collected at different time periods in the month for different product groups but in all cases between the 13th and the 21st day of each month. The indices are released around the 15th day of the following month. The price collection is confined to nine towns, but the weights are based on a sample of households in the whole country. A harmonized index of consumer prices (HICP) is also calculated in line with Eurostat methodology, but is not released for the time being to avoid confusion. A core CPI is also calculated based on a methodology developed by the CNB. The CBS also releases a monthly producer price index (PPI), usually on the 8th day of the following month. The weighting system of the PPI is based on the 2000 Annual Report of Industry and is changed every five years, while weights are partially corrected every year.

C. Wages and Employment

4. The CBS produces data on average net and gross earnings per person and employment by sector. Earning data include bonuses, sick pay, and meal allowances, and are based on monthly surveys covering 70 percent of workers in permanent employment in each industrial category. They do not cover a significant part of the working population, including persons employed in trade and crafts, contract workers, farmers, and the military and police.

5. The number of registered unemployed overstates the actual level of unemployment. A preliminary Labor Force Survey, which meets ILO standards, was conducted for the first time in 1996 on 7,200 households. The sample was subsequently expanded and the survey is now being conducted on a regular basis. The CBS released semi-annual results from 1998, and began releasing quarterly results in 2007 with a lag of about four months. The difference between the survey-based unemployment rate and that based on the registered unemployed has recently been reduced.

D. Government Finance Statistics

6. Government finance statistics (GFS), produced on a monthly basis with a lag of 30 days, are available in the Monthly Statistical Review of the Ministry of Finance (MoF) or provided directly to the Fund. Revenue data are reliable and available on request on a next-day basis for most major categories for both the central budget and the budgetary funds. Expenditure data on a cash basis are available according to GFS classifications (economic and functional) for the central budget and the budgetary funds. The data on central government financing in the MoF reports are not reconciled with those in the CNB’s monetary survey and balance of payments data, with substantial discrepancies owing partly to different methodologies and definitions of government. Following the recommendations of the October 2002 GFS mission, a task force, comprising staff from the MoF, CNB, and CBS was formed to reconcile central government financing data produced by these institutions; after a slow start, meetings are now being held more regularly.

7. The detailed data on domestic public bonds published in the Monthly Statistical Review are now augmented by a central government debt table in the CNB Monthly Bulletin, which also reports stocks of central government guaranteed debt. The MoF prepared a database with government guarantees in July 2003 that has been used to monitor developments in the stock and flows of guarantees.

8. Data on the operations of local governments and consolidated general government are available only on a quarterly basis and with a lag of 30 days. Local government data are partial as they include the operations of the 53 largest municipalities. Annual cash data through 2006 for the general government and its subsectors are published in the 2007 GFS Yearbook. Up-to-date monthly data for the budgetary central government are reported for publication in the IFS. All data for the GFS Yearbook and IFS are reported in the GFSM 2001 framework.

E. Monetary Data

9. Compilation of monetary statistics published by the CNB is consistent with the recommendations of the IMF’s 2000 Monetary and Financial Statistics Manual (MFSM). Data on the monetary survey, including separate records for deposit money banks and the balance sheet of the CNB, are published monthly with four- and two-week lags, respectively. The CNB is planning to extend its statistical framework to balance sheet information of investment funds and insurance companies. In March 2002, the CNB started collecting financial information (balance sheets and investment structure) from investment and pension funds; the data are not yet published, but used for internal purposes. According to the CNB, the inclusion of other financial corporations in monetary statistics depends on the harmonization process of the monetary statistics with the statistical reporting requirements of the European Central Bank. In November 2006, the CNB reported monetary data in the format of Standardized Report Forms for December 2001 to the present. These data accord with the concepts and definitions in MFSM and were published, along with the corresponding metadata, in IFS and the IFS Supplement on Monetary and Financial Statistics.

F. External Sector Statistics

10. Quarterly balance of payments data are compiled broadly in accordance with the fifth edition of the IMF’s Balance of Payments Manual. Data are generally available with a lag of two months and are subject to substantial revisions in subsequent releases; trade data are available with a lag of one month and data on international reserves are available the next day on request. Travel survey methodologies were modified in 2002, 2004, and again in 2005, while the method for estimating the cost of insurance and freight was modified in early 2004. The most recent modification of tourism revenue contributed to an upward revision of the current account deficit for 2004 equivalent to 0.7 percent of GDP. Net errors and omissions have ranged from 2½ to 3¾ percent of GDP since 2003, and are negative. The coverage and quality of portfolio investment data are reasonably complete and accurate.

