Abstract
Croatia achieved progress in restoring control over the public finances. Executive Directors welcomed the comprehensive economic program, with its focus on the fiscal deficit and tax reductions, wage discipline, and structural reforms in the context of a stable exchange rate. They stressed the need to maintain fiscal and monetary policies, and improve the economic statistics. They commended the country's banking system under a strengthened regulatory framework and improved supervision. They also appreciated Croatia's accession to the World Trade Organization.
The following information, which does not change the substance of the staff appraisal, has become available since the staff report was issued.
1. As noted in EBS/01/27, two prior actions remained to be completed before Board consideration of Croatia’s stand-by request. On March 13, parliament amended the law on war veterans benefits by repealing car import privileges for all but disabled veterans with effect from June 1, 2001. On March 14, parliament approved legislation to enable the government to implement measures to reduce the budgetary wage bill. The two measures were as envisaged in the program except for a one-month delay in the repeal of the car import privileges and the extension of 0.5 percent annual seniority bonuses to civil servants and government workers with less than 5 years’ tenure. The fiscal cost of these deviations is estimated at no more than 0.1 percent of GDP and the authorities have assured the staff that compensatory measures will be taken if needed to ensure observance of the fiscal performance criteria. With these parliamentary decisions, all prior actions have been completed.
2. Indicators on economic activity suggest a moderate strengthening of the economy in line with the staff projections. Summer tourism bookings from Germany, Croatia’s largest market, are up by more than 50 percent on 2000. After a marked slowdown in the latter part of 2000, industrial production recorded a 14 percent annual growth in January (20 percent in manufacturing), more than could be explained by an increase in working days. Preliminary data from the third week of February show that bank credit to the private sector had already increased by 2.4 percent in 2001, mainly on account of additional credit to households.
3. Retail price inflation in February was 6.8 percent year on year, after falling to 6.6 percent in January. The uptick in inflation was due to an increase in electricity and fuel prices and is likely to be temporary. Core inflation remained flat at 4.5 percent in February. New signs of increasing wage moderation have materialized. Average gross wages grew by 2.1 percent year on year in December 2000, against an average increase of 7 percent in 2000. The exchange rate has been fairly stable relative to the euro, showing a slight tendency to depreciate against the U.S. dollar.
4. On March 7, the Croatian National Bank (CNB) cut the Lombard rate from 12 percent to 9.5 percent and the rate of remuneration on reserve requirements from 4.5 percent to 3.7 percent. These changes reflected an adjustment to market rates. Remuneration of reserve requirements was extended to all required reserves, thus rendering the move approximately neutral.
5. On March 6, following the placement of a five-year ¥25 billion Samurai bond in February at a spread of 152 basis points over yen Libor, the government successfully launched a ten-year eurobond in an amount of €500 million. The issue, which was more than twice oversubscribed, was priced at 215 basis points over corresponding bunds.
6. On March 9, the government appointed the Norton Rose consortium as the official advisor for the restructuring of the state electricity company (HEP). On March 13, the government appointed Deutsche Bank and PriceWaterhouseCoopers as advisors for the restructuring and privatization of the oil and gas company (INA).