This statement provides information that has become available since the issuance of the staff report for the Article IV consultation with Croatia (SM/02/230). This information does not change the thrust of the staff appraisal in that report.
1. As anticipated, a new four-party coalition government, under the continued leadership of Prime Minister Račan, received majority parliamentary support on July 30. Except for the Ministry of Economy, there were no personnel changes in the economic area, and the new government’s program remains broadly unchanged, with focus on reducing unemployment, increasing competitiveness and exports, curbing public debt, accelerating structural reforms, and improving the efficiency of public administration and the judiciary.
2. The twelve-month rate of retail price inflation increased from 1.8 percent in May to 2.2 percent in June. However, the core rate of inflation remained at 1.0 percent and producer prices were 1.0 percent below their June 2001 level. During July, the exchange rate of the kuna depreciated slightly against the euro without foreign exchange intervention.
3. The twelve-month rate of broad money expansion continued to decelerate from (a recently downward revised) 37 percent in April to 34 percent in June. However, the year-on-year rate of credit expansion remained at 25½ percent in June, with a small slowdown in consumer credit offset by an acceleration in business lending.
4. Croatia’s EMBI stripped spread has remained at around 120–130 basis points since early May, despite the sharp rise in spreads for the EMBI global composite. Although down by almost 20 percent from its May 20 peak, the Croatian stock market index (CROBEX) still was up by about 11 percent year on year on July 31.
5. The caretaker cabinet shortlisted five foreign bidders for due diligence procedures ahead of the sale of 25 percent of the oil company (INA) later this year. It also decided to sell the remaining 25 percent share in Privredna Banka, the second largest bank, to its foreign majority shareholder.
6. In early July, parliament approved the new banking law, with only minor changes from the version discussed with the mission, together with new laws on securities, savings banks, and seizure of joint stock companies. Also in July, the caretaker Minister of Economy submitted to parliament draft laws on consumer protection, investment promotion, and real estate trading.
7. Revised data indicate that the June 2001 fiscal deficit ceiling under the recently expired stand-by arrangement was exceeded by HrK 136 million (less than 0.1 percent of GDP). The reason for the excess was a HrK 166 million upward revision of domestic bank financing. This revision reflects the net effect of previously unreported net sales of government bonds in domestic banks’ portfolios to foreigners (HrK 413 million) and the exclusion of a €32.5 million (HrK 247 million) bank loan to the highway construction agency (HAC), which remained outside the fiscal consolidation under the stand-by arrangement. Performance under the fiscal ceilings for the remainder of 2001 remained unaffected by this revision, and no purchases were made under the precautionary stand-by arrangement, which expired on May 18, 2002.