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©2001 International Monetary Fund
March 2001
IMF Country Report No. 01/50
Republic of Croatia: 2000 Article IV Consultation and Request for Stand-By Arrangement—Staff Report; Public Information Notice and press Release on the Executive Board Discussion; and Statement by the Authorities of Croatia
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of a combined discussion of the 2000 Article IV consultation with the Republic of Croatia and request for a Stand-By Arrangement, the following documents have been released and are included in this package:
the staff report for the combined discussion of the 2000 Article IV consultation with the Republic of Croatia and request for a Stand-By Arrangement, prepared by a staff team of the IMF, following discussions that ended on December 20, 2000, with the officials of the Republic of Croatia on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on March 2, 2000. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
a staff statement of March 19, 2001, updating information on recent economic developments.
a Public Information Notice (PIN) and a Press Release, summarizing the views of the Executive Board as expressed during its March 19, 2001, discussion of the staff report on issues related to the Article IV consultation and the IMF arrangement, respectively.
a statement by the authorities of the Republic of Croatia.
The document(s) listed below have been or will be separately released.
Letter of Intent by the authorities of the member country*
Memorandum of Economic and Financial Policies by the authorities of the member country*
Statistical Appendix
*May also be included in Staff Report.
The policy of publication of staff reports and other documents by the IMF allows for the deletion of market-sensitive information.
To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to Publicationpolicy@imf.org.
Copies of this report are available to the public from
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Price: $15.00 a copy
International Monetary Fund
Washington, D.C.
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INTERNATIONAL MONETARY FUND
REPUBLIC OF CROATIA
Staff Report for the 2000 Article IV Consultation and Reports for Stand-By Arrangement
Prepared by the European I and the Policy Development and Review Departments
(In Consulation with other departments)
Approved by Jacques R. Artus and Shigeo Kashiwagi
March 2, 2001
Contents
Executive Summary
I. Introduction
II. Background
A. Recent Economic Developments and Near-Term Prospects
B. Economic Policy Measures in 2000
III. The Authorities’ Strategy and Program for 2001
A. Objectives and Underlying Exchange Rate Policy
B. Fiscal Policy
C. Incomes Policy
D. Monetary Program
E. Structural Policies
F. Risks to the Program
G. The Remaining Macroeconomic Policy Agenda
IV. Design of the Proposed Stand-By Arrangement
A. Modalities of the Arrangement
B. Program Monitoring
C. Medium-Term External Outlook and Capacity to Repay the Fund
V. Surveillance Issues
VI. Staff Appraisal
Text Boxes
1. Measures to Reduce the Revenue Ratio
2. Competitiveness Assessment
3. Frozen Bank Deposits
Figures
1. Indicators of Economic Activity
2. Retail Price Inflation
3. Average Wages
4. Monetary Conditions Index
5. Exchange Rate Developments
6. General Government Expenditure and Net Lending in Selected CEE and EU Countries
7. Unit Labor Costs in Croatia and other CEECs
8. Consolidated Central Government Operations
Text Table
1. Consolidated Central Government Operations
Tables
1. Selected Social and Economic Indicators
2. Saving-Investment Balances
3. GDP Measures and Projections
4. Balance of Payments
5. Consolidated Central Government Operations
6. Unconsolidated Central Budget Operations
7. Unconsolidated Extrabudgetary Funds Operations
8. Consolidated Central Government Expenditure Compared With Other CEECs
9. Monetary Accounts
10. Schedule of Purchases Under the Proposed Stand-By Arrangement
11. Status of Prior Actions as of March 1, 2001
12. Selected Indicators of External Vulnerability, 1995-2000
13. Selected Indicators of Financial Sector Vulnerability, 1995-2000
14. Projected Payments to the Fund as at December 31, 2000
15. Indicators of Capacity to Repay the Fund, 2000-2007
Appendices
1. Stand-By Arrangement Text
2. Fund Relations
3. World Bank Relations
4. Statistical Issues
5. External and Financial Sector Vulnerability
Appendix Figure
1. Selected Spreads of Croatian Bonds, September 2000-February 2001
Executive Summary
The economy has pulled out of recession and the banking system has recovered from its recent crisis. With an improved external environment and an expected revival of private investment, real GDP growth is likely to accelerate from an estimated 3½ percent in 2000 to 4 percent in 2001, still too little to make a dent in unemployment at a time of planned public sector layoffs. After a flare up in the second half of 2000, inflation is expected to subside to 4½ percent during 2001, benefiting from wage restraint, exchange rate stability, and oil price moderation, Meanwhile, banks that survived the crisis have attracted new deposits and rebuilt their capital base. While banks now have long foreign exchange positions, foreign currency lending to potentially unhedged borrowers is likely to involve substantial indirect exchange rate risk. Ownership concentration is expected to continue within a strengthened regulatory and supervisory framework.
The authorities are committed to slashing the size of government and its financial imbalance, while maintaining price stability on the basis of a broadly stable exchange rate. The new government has made a good start in 2000 in reducing government spending, tax pressure, and the fiscal imbalance. Concurrently with fiscal adjustment, the central bank has eased monetary conditions. Under its fiscal framework for 2001-03, the government intends to reduce consolidated central government spending from 46.2 percent to 37.6 percent of GDP and the fiscal deficit from 6.5 percent to 1.3 percent of GDP.
The authorities’ program for 2001 is based on further fiscal adjustment, wage restraint, and structural reform. The policies are designed to ensure the desired stability of the exchange rate under the chosen managed float regime. But the central bank will not resist persistent or large exchange market pressures or tolerate endangering achievement of its quarterly international reserve targets.
Fiscal policy aims to reduce the consolidated central government deficit from an expected 6.5 percent in 2000 to 5.3 percent of GDP in 2001, implying a 4.3 percentage point reduction of expenditure in light of tax reductions and court-mandated additional pension spending. The required expenditure savings will result mainly from cuts in the wage bill, purchases of goods and services, investment, and social transfers. The deficit is expected to be financed mainly with privatization receipts, without recourse to domestic bank financing. The program contains contingency measures to offset wage policy implementation and other fiscal slippages and an adjuster for delays in privatization.
Wage restraint is to be achieved by a reduction of the government sector wage bill, a freeze of average wages in public enterprises, and a social pact that limits wage increases in the rest of the economy to somewhat below productivity gains.
Structural reforms aim at economic liberalization, restructuring, and privatization.
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March 19, 2001
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Public Information Notice (PIN) No. 01/30
FOR IMMEDIATE RELEASE
March 23, 2001
International Monetary Fund
700 19th Street, NW
Washington D.C. 20431 USA
Telephone 202-623-7100
Fax 202-623-6772
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Press Release No.01/10
FOR IMMEDIATE RELEASE
March 19, 2001
International Monetary Fund
Washington, D.C. 20431 USA
Telephone 202-623-7100
Fax 202-623-6772
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March 19, 2001