11. A large part of external debt was contracted prior to the dissolution of the former Socialist Federal Republic of Yugoslavia and Croatia’s share was agreed with Paris and London Club creditors in 1995 and 1998, respectively. The CNB compiles external debt data according to the requirements of External Debt Statistics: Guide for Compilers and Users, 2003, and began disseminating external debt data in the second quarter of 2003. The inclusion of hybrid and subordinated debt instruments, repos, late interest, and interest accruals and arrears has caused an upward adjustment in the external debt series compared to previously released data. Quarterly data on the international investment position are available on the CNB website up to Q3 2007.

Croatia: Table of Common Indicators Required for Surveillance(as of April 2, 2008)
Date of

latest

observation
Date

received
Frequency

of

data6
Frequency

of

reporting6
Frequency

of

publication6
Exchange Rates4/2/084/2/08D and MD and MD and M
International Reserve Assets and Reserve Liabilities of the Monetary Authorities13/21/083/28/08W and MW and MW and M
Reserve/Base MoneyFeb 20083/31/08MMM
Broad MoneyFeb 20083/31/08MMM
Central Bank Balance SheetFeb 20083/31/08MMM
Consolidated Balance Sheet of the Banking SystemFeb 20083/31/08MMM
Interest Rates2Feb 20083/31/08MMM
Consumer Price IndexFeb 20083/14/08MMM
Revenue, Expenditure, Balance and3 Composition of Financing - General4 GovernmentQ3 20071/16/08QQQ
Revenue, Expenditure, Balance and3 Composition of Financing - Central GovernmentNov 20073/4/08MMM
Stocks of Central Government and Central5 Government-Guaranteed DebtDec 20073/14/08MMM
External Current Account BalanceQ4 20073/31/08QQQ
Exports and Imports of Goods and ServicesQ4 20073/28/07QQQ
GDP/GNPQ4 20073/28/08QQQ
Gross External DebtDec 20073/4/08MMM

Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A), Irregular (I); Not Available (NA).

Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A), Irregular (I); Not Available (NA).

Appendix IV. Croatia: World Bank Relations

1. The World Bank is assisting Croatia in its structural and institutional reforms, within the context of the EU integration process. The Bank’s Board discussed the second Country Assistance Strategy (CAS) for Croatia in December 2004. The CAS Progress Report (CAS PR), which was presented to the Board in May 2007, assessed the relevance of the CAS and adjusted the second half of the CAS program to take account of developments including (i) the EU’s launch of membership negotiations with Croatia in October 2005 and Croatia’s progress towards accession; (ii) progress toward achieving the CAS outcomes; and (iii) the status of implementation of Croatia’s structural reform program supported by the Bank’s Programmatic Adjustment Loans (PAL).

2. The proposed operations in the CAS PR aim to address areas cited in the EU Progress Report as needing significant effort—including judicial and public administration reform, anti-corruption, agriculture, environment—as well as to facilitate Croatia’s absorption of EU IPA grant funds. The backbone of the World Bank assistance to Croatia remains a series of PALs, with investment loans supplementing the PALs. The investment loans address institutional capacity problems; work in concert with the PALs in mitigating the effects reforms may have on vulnerable groups; and assist Croatia in addressing significant environmental challenges of the accession process. The Bank Board approved the PAL1 in September 2005 and the PAL2 in May 2007, each amounting to EUR 150 million. The PAL loans aim to support enhanced economic growth through: (i) improving the investment climate; (ii) strengthening governance; and (iii) reducing the size and improving the efficiency of the public sector. They also aim to support government reforms needed for the fulfillment of the EU accession criteria and successful EU integration.

3. Currently, the World Bank finances 17 operations in Croatia in a wide range of sectors with a combined loan amount of close to US$1.1 billion. IFC’s portfolio amounts to about US$300 million and there are over US$40 million MIGA guarantees. The Bank’s current program (the “base case”), set out in the 2007 CAS PR, envisages about US$160 million in new lending during the Bank’s fiscal year ending June 30, 2008. The projects under preparation are: the Judicial Reform project, the Sustainable Health System project, and the Rijeka Gateway II project. The Bank will also seek a dialogue with the government on the future of the PAL program, including on the remaining actions that could trigger the release of the first and second tranches of the EUR 150 million PAL2.

4. The new Croatia Country Partnership Strategy (CPS) will cover July 2008 through June 2012 (the Bank’s fiscal years 2009–12). The World Bank Group seeks to launch CPS discussions with the government in early 2008. The discussions between the government and the Bank on support for structural reforms and investments, as well as analytical work during the upcoming CPS period, will be aimed at strengthening (i) Croatia’s efforts to accelerate its accession to the EU, taking account of the findings of the EC’s latest Croatia Progress Report; and (ii) the fiscal and social sustainability of Croatia’s public expenditures and policies.

1On December 27, 2002, Croatia made an early repurchase in respect of the entire amount of Fund credit outstanding. The charges shown below are net charges and assessments by the SDR Department.
2Technical assistance during 1992–99 is listed in Appendix I of IMF Country Report No. 03/27.

Other Resources Citing This Publication